Weekly Focus - More Bad News From The Euro Area

Global

In the US, we have quite a few important data releases in the coming week, with ISM manufacturing and ISM non-manufacturing for September due on Thursday and the jobs report for September due on Friday. The regional Philly and Empire PMIs suggest ISM manufacturing will come in stronger m/m in September. The Markit PMI also recovered to a five-month high at 51.0 in September. We expect ISM manufacturing to come in around 50.0 (49.9 in August).

The labour market has shown weakness for some time, which makes sense as economic growth has slowed in recent quarters. Monthly changes in nonfarm payrolls tend to be volatile and hence are difficult to predict, but we are concerned about the warning signs from the Markit PMI employment index, which suggests employment growth has fallen below the breakeven rate of ~100,000 per month. Decelerating employment growth is an important recession tracker. We expect employment growth to come in around 100,000.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Next week, we will also focus on several Fed speeches due on Tuesday, Wednesday and Thursday. We will watch closely for any signals that the Fed could ease again in October.

In the euro area, next week will bring the September flash HICP inflation prints for both Germany and the euro area on Monday and Tuesday, respectively. The euro area numbers are of high interest since it is not only headline inflation that has slumped (to only 1.0% in August), but market-based inflation expectations are also sliding again and are back below levels when the ECB September package was announced.

Furthermore, core inflation has been hovering around 1.0% in the last two years, despite a decent pick-up in wage growth. This is challenging the ECB’s credibility in delivering its inflation mandate. Hence, inflation remains a dilemma for the ECB and since energy prices continue to suffer strong downward pressure from base effects (despite the drone attack in Saudi Arabia), there is no imminent catalyst to brighten the euro area inflation outlook. With energy price inflation falling further into negative territory and core inflation stuck at 1.0%, we expect headline inflation to print at 0.9% in September.

After years in the works, the €STR (euro short-term rate) will be introduced next week amid EONIA ceasing to be calculated as we know it (and permanently discontinued on 3 January 2022). The first €STR fixing will be published on Wednesday, 2 October, based on 1 October data. €str will be set entirely on daily information relating to money market transactions, not only to the interbank lending (as EONIA), but would also include other bank lending, such as money market funds, etc. The €STR is an unsecured borrowing rate (compared to EONIA, an unsecured lending rate). The €STR is calculated as a volume-weighted trimmed mean (with high/low 25% removed). We expect €STR to fix around -54bp given the fixed spread of 8.5bp and the current EONIA level at -0.457%. For more, see also ECB website.

In the UK, the focus is on Brexit now Parliament has returned to session following the UK Supreme Court’s ruling that the prorogation (‘suspension’) of Parliament was unlawful. The small majority against a no deal Brexit will likely attempt to make the Brexit Delay Bill more watertight than it already seems to be, so that Prime Minster Boris Johnson cannot get around to asking for an extension after the EU summit. The Conservative Party Conference kicks off on Sunday. We do not expect any major Brexit proclamations at the conference, but based on the 2017 and 2018 experience, it is easier for the incumbent prime minister to compromise after the party conference (party members are more pro-Brexit than the Conservative voters are).

With respect to economic releases next week, the PMIs for September are due out. We think they will continue to show that the UK economy is growing slowly. One interesting thing to watch is the inventory component of the PMI manufacturing index, as companies have yet to start stockpiling ahead of the 31 October deadline as they did before the 29 March deadline.

In Japan, we have several interesting key figures set for release at the beginning of next week. On Monday, we get August retail sales and industrial production. The overall story so far, as in many other countries, has been that the manufacturing sector has been struggling with the global slowdown, albeit to a limited extent. However, domestic demand has been solid. In July, retail sales plunged, which poses the question of whether weakness is starting to spill over. For now, we expect retail sales to bounce back, if nothing else due to frontloading ahead of the October VAT hike, but the Bank of Japan will likely be watching closely for potential spillovers to domestic demand.

On Tuesday, the Bank of Japan’s quarterly Tankan business survey of corporate activity is due for release. This provides a significant amount of information on how Japanese businesses are weathering the global slowdown and how they see prospects for the coming months. It will be particularly interesting to see how much the VAT hike is affecting businesses expectations for Q4.

The focus in China will be on September PMI data. We look for a drop in the private Caixin PMI manufacturing index from 50.4 to 50.0 (consensus 50.2). It has stayed at a higher level than the official PMI manufacturing index from NBS. We expect the latter to rise from 49.5 to 49.7 (consensus 49.6) in September. Overall, these levels reflect a weak Chinese economy but not a recession. As usual, we will also keep an eye on comments related to the US-China trade war. High-level talks are set to be back on the table in the week starting 7 October.

China will also be celebrating the 70-year anniversary of the People’s Republic of China on 1 October. A parade of 100,000 people and military equipment is expected to roll through Beijing. The National Day Holiday follows on 1-7 October. We expect India to cut the repo rate on Friday from 5.40% to 5.0%. The Indian economy has slowed significantly this year and inflation is below the 4% inflation target.

Scandi

In Denmark, the coming week will see a number of interesting statistics published. The week kicks off with Statistics Denmark’s figures for property prices in July. Both house and apartment prices have grown rather modestly this year, with apartment prices, in particular, showing weakness, though they have gained a little ground in recent months. Nordic Outlook, Danske Bank’s view on the current state of the Nordic economies and its forecasts for the coming years, is due to be published on Tuesday.

Denmark's Nationalbank is set to release September figures for its FX reserves on the same day. The Danish krone (DKK) weakened in the wake of the rate cuts from the ECB and the Danish central bank in the middle of this month. However, this has probably not triggered any intervention, as Danmarks Nationalbank has generally shown great patience this year in relation to the sustained weakness of the DKK. Danmarks Nationalbank last intervened in the FX market in January.

The government is set to release its draft budget on Wednesday, while the week concludes with Statistic Denmark’s figures for bankruptcies and forced home sales in September.

Next week, Sweden’s PMI is due for release. Since March 2017, we have seen a downward trend. However, during 2019, this trend has stabilised, which is different to other countries, especially when comparing with the euro zone. Germany’s PMI came out this week showing that the downward trend continued. As seen in the chart on the right, the spread between the Swedish and German PMIs has never been this wide. Historically, this means that at some point, these curves will come together, so the downside risk remains high for Swedish industry.

Except the PMI, there are not many other economic data releases. Instead, we have many Riksbank speeches, where Jansson’s and Ohlsson’s will probably be the most interesting since theirs will be about the economic situation. It will be interesting to see if they mention the need for fiscal policy to take greater responsibility for the stabilisation policy in the future.

In Norway, retail sales have picked up again since spring after a weak period. We think this is mainly a result of purchasing power being boosted by stronger wage growth and – thanks to lower power prices – weaker inflation. Looking through the monthly volatility, retail sales have been trending up, with an increase of 0.8% m/m in July. We expect a moderate rise of 0.2% m/m in August, while acknowledging that the surprisingly weak clothing prices in August may have been a reflection of weak sales.

There was a marked correction in the PMI to 53.8 in August after a sharp fall in June and July. We think much this fluctuation could be due to problems with seasonal adjustment over the summer months, so we may see somewhat weaker figures for September. On the other hand, oil-related industries are so strong at the moment that there is little reason to fear that the index might collapse towards the levels of its European counterparts. We therefore anticipate a moderate decrease in the PMI to 52.8 in September, which would be consistent with growth slightly above trend.

Market movers ahead

Global movers

Scandi movers

Weekly Wrap-Up