It looks like a busy week, as there is a lot of economic data that is ready to hit the spotlight, together with the political news that are taking centre stage. Brexit negotiations are also in focus, together with the ongoing discussions around Italy’s deficit.
On Monday, the calendar is relatively quiet, apart from US retail sales figures that are set to come out before the US opening bell. The expectations here are that the figures for the core and headline could have increased. The headline number is expected to come out at +0.7%, which is well above the previous +0.1%. The core figure, which excludes automobiles, is forecasted to come out one tenth of percent higher, at +0.4%, against the previous month’s +0.3%. Certainly, better sales figures could have a positive effect on the US dollar, but we doubt that the greenback will show any strong reaction after numbers come out.
But there is one political event that could have its effect on the British pound, which is the meeting between the British and EU negotiators who will be meeting on Monday to discuss the Irish border issue between the Republic of Ireland and Northern Ireland. The Democratic Unionist Party (DUP) could vote against Theresa May if the British government breaks the DUP's red lines in Brexit talks. Both sides want to keep peace in Ireland by and will be aiming to find how to please both sides. If the talks won’t go ahead as smoothly as everyone would like to see them, then we could see the British pound being hit by sellers, who could shake up the currencies’ recent gains.
On Tuesday, during the Asian morning, New Zealand’s CPIs for Q3 are due to be released. Expectations are for the QoQ CPI rate to have risen to +0.7% from +0.4%, something that is likely to drive the YoY rate up to +1.7% from 1.5%. This would be well above the Bank’s own forecast for the quarter, which stands at 1.4%, and could raise speculation that the Bank could upgrade its inflation forecasts when it meets next. It could also raise some bets that officials may decide to bring somewhat forth the timing of when they expect interest rates to start rising. According to the August Monetary Policy Statement, interest rates are expected to start rising in September 2020.
Also, China is set to release its inflation figures for the previous month, together with the producer’s price index, which impacts consumer prices. The Chinese MoM CPI is expected to come out in line with the previous number at +0.7%, whereas the YoY on is set to rise from the previous +2.3% to +2.5%. But the Chinese PPI could slow down a bit going from the previous +4.1% to +3.7% expected.
During the European day, we get the UK employment data for August. Expectations are for the unemployment rate to have remained unchanged at its 43-year low of 4.0%, while average weekly earnings, both including and excluding bonuses, are anticipated to have risen at the same YoY rates as in July, +2.6% and +2.9% respectively.
According to the IHS Markit/REC Report on Jobs for the month, starting salaries for permanent placements rose at the second-sharpest pace in over three years. Temporary payment also increased strongly, but the rate of inflation was softer than the previous month. In our view, the strong increases in both permanent and temporary pay suggest that the risks surrounding earnings may be tilted to the upside, perhaps for a slight acceleration.
On Wednesday, during the European morning, we get the UK CPIs for September. Expectations are for both the headline and core CPI rates to have ticked to +2.6% YoY and +2.0% YoY, after rising to +2.7% and +2.1% the previous month. At its September policy meeting, the BoE kept rates unchanged at +0.75% and reiterated that an ongoing tightening of monetary policy over the forecast period would be appropriate, but any future rate increases are likely to be gradual and to a limited extend. In our view, the key takeaway from this decision is that the Bank’s plans remain more or less the same as in August. The Bank is probably done hiking for this year and even if inflation does not slow as the forecasts suggest, this is very unlikely to change. We believe that market participants will keep their gaze locked on Brexit developments, and specifically the EU summit on Thursday and Friday.
The Eurozone is also set to deliver their inflation numbers after the UK ones. The September core MoM and YoY CPIs are expected to come out in line with the previous ones, at +0.4% and +0.9% respectively. The headline YoY figure is also believed to be the same as previous +2.1%, whereas the MoM number could come out more than twice the last month’s number, at 0.5%.
The EU summit kicks off on Wednesday, where the European leaders are set to discuss a range of issues, as well as Italy and Britain. Certainly, in regards to Brexit, it is does not mean that a deal will be finalized during that summit, but the leaders are hoping it will help to progress further in the negotiations. Even though Italy is not really on the official agenda, still, it is believed that the Italian debt will be talked about. Current Italian debt is around 131 percent of its GDP, which is the second largest rate after Greece. The EU’s set debt target for that is 60 percent of GDP. Also, according to the EU Commission forecast, Italy’s deficit should be near 1.7% of GDP, but in the beginning of October, Italy came out saying that the forecast is at 2.4% for 2019 GDP. This sparked anger in Brussels to which they said that Italy is not sticking to its promises delivered by the previous government, which said that the deficit could only be near the 0.9% of 2019 GDP.
In the US, we get the minutes from the latest FOMC meeting. At that meeting, the Committee raised interest rates to the 2.00-2.25% range and removed the part describing monetary policy as accommodative, which was interpreted as dovish by the market initially. However, at the press conference following the decision, Fed Chair Powell said that said that dropping the “accommodative” part does not signal a policy outlook change, but just that policy is proceeding in line with expectations. In the Q&A session, he added that the Fed funds rate is still below the neutral estimate of every Committee member, and that they plan to keep their future decisions data driven, instead of trying to figure out where precisely the neutral level of interest rates is.