Asian equities start the week on the front foot
With Wall Street paring its recent losses on Friday – the S&P500 rallied 1.6% to close down just 0.6% for the week – the backdrop was favourable as markets re-opened in Asia today. And with House Speaker Pelosi vowing to continue talks with Treasury Secretary Mnuchin, US equity futures have made further modest gains as investors factored the possibility that the current impasse over additional fiscal stimulus might yet be resolved ahead of the election. So, most of the key benchmark equity indices in the Asian region have made gains today. And after a quiet start, in Japan the Topix rallied in the final hour to close up 1.7%, while new Chief Cabinet Secretary Katsunobu Kato was reported to have reiterated that the government won’t hesitate to introduce additional economic measures if needed (a third supplementary budget for FY20 still seems likely in our view). In China, however, the CSI300 was up just ¼%, with shares in China’s biggest chipmaker SMIC hit by the imposition of new US export restrictions. And In Australia, following a strong gain on Friday, the ASX200 slipped back today but the Aussie dollar firmed after a leading domestic bank pushed out its forecast for RBA policy easing to November, less than a week after moving the market with its call for an easing at the 6 October meeting. The yen also struck a slightly firmer note today after losing ground last week. But FI markets were largely uneventful, with USTs little changed.
It will be a busy week ahead for potential market moving events, with the highlights including ECB President Lagarde’s appearances before the European Parliament (today) and ECB Watchers conference (Wednesday), the latest flash euro area inflation estimate and US labour market report (both Friday) and the BoJ’s quarterly Tankan and Chinese PMIs (on Thursday and Wednesday respectively). And tomorrow will also see the first US televised Presidential debate between Trump and Biden, which seems bounds to attract plenty of attention (with yesterday’s NY Times reports on how much (or little) income tax the President has paid over recent years adding a touch more spice).
Japan – The BoJ’s Tankan survey and the August IP report in focus this week
There were no major economic reports released in Japan today. Looking ahead, the diary is a very busy one and begins tomorrow with the release of the advance Tokyo CPI for September. The closely-followed measures of core inflation are likely to continue to point to modest annual deflation thanks to the government subsidies on accommodation charges associated with the ongoing ‘Go to Travel’ campaign. The Summary of Opinions from this month’s BoJ Board meeting will also be released tomorrow, but are unlikely to provide new insights. On Wednesday most attention will be on the IP report for August, where the market anticipates only incremental strengthening following a better-than-expected 8.7%M/M lift in output during July. If so, this would still leave output with a double-digit decline in annual terms, but still on track to reverse slightly more than half of the almost 17%Q/Q slump in output recorded in Q2. Also on Wednesday, following a poor July, we expect warm weather to have supported a lift in retail sales in August. Information on housing starts and construction orders during August will also be released that day.
Thursday, however, will bring the key focus for investors with the release of the BoJ’s Tankan Survey for Q3. Other surveys of sentiment suggest that the Tankan’s key diffusion indices will lift from the abysmal levels reached in Q2, but unfortunately the degree of improvement seems likely to be relatively modest. Aside from gauging sentiment, we will also be interested in what the Tankan survey has to say about firms’ forecasts for profitability and capex, as well as firms’ inflation expectations. The latter will doubtless show firms’ extreme scepticism that the BoJ is on target to meet its inflation goal – scepticism that was evident even before the pandemic. Thursday will also bring the final results of the Jibun manufacturing PMI for September and vehicle sales for September. Meanwhile, on Friday we will receive information on the performance of the labour market for August, with markets anticipating that the unemployment rate will have nudged up to 3.0% for the first time in 3-years, while the Cabinet Office’s indicator of consumer sentiment for September will be published.
Euro area – Flash CPI estimate set to remain in negative territory
This week will bring plenty of commentary from the ECB, starting this afternoon when Christine Lagarde is due to address the European Parliament in a regular hearing. But of most interest will be the ECB and Its Watchers conference on Wednesday, where discussions will focus on the ECB’s mandate, the ECB’s instruments for crises and normal times, and the ECB’s monetary policy strategy. Lagarde will give the opening address, with Governing Council members Lane, Weidmann and Villeroy de Galhau also among the speakers.
