Weekly Outlook: Aug 31 — Sep 04: RBA Decision, EZ CPIs, US and Canada Jobs Reports
Last week was a relatively light one in terms of scheduled events and releases, with the main one being the Jackson Hole annual economic symposium. This week, we have one central bank deciding on interest rates and this is the RBA. As for the data, the highlights may be Eurozone’s inflation numbers for August, as well as the US and Canadian employment reports for the month.
On Monday, it is a Bank holiday in the UK and thus, markets will be closed there. Elsewhere, we already got Japan’s industrial production and retail sales for July, as well as China’s official PMIs for August. Japan’s industrial production accelerated to +8.0% mom from +1.9%, but retail sales slid 2.8% yoy after rising 3.9% yoy in June. China’s manufacturing PMI ticked down to 51.0 from 51.1, while the non-manufacturing index rose to 55.2 from 54.2. This drove the composite index up to 54.5 from 54.1.
As for the rest of the day, the calendar appears relatively light, with the only release worth mentioning being Germany’s preliminary CPIs for August. Both the CPI and HICP rates are expected to have increased to 0.1% yoy from -0.1% and 0.0% respectively.
On Tuesday, during the Asian morning, the RBA decides on monetary policy. At its August meeting, the Bank kept its targets for the cash rate and the yield on 3-year government bonds unchanged at 0.25%, noting that its mid-March package of support is working as expected. What’s more, officials noted that even though the worst of this contraction has now passed, the outlook remains highly uncertain and that the recovery will be dependent on the containment of the virus.
Since then, the only top-tier data we got was the employment report for July. The unemployment rate ticked up to 7.5% from 7.4%, instead of rising to 7.8% as the forecast suggested, while the employment change showed that the economy gained 114.7k jobs, beating estimates of only 40.0k. With that in mind, and the Bank noting that in its baseline scenario, the unemployment rate is likely to rise to around 10% later this year, we don’t expect a 7.5% rate to prompt RBA officials to act at this gathering. We expect them to stand pat and reiterate that the outlook remains highly uncertain.
As for the Aussie, we stick to our guns that it is likely to stay mostly linked to developments surrounding the broader market sentiment. If the risk-on trading continues, its uptrend is likely to continue as well, especially against safe-haven currencies, like the dollar and the yen.
During the European day, Eurozone’s preliminary CPIs for August are due to be released. The headline rate is forecast to have declined to +0.2% yoy from +0.4%, while no forecast is available for the core rate, which stood at +1.2% in July. The bloc’s unemployment rate for July is also coming out, and the forecast points to an increase to 8.0% from 7.8%.
At its last meeting, the ECB did not alter its monetary policy, but stayed ready to adjust all its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner. With that in mind, further slowdown in consumer prices may increase the chances for additional easing by the ECB, and perhaps hurt somewhat the euro. However, we don’t expect this data set to prove the catalyst behind a trend reversal in EUR/USD. With the greenback staying under selling pressure due to the recent risk-on trading, we would treat any pull back in the pair as a corrective phase of the broader medium-term uptrend.
As for the rest of Tuesday’s data, during the Asian morning, Japan’s unemployment rate for July, Australia’s current account balance for Q2, and China’s Caixin manufacturing PMI for August are coming out. Japan’s unemployment rate is expected to have inched up to 3.0% from 2.8%, while Australia’s current account surplus is forecast to have increased to AUD 13.0bn from AUD 8.4bn. China’s Caixin index is expected to have slid to 52.6 from 52.8.
During the European day, apart from Eurozone’s CPIs, we also get the final manufacturing PMIs for August from several Eurozone nations and the bloc as a whole. As it is always the case, the final prints are expected to confirm their preliminary estimates. The UK final manufacturing PMI is also coming out.
Later in the day, we get the US final Markit manufacturing index, alongside the ISM manufacturing PMI for the month. The final Markit print is expected to match its initial estimate, while the ISM index is expected to have risen fractionally, to 54.5 from 54.2.
