Original insights into market moving news

Week Ahead 18-22nd October: highlights include Chinese activity data, PBoC; BoC BOS; Flash PMIs; UK, Japan, Canadian CPI

  • MON: Chinese GDP (Q3), Retail Sales (Sep); Industrial Output (Sep).
  • TUE: RBA Minutes; Bank of Indonesia Policy Decision; NBH Policy Decision.
  • WED: PBoC LPR Setting; UK Inflation (Sep); Canadian CPI.
  • THU: CBRT Policy Decision; US Philly Fed (Oct).
  • FRI: Japanese CPI (Sep); UK Retail Sales (Sep); EZ, UK and US Markit Flash PMIs (Oct).

NOTE: Previews are listed in day-order

US TREASURY FX REPORT: The Treasury's semi-annual currency report does not set a release date, and could be published any time before the end of October. As usual, traders will monitor for any change in language within the report regarding the FX policies of major US trading partners. ING estimates that Switzerland, Vietnam, Taiwan and Malaysia met the three Treasury criteria to be labelled as FX manipulators, but thinks the Treasury will refrain from tagging any country as a manipulator in this report, and instead thinks the Treasury will seek more enhanced bilateral talks with Switzerland, Taiwan and Malaysia, while Vietnam has already made concessions to the US. (NOTE: the previous report dropped the currency manipulator labels vs the Swiss and Vietnamese). ING estimates that China meets two of the three criteria, but doesn't meet the standard for FX intervention; "When it comes to China’s FX interventions, the Treasury introduced two different measures in its latest Report," ING explains, "the first uses the change in the PBOC FX assets, and the second (considered as a more comprehensive measure by the Treasury) looks at net FX settlements data adjusted for the change in outstanding FX forwards, which we estimate was worth 1.6% of GDP, below the Treasury threshold." The bank thinks that all countries already on the US 'Monitoring List' will remain there, though Malaysia may join Switzerland, Vietnam and Taiwan in the group that meets all criteria, but not officially designated manipulators; this would mean that the Monitoring List would comprise of China, Japan, Korea, Germany, Italy, Singapore, India, Thailand, Mexico, and Ireland.

CHINESE GDP, RETAIL SALES AND INDUSTRIAL OUTPUT (MON): The Q3 GDP figures will likely attract the most focus, with the nation’s economic growth wholly expected to have lost momentum, owing to the widespread local COVID outbreaks over the summer, coupled with the electricity crunch which hampered some factory operations and will likely weigh on industrial production. Retail sales growth, meanwhile, is expected to have rebounded following the containment of local outbreaks and in the run-up to the Golden Week holiday. The street expects Q3 GDP at 5.2% Y/Y (vs 7.9% in Q2), September Industrial Production at 4.5% Y/Y (vs 5.3% in August) and September Retail Sales at 3.3% (vs 2.5% in August). Analysts at SocGen forecast headline GDP growth and IP both at more pessimistic 5.0% and 3.0% levels, respectively, assuming a larger hit from the electricity outages over 20 provinces. The electricity crunch “started to be more widespread in the second half of September and caused serious disruptions to industrial activity, especially in energy-intensive industries (c.30% of IP), such as steel and aluminium”, the analysts say. That being said, an expected slowdown in growth momentum has translated to more noise surrounding a RRR cut. Chinese press reports noted that China is expected to reduce the RRR in Q4 and could also conduct large MLF and reverse repo operations.

US INDUSTRIAL PRODUCTION (MON): Industrial production is seen rising +0.2% M/M in September (prev. +0.4% M/M), and manufacturing output is seen rising +0.3% M/M (prev. +0.2%). However, some desks are expecting the first decline in six months, as motor vehicle production drags and manufacturers slash output on parts shortages. Credit Suisse looks for a -0.3% M/M print for the headline, but thinks ex-auto manufacturing will put in a small +0.1% M/M rise. “Manufacturing hours worked from the employment report showed a small increase and ISM manufacturing has come off its extremely elevated levels earlier,” it writes, “mining production should be a small drag, as both crude oil and natural gas production dropped, and we expect utilities output growth to be neutral.”

BOC BOS (MON): Analysts have been complaining about the limited use of the Business Outlook Survey in the pandemic era, given the lag between response times and the release itself. RBC says that the last response was, however, somewhat more useful, alluding to rising inflation expectations and wage pressures, although adds that the reasonings were consistent with more temporary, pandemic-related factors. "Our expectations for this release are that inflation expectations and supply pressures will remain prominent," the bank writes, "however, Governor Macklem’s speech on October 7th provided little evidence of a change in the broader view of inflation/price pressures being tied to pandemic-related factors, even if more persistent than previously expected." RBC expects businesses to be relatively upbeat within this report since the quarter saw an easing in pandemic restrictions for most of the country.

