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RANsquawk Week In focus, week commencing 23rd September 2019


Attention will be on meetings that take place on the sidelines of next week's UN confab, particularly any meetings between US and Iranian officials, following last week's attacks on Saudi energy facilities, where from a US perspective, the blame has fallen on Iran. However, the chances of an official meeting between the two sides has faded after the attacks. Iran, which denies involvement in the attacks, has said that talks with the US cannot take place unless all sanctions on the nation are removed and the US returns to the 2015 Joint Comprehensive Plan of Action nuclear deal, which US President Trump pulled out of, and as a result, Iran has reduced commitments to limiting uranium enrichment. While Trump, who has also pushed-back on meeting Iranian officials directly, has initially pursued a sanctions route to the attacks, instructing the Treasury to substantially increase sanctions on Iran. But given the overhanging threat of escalation, where a possible military response could be eventually be sought, Stratfor's analysts think back channel talks between the two sides will continue, and other countries, such as France, Oman, Kuwait and Switzerland, will also likely continue efforts to establish dialogue to ease tensions. Elsewhere, at the meetings next week, US and Japan could announce their widely touted trade deal, while Brexit talks will continue on the sidelines - with all of the events providing the backdrop for headline risk to dominate through the week.


The main data highlight for the region comes on Monday with the release of September prelim PMI metrics (manufacturing, services and composites). In terms of the broad skew of expectations, the EZ-wide composite figure is forecast to slip to 51.2 from 51.9, manufacturing to rise to 47.5 from 47.0 with the service sector expansion set to slow to 53.3 from 53.5. From a regional perspective, focus will remain on the German manufacturing sector which remains firmly in contractionary territory at 43.5 with consensus looking for an uptick to 44.2. Ahead of the release, RBC highlight that despite the German manufacturing sector having been in recession for the past year, the larger services sector has held up reasonably well. However, the Canadian bank notes that minor improvements in August did little to change the broader narrative of an entrenched slowdown and as such, with the ECB in data dependency mode, any further weakening in the Eurozone economy could be of note for the Governing Council. That said, given the slew of easing measures announced earlier this month, it remains unclear how much more easing policymakers would be willing to unveil at upcoming meetings, particularly given the level of hawkish dissent last week. As a guide, a further 10bps of cuts to the deposit rate is not fully priced in until June next year.


The RBNZ is expected to keep rates unchanged at 1.00%, following its unexpected rate cut at its prior meeting. At its previous meeting, the Reserve Bank lowered its projection for the Cash Rate, now seeing a trough at 0.91% in 2020, which HSBC says gives the bank scope to lower rates if needed. In August, Governor Orr gave an interview where he suggested that the central bank will examine the landscape in November, and would be willing to continue easing if necessary. HSBC argues that, since those remarks, not a lot has happened that would compel the central bank to reassess its approach. However, HSBC says that the case for further cuts is building. HSBC notes that recent GDP data was in line with the central bank’s estimate, but nevertheless, the data confirmed that the economy has lost momentum; more timely data has also offered little signs of a pick-up, while recent PMI data slipped beneath the 50 mark. HSBC says it now expects one further 25bps in the final meeting of 2019 in November, and then sees 50bps worth of cuts in Q1 2020. “Even once the more recent cash rate cut flows through, they may not be enough to snap the economy out of its current funk,” and adds that “we also see RBNZ Governor Orr being highly proactive and likely to cut further yet.” It is also worth noting that the RBNZ has been clear it thinks that rates could be taken into negative territory, with a possible effective lower bound of -35bps cited.


At its previous meeting, Banxico cut rates for the first time since early 2013, and Pantheon Macroeconomics thinks that it will likely continue to ease in the near-term, with economic fundamentals continuing to falter. “Economic growth likely will  remain sluggish in the second half of the year, and the outlook for 2020 is not as encouraging as originally thought,” the economic consultancy writes; Pantheon argues that, over the last five years, the Mexican economy has grown below its potential rate, which it estimates is around 2.4%. There are some factors which may improve the growth dynamic, although depressed mining output and trade wars, as well as a lagged fiscal effect and previous monetary tightening it likely to dampen the revival beyond this year, Pantheon says.  The currency has declined sharply over the last few years, and this may provide a tailwind for manufacturers.; but much still depends on the US economy, where a slowdown has the potential to reduce demand for Mexican exports.   There is an argument that US company’s diversification away from China production could help Mexico,  but this is more a of a medium-term dynamic. In the near-term, there is still uncertainty about the USMCA. Pantheon says that the cocktail of downside risks will keep the Banxico defensive, and sees rates being trimmed by a further 50bps over the rest of the year, taking the rate to 7.50% by end-2019.


Last month’s PCE reading saw the core deflator come in at 0.2%, less than was implied by CPI data. Pantheon notes that while the Y/Y core rate remains at 1.6%, the annualised rate in the three months to July stood at 2.2%, and there are risks that we could see 1.8% August, while the consultancy says the odds of a 2.0% breach for the core Y/Y by the end of the year at 50/50. Looking more broadly, the FOMC left both its PCE and core PCE projections unchanged for its entire forecast horizon, seeing PCE at 1.5% this year, rising to 1.9% next year, and 2.0% in 2020 and 2021 (the long-run rate was held at 2.0% too); for the core measure, the FOMC sees 1.8% in 2019, 1.9% in 2020, 2.0% in 2021, 2022, and in the longer run.