ECB and BoJ announcements due on Thursday

Chris Scicluna; Emily Nicol

Mixed started a very busy week of key events, corporate reporting end economic data
A run of seven consecutive winning sessions came to an end for the S&P500 on Friday, with the index suffering a very modest loss of 0.1%, even as the composite PMI output index improved unexpectedly to a three-month high of 57.3 in October. A five-day sell-off in the Treasury market also came to an end, with the 10Y UST closing down 7bps at 1.63% – albeit still 6bps higher than it began the week. However, breakeven rates barely budged, with the 10Y breakeven closing less than 1bp lower at 2.64%. Of note, speaking to a virtual conference, Fed Chair Powell stated that “The risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation”, but he also emphasised that “it’s time to taper, not time to raise rates”. 

US equity futures and Treasury yields have reopened fractionally higher in Asia today. On a quiet day for local data, it has been a mixed start to the week for Asian markets, although movements have been modest. In Japan, the TOPIX has begun the week with a 0.3% loss. In political news, PM Kishida’s LDP lost one of two weekend upper house by-elections, further indicating that the LDP will likely give up seats at this coming weekend’s lower house election (albeit likely retaining a majority of seats in the chamber, certainly in combination with coalition partner Komeito). Stocks are little changed in mainland China and Hong Kong. There the focus remains on China Evergrande Group’s struggles, at least ahead of this coming weekend’s release of China’s official PMI reports for October. Stocks are modestly firmer in South Korea, but slightly softer in Singapore. 

In the Antipodes, although UST yields have pulled back from Thursday’s highs, a late sell-off has left Australian bonds little changed despite opening firmer. So the 10Y AGCB yield remains around 1.80%, with investors now perhaps nervously awaiting Wednesday’s Q3 CPI report. The ASX200 has begun the week slightly on the front foot, advancing 0.3% following the weekend’s announcement by Victoria state officials that virus curbs will ease further later this week once the state meets its target of achieving an 80% full vaccination rate. Markets were closed in New Zealand for the Labour Day holiday. 

Japan’s department store sales decline 4.3%Y/Y in September
Amidst ongoing restrictions following the previous month’s sharp lift in virus cases, Japan’s national department store sales declined 4.3%Y/Y in September, albeit an improvement on the 11.7%Y/Y decline registered in August. Of course, even this outcome continues to be flattered by base effects associated with the pullback in spending following the onset of the pandemic last year. The level of sales in September was around 38% lower than in September 2019 – when spending had been boosted by the imminent consumption tax increase – and 24% lower than in September 2018. In the detail, spending on personal accessories declined 3.0%Y/Y and spending on clothing fell 5.6%Y/Y. Meanwhile, after outperforming in the early days of the pandemic, sales of household goods fell 12.5%Y/Y. With state of emergency conditions being removed at the end of September, a rebound in department store spending is likely underway this month.

The BoJ, key activity and inflation indicators and a general election all ahead in Japan this week
Looking ahead, the BoJ will conclude its latest two-day policy meeting on Thursday. With indicators beginning to point to a pick-up in activity amidst a reduction in virus cases and the end of the state of emergency restrictions at the end of September, there seems little prospect of any change in the BoJ’s key policy settings. Given the impact of the Delta virus outbreak on the economy in Q3, including the worsening of supply chain bottlenecks, the updated Outlook Report will likely see the BoJ’s estimate of growth in the current fiscal year downgraded slightly, while that for the following year will be upgraded slightly. The BoJ might adopt a slightly firmer forecast for inflation, but any upward revisions will doubtless be much smaller than seen recently in many other countries and surely leave the Bank well short of meeting its 2%Y/Y inflation target within the forecast horizon.