RBA MINUTES (TUE): RBA is to release the minutes from the October 5th meeting when the central bank maintained its Cash Rate Target and 3yr Yield Target at 0.10%, as expected, while it also kept its bond purchase plan unchanged at AUD 4bln per week through to at least mid-February 2022. At the meeting, the RBA reiterated that the central scenario is that the condition for a rate increase will not be met before 2024 and it is committed to maintaining highly supportive monetary policy. It added that the Delta outbreak interrupted the recovery of the economy and GDP is expected to have declined materially in the September quarter, although the setback to the expansion is expected to be temporary and the economy will grow again in the December quarter. Furthermore, it noted that the economy is expected to bounce back as vaccination rates increase further and restrictions are relaxed, but also commented that wage and price pressures remain subdued. The meeting provided very few suprises with the decision on rates inline with the central bank’s guidance which it has rigorously stuck to and as bond purchases were also widely expected to be maintained given that it was only last month that the central bank tapered and prolonged its weekly purchases.

PBOC LPR (WED): The PBoC is to decide on its benchmark lending rates with the 1-Year Loan Prime Rate expected to be maintained at 3.85% and 5-Year Loan Prime Rate at 4.65%, which would be the 18th consecutive month that the central bank has refrained from adjustments. The rhetoric from the PBoC doesn’t suggest any urgency to alter rates as it had reiterated that it will make prudent monetary policy flexible, targeted and appropriate, as well as keep liquidity reasonably ample, while Governor Yi Gang also previously noted that China will lengthen the period for the implementation of normal monetary policy and that the PBoC has conditions to keep a normal and upward yield curve. The central bank’s actions also point to a steady approach as it had been draining additional funds that were injected prior to the National Day Golden Week holidays and with this month’s Medium-term Lending Facility operation also neutral, whereby it matched the maturing CNY 500bln amount. However, the most important clue for the central bank’s intentions is its decision to maintain the 1-year MLF rate unchanged at 2.95% as this is seen as a bellwether which the central bank had cut first prior to the last 3 occasions that it lowered the benchmark Loan Prime Rate.

UK INFLATION (WED): The data is likely to show higher energy costs as prices surged, although the core measure may ease back on the 'Eat-out' campaign base effects’, Moody's says. For traders, the data will be framed in the context of recent money market pricing for higher rates, stoked by commentary from key BoE officials, who appear to be giving a nod to the tighter path. At its September meeting, the MPC said CPI was expected to rise further in the near term, to slightly above 4% in Q4, driven by energy and goods prices. The Committee also judged that, should the economy evolve in line with its projections laid out in August, some modest tightening was likely to be necessary to help meet its inflation goals. This tone has also been echoed in recent commentary from BoE officials like Governor Bailey, who this week described inflation developments as concerning, and hawk Saunders, who has suggested that market pricing is pointing to rate rises which he thinks is appropriate. Currently, money markets are discounting a rate hike to 25bps by the end of this year (most analysts are of the view that when the Bank does raise rates, the first hike will be a 15bps move to 0.25%, and any further adjustments will resume the typical 25bps increments). Money markets are not assigning any moves in November, however, with only around 25% probability of a hike, according to Reuters. New chief economist Pill has also given a nod to inflation concerns, but this view is not universal on the MPC, and new member Mann for instance, said the BoE can hold off on rate hikes, framing the market pricing as traders merely discounting the direction of travel based on other global central banks’ normalisation, and this "endogenous" tightening of financial conditions means she is more patient on active tightening via the Bank Rate.

CANADIAN CPI (WED): Canadian bank RBC looks for a +0.1% M/M rise in the September CPI metric, pushing the annual rate up 0.1ppts to 4.2% Y/Y, as supply chain woes push up autos prices despite the typically negative seasonals in the month. As everywhere else in the world, energy prices will be in focus amid the recent price spikes; RBC says gasoline prices should weigh, however, though they remain elevated Y/Y, airfares are seen pulling back after the sharp rise in August, with further Delta concerns hitting travel. RBC recently updated its Canadian inflation projections, and now sees Q4 inflation at 4.2% Y/Y, above the BoC's +3.5% view in the July MPR; "We expect the BoC to upgrade its inflation forecasts at the October 27th meeting and MPR, though its overall view of inflation pressures being pandemic-related and likely to unwind should be largely intact."

