Original insights into market moving news

Week Ahead: Eurogroup meeting, RBA Policy Decision, Australian Budget, FOMC and ECB Minutes, UK GDP Estimate, ISM Non-Mfg PMI, OPEC WOO, Canadian Labour Market Report

  • MON: EZ, UK and US Services and Composite PMI Final (Sep); EZ Sentix (Oct); US ISM Non-Manufacturing PMI (Sep); Eurogroup Meeting; RBI Policy Decision (TBC)
  • TUE: RBA Monetary Policy Decision and Australian budget; EIA STEO
  • WED: US Vice Presidential Debate; FOMC Minutes (Sep); China Golden Week Holiday Ends
  • THU: ECB Minutes (Sep); Norwegian GDP (Aug); OPEC World Oil Outlook
  • FRI: Chinese Caixin Services PMI (Sep); UK GDP Estimate (Aug); Canadian Labour Market Report (Sep)

FOMC MINUTES (WED): The September FOMC saw the official adoption of the new Flexible Average Inflation Target, in which the Fed affirmed that it was willing to let inflation overshoot its 2% target to reach its full employment mandate; there were no changes to its asset purchase remit of USD 120bln across Treasuries, TIPS and MBS, balanced across the term structure. The Dot Plot/SEPs showed that policymakers, in general, do not see inflation (as measured by PCE & Core PCE) reaching 2% until 2023, indicative of a Fed on hold at the lower bound (FFR at 0-25bps) well past the forecast horizon. The minutes could give further insight on the manner in which policymakers are comfortable to let inflation overshoot, i.e. the velocity in which it moves above the 2% target and the ceiling at which it starts becoming a concern if above. Fed commentary in recent weeks has been mixed in regard of clarity around what it considers the upper-limit for inflation, where analysts/participants are generally honing in on between 2.25-2.5%. Evans and Barkin said they would be in favour of up to 2.5%; however, Evans said he was in a “distinct minority” in that view. It is most likely that the minutes will showcase the flexibility of the new inflation-targeting framework, looking to avoid asserting steadfast inflation ceilings and instead showing a preference to view the framework as a dynamic process in which the velocity of inflation pressures are also taken into account. Meanwhile, prior to the meeting, there had been some expectations for either the announcement of a more long-end-focused/formal QE transition, from the current “smooth market functioning” form, or some indication that this was being considered. This did not come to fruition, with Powell not indicating any such consideration in the presser/Q&A either. Therefore, it will be interesting to see if there was any focus on such a transition, and if so, what is keeping the Fed from taking such measures. Before expectations of another round of fiscal stimulus were squashed, analysts had been highlighting the imbalance of an increasing Treasury supply slate, in addition to more stimulus-induced bill issuance, potentially causing a supply glut in the Treasury market, to which it was considered the Fed would have to step-up further to provide support, particularly at the long-end in wake of record coupon auction sizes. However, with chances of new stimulus before the election now all but gone, and with it the respective ramp-up in Treasury debt issuance, this has reduced/delayed those supply pressures, hence giving the Fed some time to hold off on more asset purchases.   

US ISM NON-MANUFACTURING PMI (MON): The headline services component is expected to edge lower to 56.0 from 56.9 in September. The forward-looking New Orders component printed 56.9 in August, while Employment remained subdued at 47.9. This week saw the ISM Manufacturing come in slightly cooler than expected – 55.4 (exp. 56.4, prev. 56.0) - as New Orders declined to a still-solid 60.2 from 60.7, while the employment figure rose slightly to come in just below the 50 figure. While the Services ISM has less predictive powers (historically) of stock market returns compared to the Manufacturing index, it represents a much larger proportion of the US economy and is a useful gauge on its overall health, although more so on the direction and velocity it is heading given it is a diffusion index, rather than the absolute level. Nonetheless, there have been no concerning signals out of the regional Fed surveys, the Manufacturing ISM, as well as the Markit PMIs, which all continue to indicate a recovering US economy and should be echoed in Monday’s Services print. 