On the data front, this week’s Japanese diary continues tomorrow with the release of services PPI data and the BoJ’s underlying measures of consumer inflation for September – the latter presently providing a more accurate measure of the inflation trend given the impact of special factors on the regular headline and core inflation measures. On Thursday, retail sales data for September will likely indicate only a modest rebound from the 4%M/M slump reported in August, with a more convincing improvement likely when October figures are released next month. A busy Friday will likely see some very mixed data. Amidst ongoing supply-chain bottlenecks, especially impacting the auto sector, Bloomberg’s survey indicates that the market expects a further 2.8%M/M decline in IP in September – an even weaker result than the bias-corrected forecasts that firms had made last month. While the household employment survey might also suggest further virus-related weakness – employment fell 320k in August – the Cabinet Office’s measure of consumer confidence might reasonably be expected to improve on the pandemic high reported last month as respondents look forward to better times ahead. Friday will also bring news on housing starts in September, together with advance CPI data for the Tokyo area for October.

On Sunday, Japan will hold its 49th general election of members to sit in the House of Representatives – the lower house of the National Diet and the more powerful of the two chambers of Japan’s parliament. While the LDP is unlikely to retain all of the 276 seats that it held in the outgoing parliament – especially with the main opposition party, the CDP, co-ordinating an alliance of smaller parties – recent polls have suggested that it will go close to retaining a clear majority in the 465-seat chamber. And so with its current junior coalition partner, Komeito, likely to pick up seats – it held 29 in the outgoing parliament – anything other than the re-election of a LDP-Komeito government would be a huge surprise for markets (especially as the LDP has been in power for all but four years since 1955). While an LDP win seems likely, a narrower than expected win would likely raise questions about the recently elected Fumio Kishida’s prospective longevity as the party’s leader.

The October PMIs will take centre stage in China this week, but not released until Sunday
As far as economic data is concerned, there is little in China to attract investors’ attention during the regular working week. There may be some interest in the corporate profit data for September released on Wednesday, with growth likely to have slowed further given last week’s softer than expected IP report. Thereafter, attention will turn to the official PMIs for October, which are released on Sunday. According to Bloomberg’s survey, analysts expect a further modest improvement in the non-manufacturing PMI, which rebounded to 53.2 last month as the activity recovered following a local virus outbreak. While the survey also points to some improvement in the manufacturing sector, the consensus forecast of 49.9 – while up from a 17-month low of 49.6 last month – implies ongoing restraint on activity due to supply chain bottlenecks, electricity shortages, surging commodity prices and efforts to meet pollution-related policy targets.

A busy week ahead in the euro area features the ECB’s Governing Council meeting
The main events in the euro area this week will be the ECB's Governing Council announcement (Thursday) and flash euro area Q3 GDP and October inflation estimates (Friday). While we expect the Governing Council to leave policy unchanged, with growing evidence that its near-term inflation outlook is too low the hawks on the Governing Council, whose concerns about upside risks from current pressures were already aired at the September meeting, are bound to be enlivened this week.

However, the detail of September's inflation figures continued to suggest that underlying price pressures remain moderate. And while market-based measures of inflation expectations have risen significantly to be more consistent with the ECB's inflation target recent wage settlements remain inconsistent with meaningful second-round effects. So, the majority of the Governing Council will likely still expect inflation to fall back over the course of 2022 to below 2.0%Y/Y by year-end. And they will also be concerned about the downside risks to demand posed by the current shock to energy prices. But with no updated projections to be published at this meeting, however, the ECB might continue to judge the risks to the economic outlook as broadly balanced albeit noting the significant uncertainty posed by the ongoing supply-side shocks.

Of course, financial conditions are also a key determinant of current ECB policy, particularly the pace of net asset purchases. And over recent weeks, conditions in bond markets have tightened significantly. Since the September monetary policy meeting, the average 5Y sovereign yield has risen about 25bps to -0.22%, while the 10Y yield has risen almost 30bps to 0.29%, the highest since May and near the top of the range of the past 18 months. In her press conference, President Lagarde will be asked about the future pace of net asset purchases from Q1 on, and the nature of purchases following the end of the PEPP programme. However, she seems highly likely to deflect questions on such issues, not least as they are unlikely to be discussed thoroughly, let alone agreed, by the Governing Council until the December meeting. If the Governing Council is concerned about the recent jump in yields, however, it is possible that she might flag the possibility of an accelerated pace of net purchases if the bond market sell-off continues.