CBRT POLICY DECISION (THU): The latest CBRT policy announcement comes against the backdrop of the TRY hitting new record lows (with USD/TRY topping 9.00 recently) and another central bank shakeup by Turkish President Erdogan. There are currently no expectations of what the central bank may opt to do under the revised MPC, although desks suggest that the overhaul clears the way for further rate cuts. As a reminder, the September meeting saw the CBRT go for a surprise cut of 100bps and the statement removed the reference to interest rates being determined at a level above inflation. Since then, sources suggested that the CBRT Governor reportedly told investors that core inflation indicators are seen falling in the near term. The CBRT central bank survey meanwhile upgraded its CPI forecast to 17.63% (prev. 16.74%), GDP growth to 8.9% (prev. 8.2%), USD/TRY to 9.2195 (prev. 8.9184), whilst the repo rate forecast was cut to 14.34% (prev. 14.73%).

JAPANESE CPI (FRI): CPI is expected to remain subdued with the Y/Y core metric for September seen at 0.1% vs 0.0% in August. It was recently reported that wholesale prices rose 6.3% in September amid higher raw material costs, whilst the rise in the corporate goods price index (CGPI) and Domestic final goods prices was 5.9% and 1.8% respectively Y/Y, according to BoJ data, but soft household spending remains the biggest headwind. Heading into the end-Oct BoJ meeting and forecasts release, sources suggested that the central bank will likely cut its growth estimates and trim the CPI metric, with the former due to supply constraints.

UK RETAIL SALES (FRI): As a proxy, the BRC's gauge of September retail sales showed volumes falling 0.6% Y/Y, the lowest since January, after 3.0% in August; the data suggests retailers are suffering as a result of fuel shortages, making consumers less willing to travel. This also chimed with Springboard's data, which notes the decline in retail footfall amid the fuel supply issues. And Barclaycard's spending data reported the 2019 vs 2021 growth rate easing to 13.3% in September from 15.4% in August. Economic consultancy Pantheon Macroeconomics, looking ahead, says real household disposable income looks set to drop by about 1.5% Q/Q in Q4, as income declines in response to the end of the furlough scheme, Universal Credit payments are reduced, and CPI rises further: "After brief respite in Q1, households then will be hit by the 1.25ppts increase in the rate of employees' national insurance contributions, which will reduce real household disposable income by 0.5%, as well as by a 30% or so increase in Ofgem’s energy price cap." But PM thinks that consumer spending still has the potential to pick-up, since households' saving rates have substantially exceeded pre-pandemic levels in Q2”, though it adds that any swift return to pre-pandemic levels seems unlikely.

EZ MARKIT FLASH PMI (FRI): Analysts are expecting flash PMIs will come in lower in October; the street looks for the services print to fall to 55.4 from 56.4, the manufacturing print is seen falling to 57.0 from 58.6, which should see the composite come in a point lower at 55.2, continuing the downside seen in September as the re-opening impact fades. Regarding manufacturing, RBC argues that the headline overstates the level of activity in the sector and understates the effect of supply chain disruptions, and accordingly, the bank is not paying too much attention to the data; instead, it says that the suppliers' delivery times sub-index should give more insight into the supply chain issues. The bank also suggests keeping an eye on input and output price sub-indices, after last month's data saw the composite input prices pick-up to the highest in 21 years.

UK MARKIT FLASH PMI (FRI): Consensus expectations look for the headline services gauge slip to 54.6 from 55.4, manufacturing to pare back to 55.5 from 57.1, leaving the composite at 54.0 from a previous 54.9. Analysts expect the series will be dragged on by the persisting supply chain disruptions alongside the recent focus on rising costs of living. The September release was somewhat mixed but the final data was revised higher; the final September manufacturing report said pinned the confident outlook on recoveries in both domestic and global markets, reduced difficulties from supply chains, COVID-19 and Brexit and planned new product launches, though noted that the supply chain crisis has put a considerable brake onthe UK services sector recovery. Survey respondents were also noting shortages of staff, raw materials and transport had resulted in lost business opportunities.

CBR (FRI): Ahead of the meeting, the CBR's analysts have warned of high inflation expectations among businesses amid a background of easy financial conditions, but slowing growth. Recent data shows inflation has picked up to 7.63%, well above the central bank's 4.0% target, and accordingly, analysts expect the CBR will lift rates from the current 6.75% mark, with the consensus expecting +25bps to 7.00%.