Weekly Outlook: Oct 12 — Oct 16: US CPIs, AU Jobs Data, and Brexit Deadline

Although we don’t have any major central banks deciding on monetary policy this week, we get several data which could impact speculation over some Bank’s future plans. On Tuesday, we get the US CPIs for September, while on Thursday, Australia’s jobs report for the month is coming out. Thursday is also the deadline imposed by the EU and the UK in order to reach common ground over trade so that any deal could be ratified at the EU summit beginning the same day.

On Monday, there are no major events or releases on the economic agenda.

On Tuesday, during the early European morning, we get the UK employment report for August. The unemployment rate is forecast to have increased to 4.3% from 4.1%, while the net change in employment is forecast to show that the economy has lost 24k jobs in the three months to August, after losing 12k in the three months to July. Average weekly earnings including bonuses are forecast to have slid 0.6% yoy, a slower pace than July’s tumble of 1.0%, while the excluding-bonuses rate is forecast to have increased to +0.6% yoy from 0.2%.

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At their latest meeting, BoE policymakers noted that they are exploring how a negative bank rate could be implemented effectively, something that increased speculation over the adoption of sub-zero rates at one of the Bank’s upcoming gatherings. Although Deputy Governor Dave Ramsden has recently said that he and his colleagues are not about to use negative interest rates immediately, a relatively soft employment report may increase somewhat speculation on that front. That said, we repeat once again that we expect the pound to stay mostly linked to developments surrounding the Brexit landscape.

From Germany, we have the final CPIs for September and the ZEW survey for October. As it is always the case, the final CPIs are expected to confirm their preliminary estimates, while, with regards to the ZEW survey, the current conditions index is forecast to have increased to -60.0 from -66.2, and the economic sentiment one to have slid to 74.0 from 77.4.

We get CPIs for September from the US as well. Both the headline and core rates are expected to have ticked up to +1.4% yoy and +1.8% yoy from +1.3% and +1.7% respectively.

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At its most recent meeting, the FOMC kept its policy unchanged, but changed its inflation language noting that they “will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time”. With regards, to the new economic projections, officials revised up their GDP and inflation forecasts, and downgraded the unemployment rate ones, while the new dot plot suggested that interest rates are likely to stay at present levels at least through 2023. That said, looking at the details, we see that one member was in favor of a hike in 2022, and four saw rates higher in 2023. Combined with the inflation forecast of 2023, which is at 2%, this shows that some members may not be willing to tolerate inflation above target for long as pointed in the decision statement. With that in mind, a move of the CPIs in the desired direction may raise some speculation that interest rates may start rising faster than previously anticipated, or it could at least prevent the Fed from proceeding with additional easing measures in the next couple of months. In any case, rising inflation could prove positive for the US dollar.

Wednesday is a relatively light day with the only release worth mentioning being Eurozone’s industrial production for August. Expectations are for a slowdown to +0.7% mom from +4.1%, but this would drive the yoy rate higher, to -7.1% from -7.7%.

Thursday is the deadline imposed by the EU and the UK in order to reach common ground over trade so that any deal could be ratified at the EU summit beginning the same day. Although some progress could be made until Thursday, a final accord appears unlikely in our view as several sticking points remain well on the table. In any case, we don’t expect GBP-traders to panic as, recently, EU chief Brexit negotiator Michel Barnier suggested that talks could continue up until the end of the month. Another report noted that the EU is preparing for negotiations to last until mid-November. With that in mind, we believe that the summit will be used just to evaluate the progress being made. Anything suggesting that the two sides are getting closer to a consensus may help the pound extend its latest gains, while the opposite may be true in case headlines point to difficulties in closing the differences-gap.

Staying in politics, the second US presidential debate was planned for Thursday, but it was officially canceled on Friday after US President Trump rejected a decision by the nonpartisan commission organizing it to change its format to a virtual event. The final debate is planned for October 22 nd.

As for Thursday’s data, during the Asian session, Australia’s employment report for September is coming out. The unemployment rate is expected to have increased to 7.1% from 6.8%, while the net change in employment is forecast to show that the economy has lost 35k jobs after gaining 111k in August.

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At its latest gathering, the RBA kept its monetary policy settings unchanged, disappointing those looking for further easing after Deputy Governor Guy Debelle flagged the prospect, with options including currency market intervention and negative interest rates. That said, a weak employment report may revive speculation for more stimulus, perhaps at one of the Bank’s upcoming meetings.

Finally, on Friday, during the European session, Eurozone’s final CPIs for September are coming out, but as it is always the case, they are expected to confirm their initial estimates.

Later in the day, we get the US retail sales and industrial production for September. The headline retail-sales rate is expected to have held steady at +0.6% mom, but core sales are forecast to have slowed to +0.4% mom from +0.7%. Industrial production is expected to have accelerated somewhat, to +0.6% mom from +0.4%

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Originally published at https://www.jfdbank.com on October 12, 2020.

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