CANADIAN LABOUR MARKET REPORT (FRI): The overall consensus for the Canadian employment report is not yet available, but in August, the headline rose by 245.8k, with a strong split between full time and part time jobs, at 205.8k and 40k respectively, leaving the unemployment rate at 10.2%. For September, RBC look for a rise of 200k, which would show a continued slowing in the pace of jobs growth as the economy continues to reopen, putting the figure roughly 900k beneath the pre-pandemic level in February, RBC highlights. The desk is cognizant of seasonal factors for this report as students and youngsters will likely attribute for the gain in jobs. Although, given student employment has been low this summer due to COVID-19, the non-seasonally adjusted metric will see a smaller decline than usual for September and provide a boost to the age group on a seasonally adjusted basis when accounting for the typical seasonal effect. RBC suggest this should represent a more accurate picture of the labour market. The Canadian bank expects to see the overall unemployment rate fall to 9.4% from 10.2%, driven by the movement of students from unemployed to outside of the labour force.

EUROGROUP MEETING (MON): The upcoming meeting of EU finance ministers could prove to be interesting, namely as the EUR exchange rate is seemingly the focus of the confab. EUR has been a key theme in the markets in the second half of this year, largely after EUR/USD breached 1.2000 to the upside on September 1st – which in turn stoked concern among ECB members over the impact on price pressures, ultimately leading to verbal intervention from some Governing Council (GC) members. At the September meeting, ECB President Lagarde highlighted that the GC discussed the EUR but does not target an FX level. Subsequently, a European Commission paper for the Eurogroup noted that further substantial strengthening of the EUR would carry significant downside risks to Euro Zone (EZ) growth, and added that a long-last 5% rise in the EUR nominal rate could hamper EZ GDP by 0.9-1.1% after one year and cool inflation by 0.8-0.5%. The paper also noted that the evolution of COVID-19 will likely be a key determinant of FX moves in the coming months, with EUR likely to see heightening volatility in the run-up to the US elections. That being said, a senior EU official suggested that finance minister will discuss EUR developments but will not likely raise concerns. According to the European Council, the press briefing ahead of the videoconference will take place at 09:30BST/04:30ET, followed by an “off the record” briefing.

ECB MINUTES (THU): At the prior meeting, policymakers opted to stand pat on rates, whilst leaving policy settings unchanged for its bond buying operations, as was expected. The introductory statement noted that incoming data suggests a strong rebound in activity, which was broadly inline with previous expectations, though, ultimately activity will remain at pre-pandemic levels. The GC’s conviction in its outlook resulted in just minor tweaks to the accompanying growth projections which saw the 2020 GDP forecast raised to -8% (prev. -8.7%), 2021 held at +5.0% and 2022 tweaked lower to 3.2% from 3.3%. The 2021 HICP outlook was upgraded to 1% (prev. 0.8%) with 2020 and 2022 held at 0.3% and 1.3% respectively. With regards to the EUR, in an interesting turn of events, Lagarde’s comments were front-run by a sources piece suggesting that the ECB were in agreement that there is no need to “overreact” to EUR gains. Lagarde herself remarked the ECB does not target an FX level but will continue to monitor developments, including the EUR. Since the meeting, policymakers have continued to reinforce this message. Interestingly, particularly when squared against the upgrade to the 2021 inflation forecast, Lagarde acknowledged that FX appreciation will contribute towards subdued price pressures. With regards to further stimulus, the press conference offered little beyond the guidance provided in the policy statement with Lagarde suggesting that there was no discussion on an expansion to the PEPP envelope and a reiteration that the Governing Council’s baseline scenario envisages a full usage of that envelope. In recent weeks, reports have noted a rift in the Governing Council over future stimulus and economic projections with hawks reportedly wanting to quietly reduce the pace of PEPP purchases, whilst dovish policymakers objected to Lagarde’s “timid” language on the Euro. Attention for the account will likely fall on the extent of these divisions and how they could impair future policy decisions. 

