Fed, BoJ and Brexit deadline in focus

Emily Nicol
Chris Scicluna

Overview:
After the S&P500 closed last week at a record high, the main Asian markets have largely started the week on the front foot, as broadly positive tones surrounding the China-US trade deal – suggesting that parts of the text for the phase of a trade deal are ‘basically completed’ – offset a disappointing HSBC earnings report. In particular, China’s CSI300 closed up 0.8%, as did the Hang Seng. In contrast, the Topix was little changed. Meanwhile, the yen was a touch weaker as were JGBs – 10Y yields were 1bp higher at -0.14% – ahead of Thursday’s BoJ Policy Board conclusion, where the main parameters of its yield curve control framework are likely to be left unchanged. Of course, ahead of this, all eyes will be on the conclusion of the FOMC meeting (Wednesday), where in contrast to the BoJ, the Fed is expected to cut rates by 25bps.

In Europe, as the end-October Brexit deadline looms, the news flow in the week ahead will no doubt remain dominated by politics. But while reports over the weekend suggested that EU leaders were on track to agree today a flexible extension for Article 50 through to 31 January 2020, with the possibility to leave before if the Withdrawal Agreement is ratified, euro area govvie bonds opened lower – indeed, German 10Y Bund yields were 1½bps higher at -0.35%. Later today will see UK Prime Minister Johnson formally propose to Parliament a General Election for 12 December, although it remains to be seen whether he will get the required two-thirds majority in favour.

Politics aside, it will be a busy week for top-tier releases, with the first estimates of US and euro area Q3 GDP (Wednesday and Thursday respectively), set to show a further moderating in GDP growth last quarter. The flash release of euro area inflation (Thursday) is also set to show a further weakening in headline CPI, while tomorrow’s Tokyo CPI for October will provide the first insight into the impact of the recent consumption tax hike. Finally, Friday will bring the latest US labour market report.

Japan:
The main event in Japan this week will be the conclusion of the keenly-anticipated end-October Policy Board meeting, where members will have ‘re-examined’ economic and price developments in the face of global headwinds and following this month’s consumption tax hike. While economic momentum seems bound to have slowed this quarter, the BoJ’s Tankan and Regional Economic Report both suggested that conditions were perhaps better than might have been feared. As such, we certainly do not expect a comprehensive overhaul of the BoJ’s yield curve control framework, with the main parameters – i.e. the short-term policy rate of -0.1% and the JGB purchase commitment to target a 10Y JGB yield of 0% - left unchanged.

But the BoJ seems unlikely to be completely idle. Indeed, we might well see some tweaks to the framework similar to the adjustments made in July 2018, which saw the introduction of forward guidance, a halving of the size of the balance of current accounts subject to the negative policy rate, and an amendment of the amounts of each type of ETF to be purchased. At a minimum this time around we expect a revision to the BoJ’s forward guidance, which for some time has stated that it “intends to maintain the current extremely low levels of short- and long-term interest rates … at least through spring 2020”. A further possible amendment to policy would be to be more explicit about the BoJ’s target range for the 10Y JGB yield. In this respect, previously Kuroda has merely mentioned in his press conference a guideline of “about double the range of between -0.1% and +0.1%”. And this week we might well see Kuroda suggest an unofficial floor 10Y yield of -0.3%. Moreover, given that the BoJ wants a steeper curve, and is currently buying JGBs to increase its holdings at an annual rate little more than ¥20trn, rather than ¥80trn as currently stated as the policy objective, will this finally be the moment when the Policy Board finally acknowledges the case for fewer purchases going forward? Finally, beyond questions about rates and asset purchases, the BoJ might also announce support for areas affected by Typhoon Hagibis via means of its special lending facility for disaster affected regions.

In terms of its forecasts, meanwhile, the BoJ will likely maintain a broadly upbeat assessment of the economic outlook. Nevertheless, we might well see modest downward tweaks to its GDP growth forecast. And reports have hinted that its inflation forecast will also be downwardly revised across the horizon, albeit still likely remaining on the optimistic side. Of course, we will see the first insight into the impact of the tax hike on prices in tomorrow’s Tokyo CPI figures for October, with headline inflation forecast to rise 0.3ppt to 0.7%Y/Y. The second half of the week will also bring several September data releases of note, including retail sales (Wednesday), IP (Thursday) and the labour market (Friday). Thursday will also provide an update on consumer confidence at the start of Q4.

US:
Of course, the main event in the US will be the conclusion of the latest FOMC meeting on Wednesday. The outcome is more uncertain than recent meetings, although the Fed might not want to upset the markets, which are pricing in a near-90% probability of a rate cut. But with economic momentum slowing, risks to the outlook skewed to the downside, and various Committee members having noted the importance of acting pre-emptively, on balance, we expect the FFR target range to be cut by 25bps to 1.50-1.75%.

