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Week in Focus; week commencing 14th October 2019

  • MON: Swedish Unemployment, EZ Industrial Production.
  • TUE: RBA Minutes, Chinese Inflation, South Korean Trade, UK Labour Market, German ZEW, NY Empire State Manufacturing Index, NZ CPI.
  • WED: BoK Rate Decision, UK & EZ Inflation, EZ Trade, US Retail Sales, Canadian CPI, US Business Inventories, TIC Flows.
  • THU: Australian Labour Market, Swiss Trade, UK Retail Sales, US Building Permits, Housing Starts, Philly Fed, Industrial Production, Manufacturing Production.
  • FRI: Japanese CPI, Chinese GDP, Industrial Production, EZ Current Account.

US RETAIL SALES (WED):

Retail sales are seen growing +0.3% M/M in September, paring slightly from the +0.4% M/M in August. Analysts note that chain-store sales continued to put in a solid performance in September, auguring well for the data. Auto sales were also better in the month, and may support the headline. Even without autos, however, RBC still looks for a decent report. "The retail control group (which excludes autos, gasoline, and building materials) appears set to come in at a still constructive +0.4%, as all of the key underlying pillars of the consumer (incomes, confidence, etc.) remain fairly constructive," the bank says, "This report will help round out our Q3 consumption projection which currently sits around 2.5%."

EU COUNCIL MEETING (THU):

With Brexit remaining a key guiding force for UK assets, next week’s EU Council Meeting will be a key focus. The ongoing narrative is incredibly fluid, and thus the backdrop to the meeting could easily shift between now and Thursday. However, as a broad outline, ING highlights four key areas to watch, 1) will a deal be struck by or at the EC meeting? 2) Will PM Johnson request and extension to A50? 3) Will the EU approve an extension to A50? 4) Will there be a general election. With regards to “1”, at the time of writing, Friday’s session saw a slightly more upbeat tone from EU Council President Tusk, who noted that he had received promising signals from the Irish PM that a deal could be struck, albeit he himself is yet to see any solutions to ongoing issue from PM Johnson. Furthermore, it was also reported that EU Chief Brexit negotiator Barnier has the green light from the EU27 for there to be ‘tunnel’ negotiations. As such, there appears to be some optimism that progress between the EU and the UK can be made, however, whether it will be sufficient to simultaneously gain approval from House of Commons remains to be seen. Point “2” will ultimately be contingent on the outcome of point “1”, however, at this stage it appears that pressure will inevitably be on Johnson to request an extension, with market expectations for a deal to be struck at the EC meeting seen as currently low. The pressure on Johnson to make such a request comes from the so-called ‘Benn law’, which requires Johnson to either pass a deal in Parliament or get Parliament to approve a no deal Brexit (unlikely) by October 19th. In the event that a deal is not reached, a request for an extension to A50 though January 2020 must be submitted. As is stands, this appears to be the markets base case; Danske Bank assigns an 85% chance of an extension, followed by a snap election. However, it is worth noting that despite what appears to be his inevitable fate, Johnson remains adamant that the UK will leave the EU on October 31st, which has prompted some speculation that the government could have some strategy to subvert Parliament; such a strategy remains unclear. For “3”, despite some efforts to play hardball by the EU in forcing the UK to strike a deal with the rest of the bloc, it is widely accepted that the EU would accept such a request from the government. The main source of debate on the continent appears to be the length of such an extension. January 2020 has been touted as the potential date, however, some in the EU feel that this would not leave enough time for a potential referendum (outside chance), which could eventually see the UK re-join the EU. Even if a referendum was not on the table, the almost inevitable general election would only leave a small period of time for the new government (or Johnson government) to strike a deal in Brussels. With regards to a general election (which covers point “4”), this would be contingent on Parliament approving such a motion. In recent weeks PM Johnson has been banging the drum for such an outcome, with the primary aim of having a stronger hand heading into this week’s meeting. This move failed to materialise with the opposition Labour Party unwilling to cooperate, unless Johnson withdrew the prospect of a no deal Brexit; something that he was ultimately unwilling to do. However, should an extension to Article 50 be implemented, opposition leader Corbyn would likely give the green light for voters to go to the polls (particularly given the failure in constructing a government of national unity), albeit some remain cynical over whether or not he would necessarily follow through with this, given recent polling. Details of what to expect at a general election will follow in a future edition of this report.

UK DATA (TUE, WED, THU):

Aside from events in Westminster and Brussels next week, UK investors will also have the opportunity to digest a slew of tier 1 data points, with Labour Market (Tue), Inflation (Wed) and Retail Sales (Thu) reports all due for release. On the employment front, the 3M/3M Employment Change is set to tick higher to 53k from 31k, The unemployment rate is set to rise to 3.9% from 3.8% with headline earnings growth forecast to slip to 3.7% from 4.0%. Ahead of the release, RBC forecast not much in the way of fanfare for the report, which overall should show little in the way of material changes. The Canadian bank acknowledges that employment components of recent PMI reports have indicated a softening in the labour market, however, this trend is unlikely to appear for a few months in the ONS’ hard data which typically lags by a couple of months. From an inflation perspective, headline Y/Y CPI is forecast to rise to 1.9% from 1.7% with the Core reading set to move higher from 1.5% to 1.8%. Ultimately, the Bank of England, as per their latest Minutes release, expects inflation to “remain slightly below the 2% target in the near term”. However, this week’s inflation release will likely attract greater scrutiny than other in months gone by, given mounting expectations by the market for the MPC to ditch its easing bias. Markets have been leaning towards the prospect of rate cuts for many a month; but, a recent interjection by MPC hawk Saunders and the BOE slightly shifting guidance on the risks surrounding ongoing Brexit uncertainty has seen an acceleration in market pricing for a pivot by the Bank, with markets last week pencilling in a 25bps rate cut by September 2020 (this pricing has since scaled-back amid Brexit optimism). Finally, proceedings will be rounded off on Thursday by the latest retail sales metrics (no current consensus provided by Reuters). In terms of recent indicators, BRC retail sales for September fell 1.7% vs. a previous decline of 0.5%, and the data compiler noted that “the longer-term prospect continues to be bleak, with the 12-month average once again plumbing new depths at a mere 0.2%”.

