Macroeconomics: The Week Ahead: 2 to 6 October

The Week Ahead – Brief Preview:

The new quarter kicks off with the US having narrowly avoided a government shutdown with a 45 day funding extension after a rare display of bipartisan resolve, but with broader spending issues unresolved, including the requested $24 Bln of support for Ukraine, and the position of House Speaker McCarthy remaining under threat from hardline Republicans. The statistical schedule is a very familiar start of month mix of PMIs/ISM, the array of US labour market indicators (Payrolls, JOLTS Job Openings, ADP, Challenger Job Cuts) and Auto Sales, accompanied by German Orders, Japan’s quarterly Tankan survey, Wages and Household Spending, with China’s divergent NBS and Caixin PMIs to digest. There are rate decisions in Australia, India, New Zealand, Peru, Poland and Sri Lanka, and a busy run of central bank speakers and the ECB’s annual Monetary Policy Conference. In the commodity space, all eyes will be on the meeting of OPEC+ Joint Ministerial Monitoring Committee (JMMC) to see if there is any willingness to ease up on Saudi and Russian production cuts, with another busy run of conferences featuring ADIPEC Energy, the pre-COP28 Climate & Energy Summit and FT Mining Summit amongst others. Government bond supply is quite modest, with no coupon supply in the USA (though T-Bill issuance will be in excess of $400 Bln), just over EUR 21 Bln in the Eurozone, GBP 4.25 Bln of 2-yr in the UK and JPY 3.6 Trln of 10 & 30-yr in Japan. Corporate earnings reports remain typically light, with the highlights including Levi, Conagra, Constellation, Lamb Weston, Boohoo and Tesco among the likely highlights. China will be closed all week for the Autumn Festival/National Day holidays.

China’s PMIs looked divergent on the surface: Manufacturing NBS 50.2 vs 49.7 against Caixin 50.6 vs. 51.0; Services NBS 51.7 vs. 51.0 against Caixin 50.2 vs. 51.8, but given the higher proportion of smaller companies in the Caixin version, and the fact that the NBS SME PMI continued to contract (albeit at a slower pace), the divergence is unsurprising. With the boost from summer holiday travel effect waning, and little evidence of any strength outside of Financial Services, Communications and Media, and the seemingly eternal drag from the property sector, the recovery remains very fragile, and the drop back into contraction for the Employment sub-index underlines this, even if orders and output are continuing to expand. There will be particular interest this week on high frequency data on consumer spending during the Autumn Festival/National Day holidays.

In the US, there will be relief about the last minute deal to avert a government shutdown, but the UAW autoworkers strike is entering its third week (above all impacting parts distribution), and despite a compromise agreement having been reached on pay and benefits, there is as yet no framework agreement for battery plants (note that these have not actually been commissioned yet), or the UAW’s demand for guarantees for engines and transmissions workers, should their jobs become obsolete (due to EVs). Be that as it may, this week’s run of labour market indicators are expected to show that August JOLTS Job Openings were little changed at 8.830 Mln, the ADP Employment measure to drop to 150K (vs. 177K), Initial Claims to remain very low at 210K (prior 204K), and for Non-farm Payrolls to ease to 165K from 187K.. If forecasts are correct, this would indicate that the labour market continues to loosen, but at a slower pace, the ISM Employment indices will also require attention (Manufacturing last 48.7, Services 54.7). The consensus looks for a rebound in Auto Sales to 15.35 Mln SAAR (from 15.04 Mln), though industry estimates suggest a reading closer to 15.5 Mln, and this despite the UAW strike and a further modest rise in average Auto Loan financing rates, per se reflecting continued pent-up demand following the extensive Covid disruptions. Construction Spending is also due, and while Housing Starts took a tumble, it is expected to continue to expand at a solid 0.5% m/m (Jul 0.7%), with Manufacturing Construction (boosted by CHIPS and IRA acts) a key driver (last 1.1% m/m 7.14% y/y!!).