It will be a busy one for top-tier US data too, with the first estimate of Q3 GDP (Wednesday) and October's labour market report and manufacturing ISM (Friday) the highlights. Having slowed in Q2 to 2%Q/Q annualised, GDP growth is expected to have moderated further in Q3 to 1.6%Q/Q ann. which (aside from the Government shutdown related slowdown in Q418) would be softest pace for almost four years. The increase in non-farm payrolls at the start of Q4 is also expected to be much softer than of late, with a forecast increase of 95k likely to see the unemployment rate nudge slightly higher to 3.6%. And while the headline manufacturing ISM is expected to largely reverse September’s decline it is still expected to remain in contractionary territory for the third consecutive month.

Also of note will be the advance goods trade and inventory figures for September (today), October's Conference Board's consumer confidence survey (tomorrow), the latest ADP employment report (Wednesday), September's personal income and spending figures and Q3 employment cost index (Thursday) and September construction spending data (Friday). Additionally, various housing market indicators will be published throughout the week. In the markets, there are no UST bond auctions scheduled.

Euro area:
It will be a busy week for top-tier euro area economic data too, with the flash estimates of Q3 GDP and October CPI (Thursday) and the European Commission’s economic sentiment indicator (Wednesday) key releases. In particular, Q3 GDP in the euro area is expected to show that growth slowed to 0.1%Q/Q, half the pace seen in Q2 and the softest since Q113. We expect growth in France (figures due Wednesday) to be unchanged for the third consecutive quarter at 0.3%Q/Q, but this is a touch above the consensus forecast. While Spain’s economy likely continued to outperform other major member states, we also anticipate growth to be no stronger than the 0.4%Q/Q pace in Q2. And Italy’s economy is set to have moved sideways (at best).

Thursday will also bring the flash estimates of October inflation from the euro area, France and Italy, with the equivalent figures for Germany and Spain due on Wednesday. Having surprised on the downside in September, euro area headline CPI is expected to have edged even lower in October by 0.2ppt to 0.7%Y/Y on the back of lower energy inflation, while core inflation likely moved sideways at 1.0%Y/Y.

Wednesday will also bring the Commission’s business and consumer surveys – which arguably provide the best guide to GDP growth in the euro area – for October. With the flash consumer confidence indicator having deteriorated at the start of the fourth quarter (falling 1.1pts to -7.6), and little improvement expected in business conditions, the headline ESI is expected to have declined to a more-than 4½-year low. The following day will also bring euro area unemployment figures for September, while bank lending figures for the same month are due this morning. And Germany’s labour market figures for October on the national measure will be published on Wednesday. In the markets, Germany and Italy will sell bonds on Wednesday.

UK:
Given the looming current Brexit deadline on Thursday, UK political news seems highly likely to dominate the domestic news flow once again. However, reports over the weekend suggested that EU leaders were set to sign off today a ‘flexible’ extension to the Article 50 to end-January 2020, with the possibility for the UK to leave on 1 December 2019 or 1 January 2020 if the Withdrawal treaty had been ratified. The draft proposal also ‘firmly’ ruled out the reopening of Johnson’s Brexit deal and underscored the UK’s obligation to nominate a member to serve in the new European Commission from 1 November until its official departure.

Should EU leaders endorse this extension today, PM Johnson's planned proposal to Parliament later today of a General Election for 12 December might well have greater success of achieving the two-thirds majority required. Certainly, the Liberal Democrats and SNP suggestion over the weekend that it would put forward a bill to propose a General Election on 9 December, which would require a simple majority, had so far failed to attract support from opposition parties. Of course, not least given that the behaviour of Johnson and Labour leader Corbyn is highly unpredictable, a decision this week on the date of a General Election is not a done deal. Either way, political uncertainty will remain highly elevated for the foreseeable future.

Aside from the politics, the data calendar will be dominated by October sentiment surveys, with perhaps most notable the manufacturing PMIs due on Friday. Despite a modest pickup in September, the headline index remained below the key-50 mark for the fifth consecutive month. And while a no-deal Brexit at the end of the month was eventually effectively taken off the table, persistent political uncertainty will have continued to hamper conditions in the sector, with the headline index likely to have remained firmly in contractionary territory at the start of Q4.

Ahead of this, the week will bring the GfK consumer confidence indicator (Thursday), which seems bound to reiterate the downbeat assessment of households seen over the past year, suggesting a further likely moderation in household spending growth. Against this backdrop, the CBI distributive trades survey (today) is expected to show that retailers had seen a further decline in sales growth at the start of Q4. And the BoE’s latest lending figures (Tuesday) are likely to indicator a further slowdown in consumer credit growth at the end of Q3. Elsewhere, BoE external member Tenreyro will speak publicly later today, while the DMO will sell index-linked Gilts tomorrow.

Aussie:
Ahead of next week’s RBA meeting, the main economic focus in this week will be the Q3 CPI release on Wednesday. While headline inflation is forecast to have edged slightly higher last quarter, up 0.1ppt to 1.7%Y/Y this would still remain below the RBA’s target of between 2-3%. Moreover, the RBA’s preferred core measures of inflation – trimmed mean and weighted median – are expected to have merely moved sideways at 1.6%Y/Y and 1.3%Y/Y respectively, underscoring the subdued underlying inflationary pressures.

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