Market participants got busy straight from the opening of the week, with China’s GDP data coming out worse than expected, forcing a reduction in risk exposure. Later in the week, inflation is likely to return to the spotlight, with the UK and Canada reporting their September numbers. With the latest supply shortages around the globe, the preliminary PMIs from the Eurozone, the UK, and the US, may also attract special attention.
On Monday, the most important data are already out and those are New Zealand’s CPI for Q3 and China’s GDP for that quarter.
Getting the ball rolling with New Zealand’s CPI, the qoq rate jumped to +2.2% from +1.3%, pushing the yoy one up to +4.9% from +3.3%. At its latest meeting, the RBNZ raised interest rates by 25bps as was widely expected, while in the accompanying statement, officials appeared optimistic, noting that further removal of monetary policy stimulus is expected over time. Therefore, accelerating inflation may have increased the chances for another rate hike by this Bank very soon, and that’s why the Kiwi was found as the second in line gainer among the major currencies this morning. However, more aggressive tightening by central banks around the globe could weigh on the broader market sentiment, and thereby keep gains of the risk-linked Kiwi limited.
Speaking about the broader investor morale, overnight, as indicated by the performance in Asian equities, market participants may have decided to reduce their risk exposure, and the reason may have been the more-than-expected slowdown in China’s GDP for Q3. In quarterly terms, the world’s second largest economy slowed to +0.2% from +1.2%, something that pushed the yoy rate down to +4.9% from 7.9%. Fixed asset investment and industrial production for September also slowed. Only retail sales accelerated. China has been facing several problems recently, form potential property defaults due to Evergrande’s failure to pay interest to its bond holders, to power outages, and from stricter government regulation on tech firms, to fresh lockdown measures due to the spreading of the Delta coronavirus variant. Therefore, the more-than-expected slowdown in Q3 may have raised concerns over how the economy could fare in the last three months of the year, and what could be the spillover effect to the rest of the world.
Later in the day, we get the US industrial production for September and BoC’s Business Outlook Survey. The US industrial production is expected to have slowed to +0.2% mom from +0.4%, while we will scan the BoC’s Business Outlook Survey to see how well Canadian firms performed. An optimistic report could, combined with accelerating inflation on Wednesday, could add more credence to the case of further tapering by the BoC at its upcoming monetary policy meeting, scheduled for October 27th.
On Tuesday, during the Asian session, the RBA releases the minutes from its latest gathering, while later in the day, the US building permits and housing starts for September are coming out. With regards to the RBA minutes, we don’t expect any fireworks. At that meeting, the Bank kept all its policy settings untouched, with officials noting that they will continue to purchase government securities at the current pace until at least mid-February and maintaining the view that interest rates are unlikely to rise before 2024. They also appeared relatively optimistic, saying that the setback to the economic expansion is expected to be only temporary and that, as vaccination rates increase further and restrictions are eased, the economy is expected to bounce back. So, we expect the minutes to reflect that.
As for the US data, building permits are expected to have declined somewhat, while housing starts are forecast to have fractionally increased.
On Wednesday, inflation will take center stage again, with the UK and Canadian CPIs for September entering the spotlight. Eurozone’s final CPIs for September are also coming out, but as it is always the case, they are expected to confirm their preliminary estimates, and thus, we expect them to pass unnoticed.
With regards to the UK data, the headline CPI rate is expected to have held steady at +3.2% yoy, while the core one is anticipated to have ticked down to +3.0% yoy from +3.1%. Despite the potential slowdown in underlying inflation, both rates are expected to stay well above the BoE’s objective of 2%. Thus, if the forecasts are met, we doubt that they could alter market expectations around the BoE’s future policy plans. With BoE Governor Andrew Bailey and MPC member Michael Saunders expressing willingness to push the hike button soon, market participants have been anticipating a 15bps hike to be delivered before year end.
However, despite the latest rally in the British currency, which was the main gainer against the other majors on Friday and today in Asia, we are a bit more cautious with regards to further advances. This is because we don’t see much room for hike expectations to come forward, and due to concerning headlines surrounding the UK economy. We will get a clearer idea on that from the preliminary PMIs for October, due out on Friday. Yes, the technical outlook of the pound has turned positive against most of its peers, but we are reluctant to call for a long-lasting recovery. We prefer to take things step by step. For now, we will continue aiming higher, but with the first sign of weakness, we will re-evaluate the outlook.
As for the Canadian numbers, the headline CPI rate is expected to have inched up to +4.3% yoy from +4.1%, while no forecast is available for the core one. As we already noted, accelerating inflation could add to the case for further tapering by the BoC at next week’s gathering, and may prove supportive for the Canadian dollar, which has been performing very well recently, aided by the rally in oil prices. Let’s not forget that Canada is the world’s fifth largest oil producing nation, while it holds the fourth place in terms of exports.
On Thursday, the only release worth mentioning is the US existing home sales for September, with expectations pointing to a small increase.
Finally, on Friday, the spotlight is likely to fall to the preliminary PMIs for October from the Eurozone, the UK, and the US. In the Euro area, both the manufacturing and services indices are expected to have declined somewhat, something that will take the composite one down to 55.4 from 56.4. This could confirm that the latest energy shortages have left their mark on the Euro-area economy, and may weigh somewhat on the euro. No forecasts are available for the UK prints, while in the US, expectations are for only fractional changes, which if materialize, we don’t expect to have a major impact on the greenback, as they may barely alter expectations around the Fed’s course of action. As of now, market participants remain convinced that the Committee will begin its tapering process in November, while, according to the Fed funds futures, they expect a 25bps hike to be delivered in November 2022.
As for the rest of Friday’s releases, during the Asian session, Japan’s National CPIs for September, while later, during the early EU session, the UK retail sales for the same month are coming out. In Japan, no forecast is available for the headline print, while the core one is expected to have rebounded to +0.1% yoy from -0.2%. However, this will still be well below the BoJ’s target of 2%, and it is unlikely to tempt policymakers to start thinking withdrawing support anytime soon. Both the headline and core UK retail sales are expected to have rebounded in September after sliding in August.
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