After a positive end to last week for US stocks (the S&P500 closed up 1% on Friday) supported by a stronger-than-expected payrolls report, with the exception of Japan which is on holiday, the main Asian indices have also started the new week on the front foot. With the mood surrounding the US-China trade talks still upbeat, with officials suggesting that the first phase of the trade deal should be signed this month, China’s CSI300 rose 0.7%. The Hang Seng was up a stronger 1.4%, as was Taiwan’s TAIEX and South Korea’s KOSPI. Meanwhile, ahead of tomorrow’s RBA policy announcement gains in Aussie equities were more modest (0.3%). In the bond markets, the shift in Australia was more striking with 10Y ACGB yields up 8bps to 1.17%, despite some weak retail sales and job advertisements reports overnight (see more details below). Looking ahead, today’s final euro area manufacturing PMIs are likely to confirm still very weak conditions in the sector at the start of the fourth quarter, while the UK’s construction PMI is expected to signal ongoing sharp contraction in October.
After a quiet start to the week in Japan, the first economic release of note will be Wednesday’s final services and composite PMIs for October. Perhaps unsurprisingly given the consumption tax hike that month, there was a notable decline in the flash release, with the headline services PMI down 2.5pts to just 50.3, the lowest for more than a year. Meanwhile, the flash composite PMI fell 1.7pts in October to 49.8, the first sub-50 reading for more than three years. And the direct impact of the tax increase was clearly evident in the output price PMI, which increased 3.5pts in October to 53.5, the second-highest reading of the (relatively short) series and only exceeded by the figure immediately after the 2014 tax increase. Thursday’s release of the latest Reuters Tankan will offer the first insight into business conditions in November, which is likely to see pessimists continue to outweigh optimists in the manufacturing sector.
Friday will bring a number of top-tier releases for September, including household spending figures and BoJ consumption activity index, which will provide a guide to private consumption ahead of October’s consumption tax hike. The latest labour earnings figures are likely to show that average wage growth remained very weak at the end of Q3. And the Cabinet Office’s latest composite index of business conditions is also due.
In the euro area, the first half of this week will bring the final manufacturing and services PMIs for October later this morning and Wednesday respectively. The flash surveys implied still very weak conditions in the manufacturing sector at the start of Q4, with the euro area’s headline index unchanged at 45.7 in October, the joint lowest since 2012. And with little improvement in the services index (up 0.2pt to 51.8), the composite PMI (50.2) was consistent with stagnation at the start of Q4. Wednesday will also see the release of euro area retail sales figures for September, which are expected to report only a modest increase on the month (0.1%M/M), although this would still leave sales up over the third quarter as a whole and consistent with an acceleration in household consumption in Q3.
At the country level, German factory orders data (Wednesday) and IP figures for September (Thursday) are expected to confirm that the manufacturing sector remained in contraction in Q3 and signal ongoing weakness heading into the final quarter of the year too. September IP data from France (Friday) and Spain (Wednesday) are also due, as are trade figures from Germany and France (Friday).
Focus today will also be on Lagarde’s first official appearance as ECB President in Berlin this evening, while Hernández de Cos and Vice-President de Guindos (on Wednesday) will also speak publicly. In the markets, France and Spain will sell bonds with various maturities on Thursday.
In terms of politics, Sunday will see Spain head to the polls for the fourth General Election in as many years. The vote was called in September after acting Prime Minister Sanchez of the Socialists (PSOE) failed to secure a working coalition with opposition parties. Despite the solid economic growth and continued labour market recovery, the recent unrest in the Catalunya region following the jailing of nine Catalan separatist leaders last month raises the prospect of renewed uncertainty and instability in a key region. So while PSOE has seen its support ratings slip back over recent months, it still looks on track to once again take the largest number of seats. But like in April, it will likely fall well short of a majority. Polls suggest right-wing establishment Partido Popular (PP) has seen its popularity rise over recent weeks to the highest in almost a year at the expense of the centre-right Ciudadanos (C’s), which has seen its ratings drop to the lowest for 4½ years. But there has also been a pickup in the ratings of the ultra-nationalist/traditionalist Vox party which looks on track to overtake C’s to become the fourth largest party in Parliament, with a little more than 10% of the vote. So there is every possibility that the forthcoming plebiscite will deliver an even more hung Parliament than at present and therefore require yet another election in spring 2020.