UK GDP ESTIMATE (FRI): August’s monthly GDP report is forecast to show M/M growth of 4.6% and a Y/Y contraction of 7.1%. The report will take place against a backdrop of 2.4% growth in May, 8.7% in June and 6.6% in July as the UK economy continues to recovery from the depths of the COVID-19 crisis. Ahead of the release, analysts at RBC state their view that “the economy will have recovered to

95% of its pre-crisis level by the end of Q3”; a view that would be slightly more downbeat than that presented by BoE Chief Economist Haldane who expects GDP to be 3-4% below its pre-COVID level by the end of the quarter. Reasons for a more cautious approach include the curtailing of the current furlough scheme (replaced by a less generous scheme), further lockdown measures and Brexit-risk. From a policy perspective, consensus remains for another expansion of the balance sheet at the November meeting. However, it is unclear how much follow-through the upcoming release will have for the decision with the MPC often citing more timely activity indicators.

RBA POLICY DECISION (TUE) The RBA is expected to keep the Cash Rate Target unchanged at the October policy meeting with 25 out of 36 economists surveyed by a major newswire calling for the central bank to maintain its key policy rate at the record low 0.25%, although the same proportion of analysts anticipate a 15bps cut to 0.10% before year-end and the median forecast is then for rates to stay at 0.10% through to mid-next year. The increased expectations for further action this year has been spurred by recent comments from the central bank in which Deputy Governor Debelle stated the board continues to assess other policy options; this includes lowering the Cash Rate with and without going into negative territory, purchasing longer dated bonds and FX intervention; however, he caveated that it was unclear if FX intervention would be effective as AUD was aligned with fundamentals. Nonetheless, the mention of the possibility of lowering rates has shifted some expectations with NAB seeing significant risk of the RBA cutting its Cash Rate to 10bps and expects further easing measures to be announced at the upcoming meeting or in November. Westpac also began to call for a 15bps cut at the approaching meeting but eventually pushed this back to November and suggested it would provide the government with clean air for the budget announcement which is also scheduled this Tuesday. Other forecasters have remained firm in their view for no policy adjustments with the largest of Australia’s Big 4 banks, CBA, expecting the RBA to maintain rates at this meeting and reiterate its view that negative rates are extraordinarily unlikely, while prominent RBA watcher Terry McCrann also weighed in on the argument and suggested there was no good reason for the RBA to cut rates. Recent data in Australia has been mixed and therefore favours a patient approach with GDP for Q2 Q/Q at -7.0% vs. Exp. -5.9% (Prev. -0.3%); confirming the country’s first technical recession in 29 years and with GDP Y/Y also at a wider than expected contraction at  -6.3% vs. Exp. -5.2% (Prev. 1.4%) which may have implications on the central bank’s prior view of the downturn not being as severe as earlier expected and that a recovery is underway in most of Australia. Conversely, jobs data has been more encouraging with Employment Change topping estimates at 111.0k vs. Exp. -50.0k (Prev. 114.7k) and the Unemployment Rate unexpectedly declined to 6.8% vs. Exp. 7.7% (Prev. 7.5%) despite an increase to the Participation Rate. Focus at the announcement will be on the rate decision first given that there are outside calls for a cut, and the statement will also be scrutinised as any clues that policymakers are pivoting towards additional measures before year-end would likely pressure AUD, while a lack thereof, could push back rate cut forecasts and provide a tailwind for the currency.

