NEWSQUAWK WEEK AHEAD PREVIEW: Highlights include FOMC, BoE, BoJ JMMC, EU/China Meeting, UK Labour Market Report, UK and Canadian Retail Sales
- MON: EU/China Meeting; Japanese LDP Leadership Vote; EZ Industrial Production; Indian Trade Balance; OPEC MOMR
- TUE: RBA Minutes, Norges Bank Regional Network Report; Chinese Retail Sales; UK Labour Market Report; German ZEW Survey; US Industrial Production; IEA MOMR
- WED: FOMC Monetary Policy Decision; UK Inflation; US Retail Sales; Canadian CPI; New Zealand GDP
- THU: BoE, BoJ, SARB Monetary Policy Decision; RBA Bulletin; Australian Labour Market Report; EZ Final CPI; US Philly Fed Survey; JMMC Meeting
- FRI: CBR & BCB Monetary Policy Decision; UK and Canadian Retail Sales; Uni of Michigan
JMMC MEETING (THU): The 17th will see the monthly meeting of the Joint Ministerial Monitoring Committee (JMMC) - the group which tracks compliance among members. The committee (composed of Saudi, Russia, Iraq, UAE, Kuwait, Nigeria, Algeria, Venezuela and Kazakhstan) will review secondary source data alongside current market fundamentals before proposing policy recommendations – thus no policy decision will be taken at this meeting. In terms of compliance, data have pointed towards the “straddlers” compensating for the undercompliance when the OPEC+ deal was rolled up. However, the recent oil price slide has sparked concern among some delegates, according to EnergyIntel. A source added that the decline has caused concern in Riyadh, however, not enough to induce panic, with sources adding that Saudi is planning to keep production steady. Early September Russian Energy Minister Novak suggested that global oil demand has recovered to 90% of pre-crisis levels, alongside a proposal for OPEC to react to the recovery in demand, albeit noted tail risks of a second wave.
FOMC MONETARY POLICY DECISION (WED): The Fed's new average inflation targeting framework is generally considered to be a dovish development for future policy, although it is unlikely to result in any major policy changes at the September 16th FOMC, although how the central bank frame's its inflation goal will be eyed; it might tweak language to suggest that rates will remain low until 2% inflation has been achieved on a "sustained" basis. In that sense, updated economic projections will be eyed; currently, the Fed does not see inflation rising to 2% during its forecast horizon, that runs through the end of 2022 (we will start getting 2023 forecasts in this set of projections); if the Fed continues to not see inflation rising to 2% within the forecast period, that would be taken as another signal that rates will remain at present low levels for an extended period. The Fed's current projections do not see any movement in rates. With regards to the unemployment forecasts, the current rate of joblessness is below the Fed's year-end projection, and some officials have sounded upbeat relative to that forecast, leaving the possibility that its forecast will be reduced from the current 9.3% end-2020 projection. The next port of call will be whether the Fed opts to enhance its forward guidance; the changes to the Fed's framework will undoubtedly result in tweaks to some of its statement language, leaving the central bank scope to hold-off on new, enhanced forward guidance, if it chooses; however, the recent meeting minutes do note that "a number of" officials calling for more clarity on the rate outlook, but recent remarks from officials reveal that there is still some differences on what the new version of enhanced forward guidance should look like (if there is no update on this at the meeting, it will surely be a line of questioning for Chair Powell at his presser). Elsewhere, analysts will be watching whether the central bank extends QE maturities, since the current programme is heavily weighted towards shorter-dated maturities, with over half of purchases coming in the 0-5 year space. While some participants have said that the Fed should wait for more information, UBS argues that there are real costs to waiting, as large amounts of front-end buying intensify future leverage ratio constraints for some important banks; UBS says that USD 50bln of purchases in the 5-year+ sector would stimulate more than USD 80bln across the curve; it says that the Fed's current purchases are skewed to shorter maturities, so the duration that is removed by that USD 80bln is roughly equivalent to USD 38bln of 5-year+ purchases, and the bank says the Fed can extract more duration with a smaller headline purchase amount. Finally, on asset purchases, we will be paying attention whether the Fed enshrines the rate of purchases in its statement (currently around USD 80bln per month, but that is not explicitly stated within its statement); some have suggested that this is something more likely to be seen when the Fed eventually raises the rate of its bond buys.
