Weekly Focus: US-China Trade Showdown

Global

In the US, we have a quiet week ahead of us in terms of data releases. CPI core September is due out Thursday. The last couple of months, CPI core has surprised on the upside, however, we do not expect this to be the beginning of a new trend given the low inflation expectations among others. We expect CPI core rose +0.2% m/m in September (unchanged at 2.4% y/y).

Thursday also brings FOMC meeting minutes. At the September meeting the Fed cut its target range by 25bp to 1.75-2.00% as expected, however, the Fed did not precommit to more easing. Further, we had a clear division in the committee and the biggest number of dissenters since 2016 so it will be interesting to see if the minutes will shed light on the different stances within the Fed.

Next week, we will also focus on several Fed speeches. We will listen closely to any signals that the Fed may ease again later this month.

In the euro area, we get minutes from the September ECB meeting on Thursday. Since the meeting there have been some frictions within the Governing Council which peaked with the resignation of ECB board member Sabine Lautenschläger. Furthermore, we have seen conflicting comments in the media in which Chief Economist Philip Lane said that he did not believe that the ECB had delivered a big package and that it could cut rates further. This stands in contrast to Bundesbank President, Jens Weidmann, who stressed the need to adhere to the current rules of the ECB’s asset purchases and thus lashed out after Draghi’s recent call for more unity among board members. Hence, we look mainly at the discussions and different views in the minutes and furthermore any reflections on potential future stimulus packages (including the ISIN limit reflections).

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In Germany, we get August industrial production figures on Tuesday. These are not likely to bring any cheer since the German manufacturing slump does not seems to have bottomed out yet from looking at the manufacturing PMIs, with truck toll mileage also pointing to a further m/m decline.

In the UK, the focus is on Brexit following PM Boris Johnson’s new Brexit proposal. If a deal is to be reached at the EU summit, the negotiations should probably be concluded next week (EU ambassadors have set a deadline of 11 October). The EU has not outright rejected the proposal but based on EU sources, it is not satisfied either (especially not Ireland). While Johnson has said it is ‘take it or leave it’, it seems very difficult for him to dodge the Brexit Delay Bill in practice and we still believe another extension followed by snap election is the most likely outcome right now.

With respect to economic releases next week, we look forward to getting the monthly GDP estimate for August. PMIs continue to suggest the UK is stagnating but the GDP data may be distorted by stockpiling ahead of the Brexit deadline on 31 October (although most data suggest companies have not stockpiled to the same extent so far). We expect GDP was flat in August.

High-level US-China trade talks will take place in Washington on 10-11 October and we see a 60% chance that the talks end with an interim deal, which includes China buying US agricultural goods in return for US President Donald Trump postponing planned tariff increases on China, see US-China Trade – 60% probability of interim deal, 2 October 2019. In terms of data we get FX reserves, PMI services and possibly also money and credit growth.

In Japan, we have August total cash earnings ticking in on Tuesday. They have looked remarkably gloomy this year with declining real earnings. Domestic demand has stayed robust, though. We have seen a recovery in earnings this year, but a decline again in July, when bonus payments disappointed. We expect a rebound in August.

Scandi

In Denmark, industrial production figures for August are due on Monday. So far, the Danish industrial sector has defied the global trend and produced solid growth rates, pulled higher by the pharmaceutical industry in particular. The key question then is how long this divergence might continue, as we expect that Denmark will, as usual, eventually fall in line with the global trend.

Tuesday should see the release of the Danish Economic Councils’ autumn report, which presents its views on the Danish economy and the challenges it faces, while figures for August’s current account and exports are due on Wednesday. Exports – and in particular goods exports – have been strong so far this year, which has also been evidenced by a very large surplus on the current account. Industry has been the main driver behind this export performance, so Monday’s industrial production figures should give a good indication of which direction exports are headed.

Danish September CPI inflation is due on Thursday. We expect an increase to 0.6% from 0.4% in August. Vacation property rent has weighed heavy on inflation over the summer, because the weight in the CPI has declined sharply this year. That effect should disappear with the September figures. Diesel prices are also set to push up after the drone strikes on oil fields in Saudi Arabia shocked the oil market in mid-September. Food prices on the other hand are likely to pull downwards.

There is a lot of important data coming out of Sweden next week ahead of the Riksbank’s 24 October monetary policy decision. September inflation is of course in the limelight. We expect inflation target CPIF to print 1.2 % y/y and core CPIF excl. Energy at 1.5 % y/y, both falling a tenth compared with August. This means that CPIF will be a tenth below the Riksbank’s forecast and CPIF excl. Energy will be two tenths below. Again this should add pressure on Riksbank in combination with other weakening data. Risks are probably mostly related to higher/unchanged food prices for which we have assumed another month of decline.

Prospera also releases monthly money market inflation expectations. Supposedly forecasters in most banks and other parts of the financial community have revised down their inflation forecasts going forward, which may show up in a further decline in October expectations.

Given the drop below 50 in Swedish September PMI’s this week we would not be surprised to see quite bad, or even negative, y/y readings for the August private sector production value index (PVI). Moreover, the August household consumption indicator is also out. Car registrations and retail sales suggest it could fall back to 1% y/y. Both these figures enter our GDP model. Currently, with a limited amount of data it suggests Q3 GDP will remain at 1 % y/y, which is actually lower than the assumption in our Nordic Outlook released earlier this week.

NIER publish a new macro forecast, supposedly revised down.

In Norway, the government presents its national budget for 2020 on Monday. We expect the fiscal policy proposals to be mildly expansionary, with the structural non-oil deficit climbing from 7.7% this year to 7.9%, i.e. a fiscal stimulus of 0.2pp of GDP.

This is marginally more than Norges Bank assumed in the September monetary policy report, but not enough to impact on interest rate expectations. In the currency market, however, it is worth noting that, because oil production is expected to increase considerably next year, the government’s net cash flow from oil and gas will rise significantly from 2019 to 2020. Given that the government only spends a certain amount of this oil revenue, transfers to the Government Pension Fund Global will head back up towards NOK40bn next year, and this is what impacts on net currency flows over the course of a year.

The week also brings a variety of data, the most exciting in the wake of a surprisingly weak PMI being August industrial production. We remain convinced that the PMI is exaggerating the slowdown in manufacturing, but we nevertheless expect production to drop 0.4% m/m after the recent very strong figures. Also coming up is the GDP indicator for August, where we expect a fall of 0.3% m/m after the strong growth in July. Finally, there are the September numbers for inflation, which has faded somewhat into the background now that everything is about whether or not growth holds up.

Higher capacity utilisation and higher wage growth mean that domestic inflation will be pushing up, and a weaker krone probably spells higher imported inflation. Nor do there tend to be any major monthly variations in September, so we expect the core rate to be unchanged at 2.1%, with the risk possibly slightly to the upside this time around.

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