Asian markets weighed down by further losses on Wall Street, worries about US fiscal gridlock
With Wall Street posting a third day of losses on Friday – both the S&P500 and Nasdaq declining 1.1% – markets in Asia have reopened on the back foot today, albeit on low volumes with Japan’s markets closed for the first day of a 2-day national holiday. The Hang Seng is currently down about 1½%, while the main indices in China, South Korea, Taiwan and Australia were down between ½-1%. While the weakness was led by the technology sector, HSBC also saw its shares decline sharply to a 25-year low, with Standard Chartered stocks also hit, on the back of new allegations that the banks had engaged in suspicious transfers published over the weekend. US equity futures have also opened the week lower, with commentary focused on the possibility that the furore over the appointment of a new Supreme Court judge – to replace the late Justice Ginsberg – will further reduce the prospect of Congress coming together to agree a fiscal stimulus package ahead of the election.
Elsewhere, Bunds are outperforming other euro area govvies somewhat but the euro is only slightly firmer in response to yesterday’s FT report that the ECB has launched a review of its asset purchase facilities, with hints that the more flexible approach adopted by its PEPP facility should also be applied to its regular APP framework – the outcome of the review is reportedly to be discussed at the Governing Council’s meeting at the end of October, in good time for possible further easing before the end of the year. European stocks are also opening lower on the back of the aforementioned banking sector allegations (dubbed the “FinCEN Files”, and reported by the International Consortium of Investigative Journalists), which have pointed the finger at several other banks too, and continued bad news on the evolution of the pandemic in Europe.
In a quiet day for economic news, as expected, the PBoC announced that the 1-year and 5-year prime lending rates – which provide the benchmark for new loans to business and households – would remain at 3.85% and 4.65% respectively. These rates, reviewed at around this time each month, have been unchanged since April, with the PBoC seemingly satisfied with how the economy is recovering in the wake of the pandemic. The remainder of this week’s Chinese economic diary is sparsely populated, with Sunday’s industrial profit numbers for August the only entry of any note.
Japanese markets are closed for national holidays until Wednesday, at which point attention with turn to the preliminary PMI readings for September. The manufacturing PMI has improved steadily since bottoming in May, and signs of ongoing recovery in key trading partners – especially the US and China – bodes well for that trend to have continued in September. However, perhaps greater interest will centre on the services PMI, where an improving trend was interrupted in August, leaving the domestic economy looking decidedly tepid. Also on Wednesday METI will release the All Industry Index for July. This should point to continued economic recovery courtesy of the further solid rebound in IP during the month, more than offsetting a small decline in activity in the service sector.
Following on from last week’s CPI report, on Thursday the BoJ will release its suite of underlying inflation measures for August. That day will also bring the first indications of consumer spending for August with department and convenience store sales data released by their respective industry groups. The dataflow concludes on Friday with the release of the final results of the Monthly Labour Supply for July and the service sector PPI for August. The key BoJ events this week are Wednesday’s speech by Governor Kuroda to a business forum in Osaka, while the dated minutes of the July Policy Board meeting will be released the following day.
Sentiment surveys will dominate the euro area data flow this week, with most notably the flash September PMIs due for release on Wednesday. Having fallen back in August as concerns about a resurgence in coronavirus cases weighed on confidence, the headline composite PMI is expected to have moved broadly sideways (from 51.9 in August) this month implying a moderation in the pace of recovery at the end of Q3. These figures will be preceded by the Commission’s preliminary consumer confidence indicator (tomorrow), which is expected to report little improvement in conditions as concerns of a second pandemic wave and deteriorating labour market outlook remain to the fore. At the country level, Germany’s GfK consumer survey will be published on Wednesday, followed by the ifo business sentiment indicators the next day. The French INSEE business survey is also due Thursday and will be followed on Friday by the equivalent Italian ISTAT survey. Friday will also bring the ECB’s latest bank lending figures for August, which are likely to report ongoing solid credit growth to the region.