US RETAIL SALES (WED): Currently, the consensus for US retail sales is for a 1% rise in August, with ex-autos at 0.9%, meanwhile the control group, that feeds into US GDP, is expected at 0.5%. Credit Suisse however are more pessimistic than the consensus and expect retail sales to continue its rise, just at a slower pace. The desk forecasts a 0.6% print for the headline, with ex-auto at 0.7%, ex-autos and gas at 0.5%, with the control group at 0.2%. The desk highlights that household income was supportive until the beginning of August, when the USD 600/wk unemployment benefits expired, and while some states have received a USD 300/wk benefit from the executive order signed, some did not. Nonetheless, the desk does not expect this to have an impact on the August report, but expects to see the reduction in unemployment benefits take effect in September, especially as it is unlikely for congress to come to an agreement on any further COVID relief by then. The control group reading is elevated by groceries spending and strong online sales, Credit Suisse expect to see sales at restaurants, electronics, furniture, and clothing stores to all increase at a much slower pace after the recovery seen in the last three months. Credit Suisse also highlights the reopening continues to take place, particularly in the Northeast, however some states in the South and Midwest have seen a pause in the process. Also of note, the Fed in its latest statement amended its first paragraph to note that following the sharp declines, economic activity and employment have picked up somewhat in recent months, but remain well below levels seen at the beginning of the year, while Powell and other Fed officials have stated that high frequency indicators are showing signs that the recovery is slowing.
US INDUSTRIAL PRODUCTION (TUE): Industrial Production for August is expected to rise by a slim 0.8% m/m following July’s downwardly revised +3.0%, although the y/y figure was upwardly revised to -8.18%. The strong record prints post-COVID have been fading in recent readings and that trend is expected to continue as the pent-up growth boost fades. Credit Suisse, which itself sees the figure unchanged on the month, notes that Manufacturing is likely to be the positive factor while Mining and Utilities are expected to be the drag. The bank cites the pick-up in worker hours in the NFP report, decent business surveys, and the continued rebound in rail shipments for supporting the Manufacturing component. Meanwhile, further declines in oil output are expected, despite what appears to be a bottom in drilling, while cooler August weather is expected to weigh on utilities; the bank sees the positive Mining print in July as “positive noise amidst structural weakness”. Credit Suisse concludes that there are still strong tailwinds from the economic reopening, although near-term risks – lack of stimulus, COVID-19 contagion uncertainty, and November’s election – remain to the downside.
CANADIAN CPI (WED): RBC expects a print of -0.2% m/m in August, and sees the y/y rate unchanged at 0.1%. Perhaps more eyed will be the average of the BoC average inflation measures (Common, Median, and Trim) which previously stood at 1.63%. RBC says the downward trend in the BoC’s measures is likely to continue in a delayed response to the high degree of slack in the Canadian economy. The latest BoC statement noted how “CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below target in the near term”, and added that “the core measure [is] most influenced by services prices showing the weakest growth”. RBC highlights how the downside in July was led by softer travel services and air transport, which is normally a seasonal positive, but not this year. The desk notes “the unwind of this – when seasonals are usually negative for the categories but have no positive seasonals to offset this year – should not come until the September data”. Lower gasoline prices, a continued decline in mortgage interest costs and softer prices in general should be seen in the August report, RBC highlight.
CANADIAN RETAIL SALES (FRI): RBC’s latest proprietary card tracker saw a 6% rise and the desk splits the difference to see a 3.5% gain in retail sales for July. “Continued recoveries in auto sales and clothing stores should be evident in the details”, the desk writes. The current StatsCan estimate is for a 0.7% rise in retail sales, which is expected to feed into a 3% m/m GDP rise in July, although the bank’s retail sales estimate is more optimistic, the desk noted the GDP estimate makes sense.