Meanwhile, the euro area’s data calendar gets underway tomorrow with the Commission’s business and consumer sentiment surveys – arguably the best guide to euro area economic activity – for September. Like last week’s flash PMIs, these might well show variation in conditions between sectors and countries at the end of Q3. The final manufacturing PMIs, meanwhile, will be published on Thursday. Tomorrow will also bring the first of the week’s flash September CPI estimates from Germany and Spain, which will be followed on Wednesday by the French and Italian numbers and on Friday by the euro area numbers, which will arguably be the most closely watched figures of the week. Having fallen to -0.2%Y/Y in August, euro area headline inflation is expected to have remained in negative territory, while core inflation might well have moved sideways or lower from August’s record low of 0.4%Y/Y.
The latest euro area unemployment figures, due Thursday, are expected to show a modest uptick in the headline rate in August from 7.9% previously, although the upwards trend will have remained limited by various government support schemes. Country-level releases will include German labour market numbers for September and German retail sales and French consumer spending data for August on Wednesday, followed on Thursday by French, Italian and Spanish new car registrations figures for September. Finally, EU leaders are due to meet in Brussels on Thursday and Friday for the postponed Summit to discuss foreign affairs.
UK – Bank lending figures most noteworthy
In the UK, meanwhile, the weekend saw external MPC member Silvana Tenreyro offering a somewhat positive assessment of the potential benefits of negative interest rates. In particular, she echoed some previous comments of Governor Andrew Bailey, that evidence from other countries had been encouraging, and noted that there had tended to be almost full pass-through of negative rates into lending rates, while banks had nevertheless been able to adapt well. Of course, last week Bailey also downplayed the likelihood of a near-term move to negative rates, emphasizing that the BoE was currently simply trying to ensure that the implementation of such a policy would be technically feasible if and when the economic circumstances merited it. We certainly do not expect such a move before the end of the year, and instead expect a further increase in BoE QE to come in November. Nevertheless, given the possible harm to come from the intensified pandemic and end to the Brexit transition, we certainly do not rule out a negative Bank Rate in 2021.
Meanwhile, in a relatively quiet week for UK economic data, tomorrow’s release of the BoE’s latest bank lending figures for August is arguably the most noteworthy. These are expected to show that loan demand from SMEs remained strong, while larger firms continued to access large-scale finance through other channels. Lending to households is also expected to have picked up, supported not least by a further increase in demand for mortgage lending. Revised Q2 GDP data are scheduled for release on Wednesday, and expected to confirm the economy contracted at a record pace broadly in line with the previously estimated drop of 20.4%Q/Q. These figures will be accompanied by the latest balance of payments data for Q2. Finally, the week’s data calendar will come to a close with the final manufacturing PMIs on Thursday, which are expected to reaffirm the impression of a slight moderation in the pace of output growth in September as implied by last week’s flash release.
US – September employment report and politics the focus this week
The main data focus in the US this week will be Friday’s employment report for September. The ongoing decline in the number of unemployment benefits suggests that the recall of previously furloughed workers will easily offset layoffs, so we expect a further 900k lift in non-farm payrolls in September following a 1.37m lift in August. The unemployment rate – taken from the household survey – may not budge much from August’s 8.4% reading, however, while the return of lower-paid workers could weigh on average earnings during the month.
Ahead of this, tomorrow will bring the advance goods trade and inventory reports for August, together with the Conference Board’s consumer survey for September. We expect a modest narrowing of the goods deficit – exports seem to have more scope for ongoing post-pandemic recovery – while we expect confidence to have been little changed given the contrasting fortunes of the labour and stock markets. On Wednesday the ADP employment report will help shape expectations for the official employment report at the end of the week, while the final release of the Q2 national accounts should broadly confirm the 31.7%Q/Q annualised slump in GDP reported previously. Wednesday will also bring the Chicago PMI for September and the pending home sales report for August. On Thursday we expect to learn that personal income declined in August, with the impact of job growth more than offset by the waning of fiscal transfers. Even so, retail and auto sales data point to a further lift in consumer spending during the month. The reverse of spring discounts should see the core PCE deflator post a further 0.3%M/M lift, nudging annual inflation up 0.1ppt to 1.4%Y/Y. Also on Thursday we will receive construction data for August, auto sales data for September and the manufacturing ISM for September. Regarding the latter, we are wary of a pullback from the robust 56.3 reading posted last month. Friday will also bring August’s factory orders report.