On Wednesday, during the Asian trading session, we have Australia’s GDP for Q2. The forecast suggests that the Australian economy contracted 6.0% qoq after sliding 0.3% in the first quarter. This is likely to drive the yoy rate down to -5.3% from +1.4%. A -5.3% yoy GDP rate would still be above the RBA’s own forecast for the quarter, which is at -6.0% yoy, and thus, we don’t expect this release to alter expectations around the RBA’s future plans. We believe that a much-worse-than-expected print is needed to spark speculation for additional easing by this Bank.
Later in the day, during the US session, the ADP employment report for August is scheduled to be released. The report is expected to show that the private sector has gained 900k jobs in August, more than the 167k gain during the month of July. This may raise speculation that the NFP print, due out on Friday, may fall short of its own forecast, which is at 1.400mn. Nevertheless, as we noted several times in the past, the ADP is far from a reliable predictor of the NFPs. Even last month, when the ADP number was at 167k, the NFPs came in at 1.763mn.
On Thursday, Asian time, China’s Caixin services PMI for August is released, but no forecast is currently available.
During the EU session, we have Switzerland’s CPIs, as well as Eurozone’s and the UK’s final services and composite PMIs, all for August. Switzerland’s CPI is expected to have ticked up to -0.8% yoy from -0.9%, while, as it is always the case, the final PMIs are expected to confirm their preliminary estimates.
We get the final Markit services and composite PMIs for August from the US as well. They are also expected to confirm their initial prints. The ISM non-manufacturing PMI for the month and the nation’s trade balance for July are also due to be released. We get trade data for July from Canada as well.
Finally, on Friday, the main release is likely to be the US employment report for August. Nonfarm payrolls are forecast to have increased by 1.400mn after rising by 1.763mn in July, while the unemployment rate is anticipated to have declined to 9.8% from 10.2%. Average hourly earnings are expected to have slowed to 4.5% yoy from 4.8%.
Last week, speaking at the Jackson Hole economic symposium, Fed Chief Powell said that the Fed will now target a 2% average inflation and put emphasis on “broad and inclusive” employment, with the shift motivated by underlying changes to the economy, including lower potential growth, persistently lower interest rates and low inflation. Although he added that the Committee is not tying itself to any particular method to define “average” inflation, this means that the Fed is willing to tolerate above 2% inflation for a while before raising interest rates, which implies extra-loose monetary policy for longer. What’s more, in the minutes of the latest FOMC gathering, it was revealed that additional accommodation may be required. However, our own view is that a decent employment report may lessen the chances for additional stimulus as early as at this month’s meeting. Officials may wait for more evidence before deciding whether (or not) to expand their efforts to stimulate the US economy.
We get employment data for August from Canada as well. The unemployment rate is expected to have declined to 10.2% from 10.9%, while the net change in employment is forecast to show that the economy has added 300.0k jobs after gaining 418.5k in July.
At its last meeting, the BoC decided to keep interest rates unchanged at +0.25% and noted that they will stay there until the 2% inflation target is sustainably achieved. Officials also added that they will continue with their QE program until the economic recovery is well underway, and that they stand ready to adjust their programs if market conditions change. With that in mind, and also taking into account that Friday’s GDP data showed that the Canadian economy performed better than expected in June, despite sliding 38.7% on a qoq annualized basis, we believe that a relatively good employment report may allow BoC policymakers to stand pat for a while more. As we noted last week, with oil prices still in an uptrend mode and the broader market sentiment remaining relatively supported, the Loonie may stay relatively strong for more, especially against the safe havens, like the US dollar and the Japanese yen.
As for the rest of Friday’s releases, those worth mentioning are Australia’s retail sales for July and the UK construction PMI for August. Australia’s retail sales are anticipated to have accelerated to +3.3% mom from +2.7%, while the UK construction PMI is forecast to have risen marginally, to 58.3 from 58.1.
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