BOE POLICY MEETING (THU): Rates are set to be kept at the record low 0.1% via a 9-0 vote, with the APF remit to remain at the current GBP 745bln following the decision to expand it by GBP 100bln in June. Given the volume of stimulus unleashed since the start of the pandemic and the further top-up to the Gilt remit, policymakers will likely use the upcoming meeting to take stock of existing actions and the current state of the economy. The meeting will take place against a backdrop of a Q2 GDP outturn of a 20.4% q/q contraction with growth in June picking up by 8.7% on a m/m basis from May, with further growth of 6.6% recorded in July. On the inflation front, headline CPI in July rose to 1.0% from 0.6% with the core reading notably firmer at 1.8% (prev. 1.4%), albeit inflation expectations for August readout have been largely tempered by the ‘Eat Out to Help Out Scheme’ and VAT adjustments. Elsewhere, the latest round of survey data saw the Markit Composite PMI print a near 7-year high of 60.3, however, diffusion indices have suffered from some distortions given the extreme lows seen during lockdown. In the labour market, the unemployment rate remains artificially suppressed by the government's soon-to-be withdrawn furlough scheme. The conclusion of this programme has been one factor behind the market’s expectations for further easing by the MPC later this year, with UBS pencilling a GBP 100bln addition to the Gilt remit in November. Rhetoric from the Bank has accommodated these expectations with BoE Governor Bailey recently acknowledging that risks for the growth outlook remain skewed to the downside. Note, these comments were made before the recent decision by the government to limit the number of people permitted to gather indoors and outdoors; note, on September 2nd, MPC external member Saunders warned that further lockdown measures could threaten the recovery in spending by businesses and households. The prospect of negative rates is likely on the back-burner for now with the accompanying statement set to reiterate current guidance that "the Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably". Elsewhere for the MPC to consider, is the pickup in Brexit headlines in recent days, however, the Bank will likely reiterate its assumption of "an immediate but orderly move to a comprehensive free trade agreement with the European Union on 1 January 2021" given that this remains the policy of HMG.
UK INFLATION (WED): UK inflation metrics on Wednesday are set to reveal a decline in y/y CPI to 0.6% from 1.0% with the core reading expected to fall to 1.3% from 1.8%. The reason for the downtick is largely a by-product of temporary factors within the services sector bolstering the July print, with the August reading set to be impaired by recent government policy actions. These actions being the reduction in VAT for accommodation and hospitality sectors and the ‘Eat Out to Help Out Scheme’, which the BoE suggests could trim 0.4ppts from CPI inflation in August and result in a negative m/m print, accordingly, consensus has pencilled in a 0.1% contraction. The negative impact from the Eat Out to Help Out Scheme will be a temporary factor given the conclusion of the programme (some restaurants have continued to provide 50% discounts on certain days), however, given ongoing the economic impact of COVID-19, the BoE continues to guide towards 12-month CPI averaging around 0.25% in the latter part of the year and therefore a soft inflation print this week will likely come as little surprise to market participants.
UK LABOUR MARKET REPORT (TUE): The July unemployment rate is forecast to show a modest rise to 4.0% from 3.9% as the government’s furlough scheme continues mask the true extent of COVID-19 on the labour market. On the furlough scheme, RBC notes “the number of furloughed employees peaked 8.9m in early May and has fallen since then to 11% or circa 3m employees under the latest estimate”; as it stands the scheme is set to expire in October, at which point, the extent of the damage to the labour market will become more apparent. Elsewhere, for the the 3-month employment metric, citing PAYE data, Pantheon Macroeconomics expects a 175k decline, whilst from a wage perspective, the consultancy looks for a -0.9% outturn in July for AWE-including bonuses, leaving the headline rate at -1.2%.
UK RETAIL SALES (FRI): July retail sales rose 3.6% on a m/m basis taking the level of activity in the sector to 3% above pre-pandemic levels as the volume of food store sales and non-store retailing remained at high sales levels. This time around, a consensus is yet to be published, however, Oxford Economics opines that a combination of restrictions being unwound in areas such as leisure and restaurants will have diminished the previous benefit of a lack of alternative spending options for the retail sector. This allied with declining levels of pent-up demand has led the consultancy to pencil in just 0.2% growth m/m this week.