Top tier activity, inflation and sentiment data also ahead in the euro area this week
Alongside the ECB announcement, the end of the week will also bring a number of key top-tier economic releases concluding with the first estimates of euro area Q3 GDP and October CPI data on Friday. We expect to see another quarter of solid GDP growth in the euro area of 1.8%Q/Q in Q3 (following growth of 2.2%Q/Q in Q2), thanks to a strong contribution from services as Covid restrictions were relaxed. At the country level, we expect growth to have accelerated in France and Spain (from 1.1%Q/Q in Q2), be a little stronger in Germany (from 1.6%Q/Q in Q2) and have moderated in Italy (from 2.7%Q/Q previously). In terms of inflation, we expect the euro area's headline measure of inflation to have taken a step up from September's thirteen-year high of 3.4%Y/Y, driven by a further jump in energy inflation following the surge in wholesale gas prices. In contrast, we expect the core measure to have moved sideways at 1.9%Y/Y this month. Ahead of the euro area figures, Thursday brings the equivalent German and Spanish CPI numbers, followed on Friday with the French and Italian numbers.

A number of sentiment surveys are also due and like last week’s flash PMIs are expected to suggest a further moderation in recovery momentum at the start of Q4. Among these will be the European Commission's business and consumer indicators (Thursday), which are expected to show the headline economic sentiment index fall to a five-month low. Germany's ifo business climate index for October is due today. Other releases include the ECB's quarterly bank lending survey (tomorrow), euro area bank lending figures for September (Wednesday), as well as French jobseeker data for Q3 and German unemployment numbers for October (Thursday).

Wednesday’s Budget and Spending Review the focus in the UK this week
Ahead of the BoE's MPC meeting on 4 November, much focus this week will be on the Chancellor's Budget and Spending Review on Wednesday. While the past week's public finance figures suggested greater scope for fiscal giveaways, the OBR's updated economic forecasts will be based on national accounts numbers that were published before the recent significant upwards revisions and therefore suggest more limited opportunity for fiscal loosening. Nevertheless, we would expect some government support for lower-income households to cope with increased household energy bills as well as additional government spending on public services affected by the continuing pandemic. However, overall, for now at least, we expect the Chancellor to maintain the impression that the fiscal stance will be tightened over the coming few years.

Datawise, the UK economic data calendar kicks off tomorrow with the release of the CBI distributive trades survey for October, which will provide the first look at retail sales growth this month and is likely to further highlight the challenges facing the distribution sector. Meanwhile, Wednesday's BRC shop price index for October will reveal how supply chain issues are also affecting shop prices. On Friday, the Lloyds business barometer for October will be published, along with the Bank of England's lending figures for September. The latter half of the week might also see Nationwide publish its October house price index.

Fed in blackout but a huge week ahead for US corporate earnings; lots of economic data too, including Q3 GDP, sentiment and spending indicators, core inflation and wages data
With the next FOMC meeting on 3 November, the Fed is now in the blackout period and so there are no Fed speaking engagements scheduled over the week. However, this week’s US diary features a very large number of corporate earnings and economic reports. As far as earnings are concerned, almost a third of the S&P500 will report this week, as well as ten of the 30 DJI companies. Amongst the significant names that will attract attention are: Facebook (today); General Electric, Alphabet, Twitter, Microsoft, AMD and 3M (Tuesday); Apple, Boeing, Coca Cola, Ford and General Motors (Wednesday); Amazon, Caterpillar, Merck and Mastercard (Thursday); and Colgate-Palmolive, Exxon Mobile and Chevron (Friday).