Be that as it may, PMIs get the week under way, along with Japan’s Q3 Tankan. Flash G7 Manufacturing PMIs were all down at heel, above all in the Eurozone and UK, with the focus on Asian readings, which have been very mixed (Japan, Malaysia, South Korea & Taiwan contracting, Vietnam expanding marginally, while Indonesia showing some strength), while the US ISM is expected to remain in contraction, but edge up in m/m terms to 47.9, and regional Fed surveys hinting at a modest upside risk. Services PMIs have shown rather more divergence, holding up relatively in Japan, but persistently weak in the Eurozone and UK, while the US Services ISM (exp. 53.5 vs. prior 54.5) has significantly outpaced the PMI (flash 50.2), though that ISM strength reflects a smaller proportion of SMEs in the ISM relative to the PMI. Overall the readings will only serve to underpin expectations that the Eurozone and UK are likely to slip into recession in H2 2023. Japan’s Q3 Tankan readings are seen little changed vs. Q2 on current measures, but diverging on Outlooks, with Manufacturing expected to deteriorate, but Services anticipating a pick-up.

After a steep decline of -11.7% m/m in July, German Factory Orders are seen posting a dead cat bounce of 1.5% m/m, but still be down 7.9% y/y, and doubtless reflecting weakness in external demand, which is likely to be reinforced by an expected further drop in Exports of -0.8% m/m, which would follows July’s -0.9% and June’s -3.2% m/m. French and Spanish Industrial Production are also scheduled for release. In the UK, BRC Shop Prices will be closely watched (last 6.9% y/y) especially after the better than expected CPI readings for August, with the Nationwide House Price measure seen posting a slightly smaller fall of -0.4% m/m, which would see the y/y rate slip to -5.6% from -5.3%. Canada’s labour market indicators are forecast to show average 20K rise in Employment, though the Unemployment Rate is expected to edge up to 5.6% from 5.5%, while Wages are seen edging down to 5.1% y/y.

OPEC+ JMMC is likely to recommend that production cuts are maintained at current levels, due to the uncertain economic outlook, and despite a clearly tightening supply backdrop, with weekly US EIA inventories likely to show inventories remain very low.

Australia’s RBA is expected to hold its key rate at 4.1%, despite an oil price driven rise in monthly CPI to 5.2% y/y, with other indicators painting a rather mixed picture on economic activity. It will doubtless maintain a tightening bias, above all with energy prices rising, and some signs that the housing market is improving, notwithstanding the swift pass through of rate increases to mortgage rates and other borrowing costs. New Zealand’s RBNZ is also seen keeping rates steady at 5.5%, despite the much stronger than expected 0.9% q/q rebound in Q2 GDP and the rise in Q2 CPI to 6.0%. The latter will doubtless be cited along with rising energy prices as grounds for retaining a tightening bias, though it will be November’s meeting at which it presents updated economic forecasts, which will be key in terms of the rates outlook. India’s RBI will likely echo the RBA and RBNZ with a no change rate decision and a tightening bias, but with late monsoon rains easing the upward pressure on food prices which has pushed CPI above the RBI’s target range, and with refiners not passing on much of the recent increase in energy prices, the likelihood is that CPI falls back into range in the next few months. Standing out amongst the crowd will be Poland’s NBP, with the consensus looking for a 25 bps rate cut to 5.75%, following from the unexpected and sharp 75 bps cut at last month’s policy meeting. To be sure the NBP can point to the steep fall in September CPI (8.2% y/y from 10.1%), though this boiled down to the fact that petrol prices were slashed 7.0% by state owned refiner PKN Orlen, in a move doubtless under duress from the PiS government ahead of the October 15 election, and totally out of sync with ARA Barge prices for European Gasoline 95, which have been range bound since June (see chart).

Otherwise there will be plenty of Fed and ECB speakers, with both Powell and Lagarde slated to speak this week, while BoE’s Broadbent will join a panel discussion on “Running up that hill – taking stock of the hiking cycle” at the ECB’s annual Monetary Policy conference.