EU/CHINA MEETING (MON): Chinese President Xi is to hold a video call with German Chancellor Merkel, French President Macron, European Commission President Von der Leyen and Council President Michel. The focus of the summit will be trade, whilst the EU is also negotiating a proposed investment agreement which looks to protect European business interests in China. EU leaders are seen highlighting the importance of European businesses to the Chinese economy, particularly in light of the pandemic. However, since the June meeting, EU negotiators have been criticized China’s lack of commitment to meet EU demands in full, whilst the Chinese Ambassador remarked that the EU should meet them halfway. In terms of other topics, an EU official said that President Xi will be pressed on the Hong Kong issue, although this is not expected to dictate discussions, with EU officials less urgent as elections for Hong Kong’s legislature have been delayed by a year to September 2021. The EU is also likely to bring up climate change given that China is seen as the largest carbon dioxide contributor. Meanwhile, Thursday’s meeting between Vice Premier Liu He and EU’s Vestager was said to be “constructive”. EU sources signalled Beijing would review its policies on product safety and research reciprocity, two of the EU’s main concerns – thus paving the way for more fruitful talks between leaders.
CHINESE IP/RETAIL SALES/FAI (TUE): Industrial Production is expected to increase to 5.1% y/y in August from 4.8%, with desks citing the expansionary manufacturing PMI data as a proxy for the IP release. Operation rates at steel mills averaged around 71% nationally, up some 0.9ppts m/m. “Considering the lower base from August 2019, we think the headline IP reading could break the 5% mark.” Citi said. Meanwhile, Retail Sales for August are seen at +0.1% y/y (Prev. -1.1%), which would mark the first growth since the pandemic began. Passenger car sales expanded 12% y/y in the first three weeks of August, marking a faster expansion from July’s 8%. Some note that catering revenue, which carries a large weighting, should have continued to recover given the opening of indoor leisure places. Online sales may have also been somewhat underpinned by the behavioural change from COVID-19. Finally, the Fixed Asset Investments print is forecast at -0.4% y/y from July’s -1.6%. China’s effort to bolster investments are still at play, although tail risks remain that the pace of the recovery abating. “Property investment’s resilience will likely continue, while manufacturing investment will remain a drag given the cloudy business outlook ahead”, Citi concluded.
JAPANESE LDP LEADERSHIP VOTE (MON): The vote is set to take place on the 14th September at 0600BST/0100ET. Japanese PM Abe announced his resignation on the 28th August due to his worsening health. The resignation sparked speculation that it could represent the end of an era of his reflationist and three arrows of Abenomics policies (aggressive monetary policy, fiscal consolidation, and pro-growth policies) which have been in place since late 2012. That said, the main candidates up for the position, thus far, have not signalled an immediate nor significant shift from Abe’s policy. The LDP General Council will be holding an abridged election with ballots cast solely by delegates and lawmakers from the party’s local chapters, thus there will be no general election. Abe said he will serve as PM until a replacement has been appointed. In terms of the main candidates: Yoshihide Suga, the market-friendly candidate in the leadership bid, is seen bringing continuity to Abe’s main policy framework. Suga has also won the backing of the largest LDP faction - although this does not mean his win is in the bag. Shigeru Ishiba is seen as Suga’s main opposition and the “change candidate”. Ishiba has previously criticized the BoJ's ultra-low interest rates due to negative effects on regional banks and instead called for boosting spending on public works. Desks note that the LDP’s decision to hold a “diet” vote stacks the odds against Ishiba, who in the past has been popular in public surveys. Finally, the third candidate Fumio Kishida – whose bid for the top position has been dwindling with the race more so between the former two. Note: the BoJ has stated that it sees no change in their policy stance following Abe’s resignation – analysts at SGH Macro also expect the current stance to be maintained until the end of Governor Kuroda’s tenure in April 2023.