CANADA SEPTEMBER CPI (WED):

The Street looks for headline CPI to rise to 2.0% Y/Y from a prior 1.9% Y/Y. Canadian bank RBC looks for a monthly decline of 0.2% M/M in the headline, which would actually correspond to a small rise in the headline to 2.1%; the monthly decline is seasonal in nature with intercity transport and food the key drivers, RBC says, while gasoline prices were close to flat in the month. The ex-food/energy component may be bolstered by insurance and mortgage costs, with the latter appearing to have peaked in May, RBC believes, and could fall further ahead on the back of lower borrowing costs for consumers. Meanwhile, the average of the three BOC measures averaged 2.0% last month, and have been in the tight 1.9-2.1% range since February 2018; RBC sees the possibility of a small uptick to the top end of that range in the September data.

RBA MINUTES (TUE):

At its policy meeting, the Reserve Bank cut its cash rate by 25bps to a new record low of 0.75%, as most analysts were expecting. The central bank retained its easing bias, and is prepared to ease further, despite it seeing the economy at a "gentle turning point." The statement was tweaked, and now concludes that the RBA will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time. Analysts noted that the inclusion of 'full employment' was a dovish development (changed from 'reduce unemployment'), that may bring forward any easing timeline at the RBA.

CHINA Q3 GDP (FRI):

The consensus view looks for Chinese GDP to rise by 6.1% in Q3, paring from 6.2% in Q2. There will be added attention on the Q3 data given China's official 6-6.5% growth target for the year. Analysts are of the view that if the pace of growth fell outside of the bottom end of that range, it might prompt policymakers to step up stimulus efforts. BofAML's analysts argue that, given much weaker growth in July and August, a September rebound will likely keep 3Q GDP growth at 6.0% Y/Y, however, without further easing measures, growth will likely trend lower in 4Q due to higher and wider trade tariffs, as well as still weak domestic demand. "This implies to maintain macro stability, policy makers will have to roll out more stimulus measures, especially in infrastructure, consumption and monetary policy," BofAML writes; the next consideration is when the stimulus will come, with the bank suggesting that, in the past, slow policy responses have been a function of centralised policy making decisions; "In our view, the ultimate instruction to ease hasn’t arrived yet," the bank writes, "in other words, the policy stance shift will take place only when the next Politburo meeting announces the change, likely at end-October." BofAML says that, since there is very little policy autonomy at ministries, local governments, and SOEs, the policy decision passthrough has to come from the above."

AUSTRALIA SEPTEMBER JOBS REPORT (THU):

The Street looks for 15k jobs to be added to the Australian economy in September, following the solid 34.7k added in August. Despite the moderation in the pace, the labour market remains robust, Westpac says, with the 3-month rolling average currently at a clip of +24k (vs +25.9k going into the August report); in the 12-months through August, employment growth was running at a pace of 2.5%, easing from the 2.8% seen in the summer, but still firmer than the 2.2%yr at the end of 2018. "Our Jobs Index suggests employment should be growing around 2.4% Y/Y currently, before slowing to 2.1% through," Westpac says. "Given the strong run of employment prints in contrast to the moderating leading indicators, it would be tempting to forecast a soft print for September. However, the outgoing rotation group has a lower employment to population ratio than the sample as a whole." The bank looks for +17k, and sees risks for an even more positive print in September. In terms of the jobless rate, the street looks for an unchanged 5.3%.

NZ Q3 CPI (TUE):

The consensus expects CPI to rise 0.6%, matching the pace of Q2; that would mean the annual rate of inflation falls to 1.4% from 1.7%, with base effects relating to last year's fuel price spike moving out of the 12-month window; the RBNZ's latest forecasts see annualised inflation at 1.3% in Q3. Westpac says that it is slightly above the Reserve Bank’s estimate, particularly on the non-tradables side, arguing that easy monetary policy has supported a gradual lift in non-tradables inflation over the last couple of years, but notes that by contrast, tradables inflation remains weak.

BOK PREVIEW (WED):

Five of the seven analysts surveyed in a Bloomberg poll expect the BOK to lower rates by 25bps to 1.25% (two see unchanged). "The central bank started its easing cycle in July this year with a 25 basis point rate cut and the arguments for more cuts has only become stronger," ING writes, arguing that "the export-led economic slowdown is deepening with the escalation of trade tensions with Japan depressing electronics manufacturing and exports. Extending a streak of double-digit declines to the fourth month, exports contracted by 12% year-on-year in September, with semiconductor persisting to be the weak spot with over 30% fall." ING says that, while this will be translated into continued GDP growth slowdown, consumer price inflation has also moved into the negative territory in September for the first time ever. "We believe the economy is flirting with a recession and, if so, it makes sense the BoK acts sooner than later." Looking ahead, there are two meetings before the end of the year, and ING suggests there is a greater probability of an October move rather than in November.

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