AUSTRALIAN BUDGET (TUE): The unveiling of the Aussie budget will take place on the same day as the RBA’s October monetary policy announcement. The budget is set to include income tax cuts alongside a AUD 1.4-1.5bln programme that will boost local manufacturing. The package will highlight six priority sectors for Australian manufacturing (resources and critical materials, food and beverages, medical products, recycling and clean energy, defence, and space) alongside a grant funding of over AUD 1bln to aid commercialise ideas and integrate manufactured goods into the global supply chain. Further, some AUD 107mln is to be directed to strengthening supply chains that have been corroded by the pandemic. In terms of the nuances, Westpac expects a Federal Budget deficit of AUD 240bln (or 12.5% of GDP) vs. AUD 184.5bln in the July update, “The AUD 55.5bln deterioration since then reflects an expected further AUD 60.6bn in policy support, with a small partial offset due to an upside surprise on the economy” Westpac writes. This would mark a sizeable deterioration from a balanced budget for 2018/19 and the AUD 85.3bln deficit for 2019/20. The focus of economic growth will likely fall the outlook for output growth alongside the unemployment. For real GDP, Westpac anticipates the following profile: 2020/21 at -2.25% (vs. -2.5% in July), 2021/22 at +4.25% (reflecting the rebound year), followed by +3.5% in 2022/23 and 2023/24. The unemployment profile is seen as follows: 2020/21 at 8.5% (vs. 8.75% in July), 2021/22 at 7.5%, 2022/23 and 2023/24 at 7% and 6.5% respectively. Desks believe that the government will anticipate upholding fiscal stimulus to support the labour market. On tax cuts, some expect the reductions to be brought forward to July 2021 from the legislated date of July 2022. However, Westpac assesses that the economy cannot wait that long, whilst also arguing that a sustainable rise in business investments can only be achieved through rising demand, with personal tax cuts a key piece to boosting such prospects. Westpac also notes of other measures including a “one off” payment and income support for individuals on income benefit, and thus the bank has factored in AUD 3bln for 2020/21 and 2021/22. Some also note of several non-revenue items in the budget that will be aimed at bolstering productivity and activity.   

RBI POLICY DECISION (MON - TBC): Analysts are mixed with regards to the outcome of the RBI’s meeting; many anticipate the central bank will keep rates unchanged, with the Repurchase Rate and Reverse Repo Rate likely to be maintained at 4.00% and 3.35% respectively, while the RBI is also expected to retain its accommodative stance. At the last meeting, the MPC defied the consensus for a 25bps cut, and instead unanimously decided to keep rates on hold in the face of rising inflation which surpassed the central bank’s 2-6% tolerance band. After that meeting, the RBI said that it will ensure inflation stays within the target, and noted that inflation risks remain but may ease ahead on favourable base effects; Governor Das also reiterated that there was space for further monetary policy action, though impressed the need to keep some powder dry; Das also called for patience while the cumulative 250bps rate cuts already since undertaken since February 2019 seep into the financial system, further reducing interest rates and spreads; the minutes from the confab stated that the MPC decided to stay on hold and remain watchful for a durable reduction in inflation to use the available space to support the revival of the economy. These comments therefore point to a lack of urgency for the RBI to act in the immediate term, with the central bank also restricted by the latest inflation data which remained above target at 6.69%. That said, there are still risks the central bank could take action, and this would certainly be possible once inflation eases back to acceptable levels as there is a need for policymakers to support the domestic economy that has been ravaged by the coronavirus pandemic. Elsewhere, focus will be on the statement to see if the central bank tweaks its stance, and for any clues on future policy. Participants will also be on the lookout for the central bank’s growth and inflation forecasts which it is mandated to publish once every six months, and has refrained from since the last projections in February due to uncertainty from COVID, although it did state at the last meeting that it expects inflation to remain elevated and for Real GDP to contract in H1 and FY 20/21.

OPEC WORLD OIL OUTLOOK (THU): The World Oil Outlook (WOO) offers the OPEC Secretariat’s medium- to long-term analysis and projections for the global economy, oil and energy demand, alongside liquids supply and oil refining. The release will include analysis of the energy industry’s relationships and its moving parts. The prior WOO included breakdowns by region, sector, and timeframe. Last year’s release was also consistent with the July 2019 edition of OPEC’s Monthly Oil Market Report (MOMR). It goes without saying that developments in the energy complex this year have been far from linear; thus, OPEC could opt to use a timelier baseline, especially given the OPEC+ Deceleration of Cooperation (DoC) which saw a slight tapering of output cuts among producers in August. Credence will likely be put on OPEC’s medium-term forecast to encapsulate the Secretariat’s view of supply and demand developments after the availability of a vaccine, whilst its longer-term forecasts are likely to be brushed aside. Forecasts are likely to be made using key assumptions on 1) population and demographics, 2) economic growth, 3) energy policies and 4) technology and innovation, although it would not be surprising if a fifth COVID-19 category is added to explicitly outline its assumptions. That being said, the OPEC MOMR is due the following week, followed by the October JMMC meeting the week after – which may provide timelier/less stale commentary on the energy market.