Turning to this week’s economic data, following today’s release of the Dallas Fed manufacturing survey for October, tomorrow will bring the Richmond Fed’s manufacturing survey and the Conference Board’s consumer survey for October. If the preliminary findings of the University of Michigan’s consumer survey are any guide, the latter may indicate a further softening of sentiment due to inflation and virus-related concerns. Tomorrow will also see the release of new home sales data for September and the S&P/Corelogic and FHFA house price measures for August. As far as the former is concerned, in light of last week’s upbeat NAHB survey, Daiwa America’s Mike Moran anticipates a near 5%M/M lift in sales. On Wednesday, estimates of Q3 GDP growth will receive a final tweak following the release of advance merchandise trade, durable goods orders and inventory data for September. Mike anticipates a modest widening of the trade deficit to $89bn. Meanwhile, he estimates a 1%M/M decline in durable goods orders, which will likely be weighed down by a correction in aircraft orders following a relatively high August reading and the impact of semiconductor shortages on bookings in the auto sector.

Thursday will bring the first release of the national accounts for Q3. Ahead of the aforementioned final indicators, Daiwa America’s Mike Moran estimates that GDP grew 2.5%AR – slightly below the consensus estimate in Bloomberg’s survey. A marked deceleration in consumer spending is likely to standout in the report, probably increasing less than 1%AR versus almost 12%AR in the first half of the year. Residential construction and business investment in new equipment will also likely prove two soft spots. As a result, government spending and a smaller inventory drawdown are likely to account for most of the advance in GDP. Thursday will also bring the release of pending home sales data for September – of interest following the sharp 8.1%M/M uplift reported in August – and the Kansas Fed’s manufacturing survey for October.

A busy end to the week will see a number of important indicators released on Friday. The personal income and spending report for September will reveal the monthly profile of the income, spending and core PCE deflator outcomes depicted in the previous day’s national accounts report. While Mike Moran anticipates a relatively modest 0.2%M/M lift in the core PCE deflator – the least since February – this would still lift annual inflation to a new high of 3.7%Y/Y. A significant point of interest will be the Employment Cost Index for Q3, which will provide some insight on potential future pressures on inflation. With firms clamouring to attract workers, Mike anticipates a 1.0%Q/Q lift in compensation – the most since 2006. The finalised University of Michigan consumer survey for October will also be released on Friday, together with the Chicago PMI for October.

Inflation week ahead in Australia; retail spending data also of note
Ahead of next week’s RBA Board meeting, the focus in Australia this week will be squarely on inflation, with the ABS set to release its trio of quarterly price reports, beginning most importantly with the Q3 CPI on Wednesday. According to Bloomberg’s survey, the consensus expects a 0.8%Q/Q lift in the headline CPI which, given base effects, would lower annual inflation by 0.7ppt to 3.1%Y/Y. Both the trimmed mean and weighted median are forecast to increase 0.5%Q/Q – as they did in Q2 – which for both measures would nudge annual inflation higher but leave it sitting just below 2%Y/Y i.e. the bottom of the RBA’s 2-3%Y/Y target range. Given the substantial sell-off in the Aussie bond market of late, figures such as these – should they occur – would probably come as some relief (especially in light of the huge increase in the Kiwi CPI in Q3).

On Thursday, the ABS will release its estimate of international trade prices for Q3 while the PPI report for Q3 will follow on Friday. Also on Friday, the ABS will release its estimate of developments in retail spending for September as well as overall spending volumes in Q3. While spending likely broadly stabilised in September, volumes are expected to be down about 5%Q/Q in light of the lockdowns in place in New South Wales and Victoria for much of the quarter. In addition, on Friday the RBA will release its money and credit aggregates for September. Given the proximity of the next Board meeting, there are no RBA events this week.

Trade and sentiment data ahead in New Zealand this week
The Kiwi market was closed for the Labour Day holiday today. Looking ahead to the remainder of this week, Wednesday will bring the release of September merchandise trade figures and the final tabulation of the ANZ’s Business Outlook Survey for October. The only other data in New Zealand this week is Friday’s release of the ANZ-Roy Morgan consumer confidence survey for October. There are no monetary policy related events in the diary this week, but as is in vogue amongst central banks, tomorrow the RBNZ will hold a press briefing to mark the release of a report on climate change. 

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