BOJ POLICY MEETING (THU): The Bank of Japan is expected to keep its policy settings steady, with the NIPR at -0.10% and 10yr JGB yield target around 0%, whilst forward guidance is to be maintained. The policy meeting would come against the backdrop of a new Japanese government following PM Abe’s resignation – with Chief Cabinet Secretary and Abe loyalist Suga the frontrunner. The BoJ has remarked that it will hold its policy stance, whilst Suga said he wants Abenomics to succeed and wants to push it further. The PM-favourite also noted that he wants the BoJ to take further action if needed – comments echoed by the BoJ board members recently. As per the usual pre-meeting sources, last week it was noted that the BoJ sees little need to take further action at this moment in time but is expected to offer a more upbeat view on the economy, output and export than presented in the prior meeting, with some signs of a economic pick-up seen.
NEW ZEALAND GDP (WED): Headline GDP is forecast to show a contraction of 12.8% q/q in Q2 vs. RBNZ’s forecast of -14%, with the y/y figure seen at -13.3% (vs. Prev. -0.2%). The release would encompass the lockdown, which prevented business activity for a large part of April. The lockdown restrictions were lifted but the resurgence of the virus has sapped recovery momentum in Q3. Nonetheless, desks note that initial Q2 data have been consistent with a less-weaker-than-expected contraction than originally feared. Thus, analysts at ASB see the Kiwi economy at -11% in Q2; suggesting “many sectors able to produce more output over Alert Level 3 and Level 2 than we assumed”. However, analysts warn that the uncertainty to forecasts remain elevated, especially with StatsNZ usual modelling techniques for the release “not designed to account for this type of extraordinary economic disruption.” Nonetheless, the data is unlikely to have much policy implication as the central bank and government have already responded to the effects of the lockdown. “Going forward, further policy moves will be dictated by developments over the rest of the year and 2021”, ASB said.
RBA MINUTES (TUE): Participants will be eyeing any colour regarding the RBA’s “further monetary measures” line that was added to the concluding paragraph in the Sept statement. To recap, the RBA left its Cash Rate Target unchanged at 0.25% and the 3-year yield target at 25bps, as expected. The central bank also reiterated forward guidance that it will not increase rates until progress is being made towards full employment and it is confident inflation will be sustainably within the 2-3% target band. Meanwhile, it decided to increase the size of the Term Funding Facility and make the facility available for a longer period. Further, it stated wage and prices pressures remained subdued, which was likely to continue for some time, and that inflation was expected to average between 1-1.5% over the next couple of years. The release was perceived as slightly dovish given the reference that the RBA “continues to consider how further monetary measures could support the recovery" alongside the increase in both size and duration of the TFF. With regards to past comments surrounding further measures, the RBA Governor in late August highlighted limitations of monetary policy and said the focus is on fiscal measures, whilst also pushing back on negative rates, remarking that NIRP is “unlikely”.
AUSTRALIAN LABOUR MARKET REPORT (THU): Total Employment Change in August is forecast to show 50k jobs were shed in the month (vs. Prev. +114.7k), whilst unemployment rate is expected to tick higher to 7.7% from 7.5% and participation rate is seen steady at 64.7%. The August report will entail the shutdown measures reimposed in the second largest Aussie State of Victoria, given the spike in COVID-19 cases in the month, whilst the New South Wales recovery levelled out. Analysts at Westpac back the Street expectations for the headline change and unemployment rate, but the Aussie bank expects the participation rate to moderate to 64.5% as the job losses and recovery were focused on part-time employment, which then led to a rebound in participation “as these less attached workers left the labour force only to quickly re-enter as employment conditions improved” ahead of the Victoria lockdown. RBA Governor Lowe, on Sept 1st, remarked that “The virus outbreak in Victoria and subdued growth in aggregate demand more broadly mean that it is likely to be some months before a meaningful recovery in the labour market is under way”, whilst reiterated that RBA’s central scenario is for unemployment to rise to around 10% later in 2020.