Aside from the data flow, this week features a large number of speeches by Fed Governors and regional Bank Presidents, although none seem likely to supersede the messages reiterated by Chair Powell on several occasions last week. Politics will also remain a key focus for markets, especially as concerns any progress on advancing a fiscal stimulus bill that would be acceptable to Congress. Meanwhile, the first televised presidential candidate debate between Donald Trump and Joe Biden will take place tomorrow, and is bound to generate some headlines.
China – Industrial profits up strongly in August; PMIs the highlight ahead of Golden Week holiday
There were no economic releases in China today. However, over the weekend, it was reported that corporate profits rose a very encouraging 19.1%Y/Y in August, very similar to the 19.6%Y/Y gain seen in July. Given the earlier impact of the pandemic on production, profits remained down 4.4%YTD/Y in part due to a 38.1%YTD/Y slump in profits in the mining sector. Manufacturing profits were down 1.0%YTD/Y and are likely to have turned positive this month.
Looking ahead, the only economic reports due over the remainder of the week are on Wednesday, which will see the release of the official PMIs for September, together with the Caixan manufacturing PMI for September. Bloomberg’s survey indicates that analysts expect the official manufacturing PMI to edge up to 51.3, which if realized would be the best reading since March. By contrast, analysts expect a modest decline in the non-manufacturing PMI which hit a 31-month high of 55.2 last month. It is worth noting that due to the Golden Week holidays China’s markets are closed from Thursday until 9 October.
Australia – Lockdown restrictions ease in Melbourne; quiet week ahead as RBA awaited
There were no economic reports released in Australia today. However, prospects for the economy were improved by news that the state of Victoria had recorded just 5 news cases of coronavirus cases on Sunday, representing the best result in over three months (New South Wales reported no cases – also the best day in over three months). Reflecting the encouraging trend of late, Melbourne today for the second time eased restrictions, which includes the removal of the 9pm-5am curfew and allowing primary-aged children to return to school in a fortnight when the new term begins. And optimistically, Premier Andrews suggested that Melbourne may be able to implement the next stage of its easing plan on 19 October, a week earlier than signalled previously. Meanwhile, given the latest figures, Australia’s Tourism Minister again mooted the possibility of implementing a trans-Tasman tourism bubble with New Zealand by the end of this year.
Looking ahead, a relatively quiet week looms in Australia as investors await the next RBA Board meeting and federal Budget on 6 October. On Wednesday the ABS will release its building approvals report for August, which last month showed the first signs of recovery from the pandemic-induced slump. In addition, the RBA will release data on private sector credit for August. Annual growth in credit seems likely to have declined to a new post-GFC low – weakness that is doubtless spurring last week’s government announcement of a proposed easing of the obligations that are currently faced by lenders when approving loans. On Thursday we will receive information on house prices for September – probably also showing some signs of improvement – together with the final manufacturing PMI readings for September and the ABS job vacancies count for Q3. The week concludes on Friday with the retail sales report for August. This will likely confirm the roughly 4.4%M/M decline in spending suggested by the preliminary data released last week, which in large part reflected the impact of the lockdown in Victoria.
New Zealand – Labour market proving resilient; confidence surveys due this week
According to Statistics New Zealand, based on information taken from tax data, the number of filled jobs is estimated to have increased 1.5%Y/Y in August. While clearly a positive result, this still leaves the number of jobs about 1.4% below the pre-pandemic peak. The diary for remainder of the week is quiet, with the many focus likely to be on the ANZ business survey and consumer confidence reports for September, released on Wednesday and Friday respectively. The building consents report for August will also be released on Wednesday.