Weekly Focus: Another Fed Cut Amid Packed Economic Calendar

Global

In the US, we have a packed week ahead of us. The most important event is the Fed meeting on Wednesday (19:00 CET) where we expect another 25bp. While investors have fully priced in a cut, economists are evenly divided on whether the Fed will cut or stay on hold. Despite abating political risk, data remain fragile. For details see today’s FOMC preview: Divided Fed is likely to cut again without pre-commitment.

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Also on Wednesday, the first estimate of GDP growth in Q3 is due out, which we expect to come out at 1.8% q/q AR. US growth has peaked, as investments are struggling in the current environment and private consumption is not growing as fast as previously.

On Friday, we get both the jobs report and the ISM manufacturing index for October. Based on the Markit PMI employment subindex, we should expect a fairly weak jobs report in terms of jobs growth. We expect an increase of around 50,000 (which, however, is also pulled down by a strike in general motors, who are counted as unemployed in the jobs report). Both Markit PMI manufacturing and regional surveys suggest ISM manufacturing has risen in October. We expect a rise to 49.0.

In the euro area, we have an interesting week ahead of us. On Thursday, we get the latest chapter of the euro area inflation tragedy when the October print is published. The protagonist, headline inflation, is still in free fall and we expect this fall to continue to 0.7% y/y in October due to base effects in the energy component. Headline inflation does not get much support from core inflation, since it has been hovering around 1.0% in past years despite a solid uptick in wage growth. Hence, we expect the core print to come in at 1.0% y/y. Wednesday brings the German inflation figures, which will give an early sign of where the euro area print is heading.

Also on Thursday, we get the preliminary Q3 GDP print. In Q2 we already saw signs that domestic demand is slowing. PMIs took a further plunge in September pointing to almost stagnant Q3 growth. We still think though that the service sector can compensate for some of the weakness from the ongoing industrial recession and hence look for a quarterly growth rate of 0.2% q/q.

German politics is also entering an interesting week with the result of the SPD members’ vote on a new party leader to be announced on Saturday. A second run-off might be held in November, should no candidates secure an absolute majority. The outcome will have important implications for whether the SPD party will stay in the current governing coalition or whether Germany is heading towards new elections in 2020. An SPD decision is expected at the party conference in early December.

The UK is supposed to leave the EU on 31 October but we expect another Brexit extension although the EU leaders have not agreed to one at the time of writing. British politics is as unpredictable as ever but we see two ways forward. Either PM Johnson’s deal passes eventually or we are heading for a general election. We are leaning towards thinking the latter option is more likely. Regardless, it is difficult to see a path to a no deal outcome anymore, which also explains why a lot of negativity has been priced out of the GBP. For more details see Brexit Monitor: Two ways forward: PM Johnson’s deal or general election, 23 October.

In terms of economic data releases, it is a quiet week. Most important is the PMI manufacturing index due out on Friday. Despite the weakness in manufacturing in the rest of Europe, we could see another increase in the UK index, as companies may have stockpiled ahead of the 31 October Brexit deadline. We expect an increase to 49.0 from 48.3 due to stockpiling.

In China the important PMI data are due for release. We expect it to be a bit mixed.

We see some downside risk for Caixin PMI manufacturing simply because the increase in the past months seem too good to be true. We look for it to decline to 50.7 (consensus 51.0) from 51.4 in September. For the official PMI manufacturing from NBS we look for a flat reading at 49.8. The NBS PMI has been painting a softer picture but still shows some signs of improvement lately. We currently believe the NBS PMI paints a truer picture as it is better in line with other indicators like the development in metal price inflation. Industrial profits is also up for release. We look for profit growth to continue to fluctuate around zero.

Also look out for comments on the US-China trade talks, which have been continuing over the phone by lower-level officials currently. We still believe the two sides will be able to reach a ‘phase 1’ deal to be signed in mid-November on the side-lines of the APEC meeting in Chile

In Japan, the most important event is the Bank of Japan’s policy meeting ending on Thursday. The market is pricing some 50% probability of a rate cut. The economy is still in good shape and USD/JPY remains at far from alarming levels, thus we expect the BoJ to remain cautious and stay on hold (see more in preview here: Bank of Japan preview: No reason to deviate from cautious approach, 25 October.

We also get some interesting key figures. First on Wednesday, September retail sales tick in. We expect to see a surge in the run up to the October VAT hike. On Thursday, we get September industrial production. The manufacturing sector has been slowing recently and we are not likely to see a rebound in the hard figures anytime soon

Scandi

In Denmark, a busy week kicks off on Monday with September retail sales. These surprised to the upside in August with an increase of 0.3%, but we expect more subdued growth going forward: while households still have strong finances, they will probably remain fairly cautious.

Wednesday sees October business confidence, which has been pulled down recently by weak sentiment globally. Things have looked particularly bad for manufacturing, whereas services have fared reasonably well as in other countries. On the one hand, we have a truce in the US-China trade war and reduced uncertainty around Brexit, but on the other, the US has introduced tariffs on a range of European goods. So, although trade uncertainty has eased, it will probably continue to make its mark on the manufacturing indicator in particular.

Finally, Thursday brings jobless figures for September and housing prices for August. It will be especially interesting to see whether the early signs of a slowdown seen lately in the labour market have fed through into the unemployment data.

There is a lot of important data coming out next week in Sweden: trade balance, Economic Tendency Survey and PMI manufacturing. Regarding ETS, in the past five months, the indicator has been below the 100th mark with a downward trend, which indicates weaker and weaker growth. It has mainly been driven by households but the business sector continues to indicate weak growth, especially manufacturing and private sector industry.

Due to SCB's miscalculations last week, we do not know the exact unemployment rate; it is more important to look at other early indicators. The total employment outcome in ETS is equal to zero and actual hours worked per week are close to that. What will be extra interesting next week is to see if the employment outcome passes zero and strengthens the belief that the labour market is deteriorating.

The downward trend that we have seen in PMI since 2017 has stabilised during the year. This is something that we have been a little pensive about as Germany's PMIs have continued to decline and the spread between Germany and Sweden has been at historically high levels. In September, however, we saw a drop that we were waiting for and the spread tighten. Yet, the drop was quite large – in fact the largest drop since September 2008 - and typically large moves (up or down) in the index are followed by some correction the month after.

After falling continuously for three years, unemployment in Norway has begun to flatten out. Gross unemployment has continued to fall somewhat, but unemployment rates have stabilised. Unchanged unemployment could indicate growth is approaching trend. However, the number of job vacancies is still growing relatively strongly, suggesting that the demand for labour remains buoyant and that unchanged unemployment is due to bottleneck problems. We therefore expect that unemployment was unchanged at 2.2% in October. The retail trade is fighting relatively strong structural headwinds at the moment and is growing much slower than services consumption. Nevertheless, we expect modest retail trade growth of 0.3% m/m in September. The PMI has vacillated considerably in the past three or four months, but the underlying trend is clearly down. Other indicators, too, are pointing to a slowdown in industrial activity, albeit not so pronounced as the PMI indicates. We therefore expect the PMI rose marginally to 52.0 in October and see only limited downside given that activity in the oil-related industry remains high. The risk here is that the oil-related industry appears to be under-represented in the PMI.

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