NORGES BANK REGIONAL NETWORK SURVEY (TUE): In August, the Norges Bank left all policy settings unchanged and largely reiterated prior commentary, maintaining the line that the outlook and balance of risks indicates that the policy rate will likely be at current levels for some time ahead. The regional network report serves as a timelier indicator of the economy’s recovery and projected path since the last such update in June, where respondents looked for broadly unchanged activity in H2. Since then, whilst the economy has exited lockdown, data has painted a somewhat mixed picture of the domestic economy with July’s GDP reading, the timeliest figure thus far, missing expectations for the mainland print. Data aside, Statistics Norway modestly upgraded its non-oil GDP forecast for 2020 but slightly cut 2021 and 2022’s readings; unemployment rate is seen decreasing faster than projected in June for this year and next; given these updates indicate a marginally quicker pace of recovery than forecast by the Norges Bank in June it may pressure the Norges Bank’s September forecasts slightly. Within the regional network report, focus will be on whether respondents feel the near-term outlook has improved or, and as the Norges Bank indicated in August, believe the economy’s development has been largely in-line with projections. As such, the broader message from the regional network survey is unlikely to provide too much in the way of policy-altering commentary at this stage; with focus more on CPI metrics and other hard data points.
SARB POLICY MEETING (THU): Analysts expect the SARB will hold rates at 3.5% on Thursday, before cutting by a further 25bps in November, according to a Reuters poll. The central bank has cut rates by a cumulative 300bps in 2020 thus far to help support the economy amid the pandemic fallout. Citi thinks the SARB only has 25bps of scope to cut rates, though this will depend on incoming data. Looking further out, analysts believe that the expected cut in November will be the last before the central bank begins hiking, perhaps as soon as next summer; but this is not expected to be a theme any time soon, given the recent dire economic metrics, where data showed the economy contracted by 51% in Q2.
CBR POLICY MEETING (FRI): Consensus points to the Russian Central Bank cutting its Key Rate by 25bps to 4.00%, with split views amongst respondents as seven out of 16 expect a hold. Since the July 24th meeting, which saw a 25bps reduction, commentary from Russia has also been dovish-leaning. Deputy governor Zabotkin highlighted the necessity of further cuts to be considered at the Sep 18th meeting, whilst also noting that the economic contraction in 2020 may not be as deep as initially feared. The central bank said it will begin publishing trajectory of possible changes to key rates and expand the number of scenarios for monetary policy based on economy, not oil prices, although recent CPI data warrant easing. Analysts at Credit Suisse see two options: 1) cut the key rate by 50bps and announce a pause of its easing cycle, or 2) cut by 25bps and leave room for further cuts if needed. The landscape however has changed since the prior meeting. Real sector data released since has been indicating a strong recovery, whilst on the other hand, the RUB has weakened to fresh YTD lows amid revisions in offshore double taxation treaty alongside Belarusian protests and the Navalny situation. “Although inflation data were supportive for a further policy easing, ignoring other developments, we change our view and no longer expect that the CBR will cut the policy rate in the next rate-setting meeting” Credit Suisse said, adding that it does not expect the CBR to ease policy for the rest of the year.
BCB POLICY MEETING (FRI): The Brazilian Central Bank is expected to keep its benchmark Selic rate unchanged at 2.00% on Friday. Recent commentary from policy director Kanczuk has continued to show the bank’s aversion to further cuts or QE (which it views as a market dysfunction solving tool rather than a monetary policy tool), and a preference to instead leverage its forward guidance more aggressively if more stimulus were needed, although it believes they are a “long way” from that currently. Policymakers are fortunate in the sense that the deflationary nature of the coronavirus has provided them with more capacity to stimulate growth, although the line is thin in Brazil for market confidence. The IPCA gauge of inflation rose by 0.2% in August, as expected, taking the Y/Y rate up a notch to 2.4% (prev. 2.3% in July), off May lows, although still a depressed level from the 4% levels seen pre-COVID. On growth, BCB Chief Campos Neto has said the central bank sees GDP running hotter than the market expects in Q4, and 2020 growth is seen at -5.00% (vs. -5.3% market consensus). The bank has been vocal about the dangers of low rates in a less fiscally disciplined environment under President Bolsonaro's administration. Recent discussions on expanding spending/benefits have seen the BRL come under pressure; the bank itself has said it does not target a specific FX rate, though will intervene as necessary. Friday’s rate decision isn’t expected to create any fireworks, but it is likely to continue to acknowledge that while inflation is currently low, a sudden move higher remains a key risk under a fiscally expansive regime. As such, the BCB will try to offset fiscal exuberance while simultaneously providing the conditions needed to foster the economic recovery.