With Parliament set to be dissolved on Wednesday ahead of the 12 December general election, the main event in the UK this week will be Thursday’s BoE monetary policy announcement, which will be accompanied by updated economic forecasts in its newly rebranded quarterly Monetary Policy Report. We expect no changes to policy, with Bank Rate set to be left at 0.75%. But with September’s policy statement having implied a further loss of confidence on the MPC about the Brexit process, and acknowledged the more challenging external environment, we would expect the MPC to remain downbeat about the near-term outlook, with possible further downward revisions to both its GDP growth and inflation forecasts. Of course, in August, the MPC downplayed the value of its economic projections, emphasising the inconsistencies between the Bank’s assumption of a smooth Brexit and the conditions underpinning moves in market asset prices, which at the time had reflected the increasing probability of a no-deal. And so, Carney seems likely to reiterate that downside risks not least associated with political uncertainty remain to the fore and therefore restate that the MPC will “take all appropriate measures to support jobs and activity, consistent with achieving the 2% inflation target commitment”.
Turning to the data, the first half of the week will be dominated by October sentiment surveys, with arguably the most noteworthy release tomorrow’s services and composite PMIs. Having slipped below the key 50 expansion level in September, the headline services activity PMI is expected to have moved broadly sideways at 49.5. So, despite the improvement in the manufacturing output PMI in October, with the equivalent construction index (due today) set to remain firmly in contractionary territory, the all-sector PMI seems likely to remain below 50 for the second successive month and only the third time since 2012. Tomorrow will also bring the BRC retail sales monitor, alongside the latest car registration figures. And Friday will see the release of the REC/KPMG report on jobs for October. In the markets, the DMO will sell 10Y Gilts tomorrow.
In the US, the week’s data calendar kicks off this afternoon with the latest factory orders figures for September, followed tomorrow with the non-manufacturing ISM for October and full trade report for September. Of most interest on Wednesday will be non-farm productivity and labour costs figures for Q3, while September consumer credit data on Thursday will be accompanied by weekly jobless claims numbers. And the week will conclude with the University of Michigan’s latest consumer confidence survey. In terms of Fed Speak, voting FOMC members Williams and Evans will speak in New York on Wednesday, while Kaplan and Kashkari are due to speak publicly on Tuesday. In the markets, the Treasury will sell 3Y notes (tomorrow), 10Y notes (Wednesday) and 30Y bonds (Thursday).
In China, with much focus on the first phase of the trade deal with the US, the most noteworthy economic data this week will likely be Friday’s goods trade report for October, which is expected to show that exports and imports continued to decline compared with a year earlier.
The main event in Australia this week will be the RBA’s latest monetary policy decision tomorrow. Having cut the target cash rate by 25bps in September – the third such easing since May – the RBA is expected keep rates on hold at 0.75%. But Lowe’s post-meeting statement is likely to flag that risks to the outlook for the global economy remain skewed to the downside, while domestic inflation pressures are set to remain subdued for some time too. So the statement will likely reiterate that “it is reasonable to expect that an extended period of low interest rates will be required in Australia” and that the Board is “prepared” to ease monetary policy further if needed. Later in the week will bring the RBA’s updated economic forecasts in its latest quarterly Monetary Policy Statement on Thursday.
In terms of data, today’s retail sales figures for Q3 were disappointing, particularly in light of the support from income tax refunds since July, as well as lower interest rates, with retail volumes down 0.1%Q/Q in Q3 following a weak end to the quarter. This left sales down in three of the past four quarters, to leave them 0.2% lower than a year earlier. And today’s ANZ job advertisements data were hardly favourable about the near-term employment outlook. In particular, advertisements were down 1%M/M in October, the second monthly decline in three, to leave them almost 11½% lower than a year earlier at their lowest level since the start of 2017.