Brexit unknowns ever present

Monday

Data releases are few and far between on Monday. Japan will release its August All Industry Activity Index in the early European morning. Switzerland will also report its usual Total and Domestic Sight Deposit data for October 19th. With financial market concern escalating over Italy’s defiance of EU budget rules, an increase in Switzerland’s domestic bank sight deposits would show the central bank’s defending its currency from unwanted appreciation.

In the afternoon, Canada reports August Wholesale Trade Sales and the US prints September’s Chicago Fed National Activity Index. The Chicago Fed National Activity Index reported steady above-trend economic growth in both July and August, and September’s reading is projected to show a growth uptick. Other data has had a strong September print so far; in particular, the ISM Non-Manufacturing index which reached over a two-decade high and has buoyed expectations for a strong result. In the late evening, Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle speaks.

Tuesday

Japan’s September Supermarket and Nationwide Department Sales will be released in the early European hours, followed by the nation’s final September Machine Tool Orders figure. Last month’s release of the US Richmond Fed’s Manufacturing Survey encapsulated the resilience of US manufacturing in spite of US tariffs and continued uncertainty in trade policy. The regional measure of mid-Atlantic factory rose to its highest level on record. A spike in September’s new orders, order backlogs and a drop in raw inventories show the sector growth is not set to slow anytime soon. Eurozone Consumer Confidence has tracked lower since the start of 2018, in line with a host of business sector confidence measures and the Eurozone Composite Purchasing Managers’ Index (PMI). The first release of October Eurozone Consumer Confidence threatens to undermine the European Central Bank’s (ECB’s) belief that household spending can maintain growth as manufacturing and exports slow.

Tuesday has a heavy speakers schedule. The RBA’s Michele Bullock and Guy Debelle speak in the early hours. The typical hawkish Bank of England (BoE) Andy Haldane will speak at an Organisation of Economic Corporation and Developments (OECD) event. The central bank Chief Economist is very aware of rising wage pressures and no productivity growth pushing up inflation. However, with Brexit unknowns ever present, his hawkish comments may fall on deaf ears. Later, the BoE’s Governor Mark Carney speaks, but the conference title ‘Machina Learning and the Market for Intelligence’ mean his remarks may be off topic. Federal Reserve centrist Robert Kaplan will also speak.

Wednesday

Japan will release its October Nikkei Manufacturing PMI in the early hours. Eurozone October Services, Manufacturing and Composite PMI will be the focus of the European morning. The manufacturing sector has dragged growth lower since the start of 2018 as trade flows almost stall. The clear loss of momentum in both output and new orders suggest Eurozone growth will fall further, adding pressure to the ECB before their meeting decision Thursday. Eurozone M3 Money Supply growth will provide a signal as to whether Eurozone credit growth continued to slow in September. 

In the afternoon, the US reports on its housing sector with the release of the MBA October 19th Mortgage Applications, FHFA August House Price Index, and September New Home Sales. US Markit October Manufacturing, Services, and Composite PMI’s will be released. Last month, services growth dipped while manufacturing remained resilient. However, strong services new orders growth, building order backlogs, and strong employment gains suggest the weakness was an aberration and not the beginning of a slowdown. The Bank of Canada (BoC) will hold a policy meeting and are expected to raise rates. New Zealand September Trade Balance will be released overnight.

On the speakers’ schedule, two Federal Reserve hawks Esther George and Loretta Mester will talk as well as centrist Raphael Bostic. The Fed also releases the latest Beige Book.

Thursday

The highlight of the week will be the ECB’s October policy meeting. The question is what has changed in the last six weeks which might cause a change of tone from the central bank? Is the continued weakening in Eurozone PMI still in line with the ECB’s outlook for a gradual growth slowdown? Does core inflation remaining stuck at 0.9% corroborate its outlook for rising price pressures? The biggest risk is likely to be a downgrade to the risks to the economic outlook from ‘broadly balanced’ to skewed to the downside. The ECB September minutes already suggested the Council saw a case for this change in September. Since the Council last met, Brexit negotiations have become deadlocked while time runs out to reach an agreement. Italy’s defiant budget caused the nation’s 10-year borrowing cost to reach a high of 3.8%, and early signs of contagion could be seen. Portuguese, Greek, and Spanish bond yields all moved higher in line with Italy. The ECB cannot change policy based on one country alone, but if the issue becomes a systemic problem they can act. 

US September Durable Goods Orders will be the main release of the US session.  In August, Durable Goods Orders rose at the fastest pace since February. However, non-defence aircrafts rose 69.1% on the month, a volatile component that we expect to directly subtract from September’s month-on-month reading. We already know that Boeing orders fell to 65 in September from 99 in August. Durable Goods New Orders excluding transportation appears to be reaching its peak, suggesting a coming slowdown in the US Manufacturing sector. The US will also release September Wholesale Inventories, Initial Jobless Claims, Continuing Claims, September Pending Home Sales, and October’s Kansas City Fed Manufacturing Activity.  Fed centrists Lael Brainard and Richard Clarida will also speak.

Friday

Japan will release its October Tokyo CPI and Eurozone ECB Survey of Professional Forecasters. The US will publish its first estimate of third quarter US Gross Domestic Product (GDP), and the market is expecting 3% quarterly growth. After providing a big boost in the second quarter, trade balance data suggests net trade was a substantial drag on GDP growth in the third. Consumption continues to be a strong contributor to growth in Q3, supported by a strong US labour market, wage gains, tax cuts, and replacement demand after Hurricane Florence. However, investment will be a mixed picture. Business investment should accelerate as businesses increase their capacity while residential investment likely subtracted from growth due to rising mortgage costs and alleviated house prices.

The Personal Consumption price index, calculation from the national accounts, will be in focus as inflation is seen as setting the pace of Fed hikes. US October University of Michigan Sentiment will be revised in its final release. In terms of speakers, Fed hawk Loretta Mester, ECB President Draghi and ECB hawk Benoit Coeure all take to the podium.