Separately, the ECB will also announce on Thursday the take-up of its latest TLTRO-III operation. Following the extremely high level of participation at the prior operation in June, when 742 banks borrowed €1.31trn, we expect a significantly lower level of take-up from fewer banks this time around. Meanwhile, ECB President Lagarde will speak today at an online meeting of the Franco-German Parliamentary Assembly. And among other ECB Governing Council members in action, Chief Economist Lane will speak publicly at an online event tomorrow.
Like in the euro area, sentiment surveys will be the main UK data focus. Wednesday’s release of the flash PMIs is expected to suggest ongoing solid recovery across the sectors in September, although the conclusion of the government’s “Eat out to help out” scheme at the end of August might well see the headline services activity index slip back slightly. These indicators will be preceded and followed by the CBI’s industrial trends (tomorrow) and distributive trades surveys (Thursday). The only other release will be August public finance figures on Thursday.
But likely of more interest that day will be BoE Governor Bailey’s speech to a British Chambers of Commerce webinar, which will include discussion of recent monetary policy decisions and what further steps might be required to sustain the recovery. The BoE’s continued preparations for a possible future shift to negative rates might therefore again come into focus.
This week’s US economic dataflow is focused mainly on the housing and manufacturing sectors. In July, supported by very low interest rates, both existing and new home sales recovered from their-pandemic induced slump to levels not seen in more than 13 years. The existing home and new home sales reports for August are released tomorrow and Thursday respectively and polls suggest that analysts expect that high levels of activity have been sustained. On Wednesday the preliminary Markit PMIs for September will be of some interest, albeit these reports continue to play second fiddle to those compiled by the ISM. Last month’s manufacturing and services reading of 53.1 and 55.0 respectively seem likely to be broadly sustained. Further insight on the manufacturing sector will be provided by the Richmond and Kansas Fed surveys released on Tuesday and Thursday respectively. The advance durable goods orders report for August concludes the week on Friday, with markets expecting core orders to inch closer to pre-pandemic levels.
Aside from data, Fedspeak will resume with a large number of Governors and regional Presidents speaking at an array of venues. Notably, Fed Chair Powell will testify (alongside Treasury Secretary Mnuchin) on the CARES Act before the House Financial Services Committee tomorrow and then before the Senate Banking Committee on Thursday. Powell will also testify on the Fed’s coronavirus response before another House committee on Wednesday. Meanwhile, investors will monitor whether a bipartisan fiscal stimulus plan can win the support of the President and the broader Congress. The chances of such a deal been agreed have probably not been helped due to tensions caused by President Trump’s plan to rush the appointment of a new Supreme Court Judge – to replace the late Justice Ginsberg – ahead of the election.
This week’s Australian economic dataflow begins tomorrow with the release of weekly payrolls data for 5 September, providing a high frequency indication of the impact of the pandemic of the labour market. On Wednesday the ABS will release its preliminary estimate of retail sales for August. Spending rose 3.2%M/M in July, but this growth seems likely to have been more than reversed in August given the re-imposition of lockdown restrictions in the state of Victoria. That day will also see the release of the preliminary PMI readings for September. It would not be surprising to see the manufacturing PMI ease a little from last month’s reading of 53.6 as catch-up activity stemming from earlier disruptions begins to fade. But after declining sharply to just 49.0 last month, the service sector PMI might take some heart from the decline in new coronavirus cases in Victoria over the past month. Indeed, just 14 new cases were reported on Sunday, suggesting that the state is on track to move to the next stage of its planned gradual easing of restrictions from next Monday. On Friday the dataflow will conclude with the release of preliminary merchandise trade data for August.
Aside from data, the other diary entry of note is tomorrow’s speech by RBA Deputy Governor Guy Debelle on “The Australian Economy and Monetary Policy”. This speech will be especially interesting in light of last week’s much firmer than expected labour market report and will help to set expectations ahead of the Board’s next meeting on 6 October.
There were no economic releases in New Zealand today, although investors and businesses received some good news from PM Ardern who confirmed that most of New Zealand – excluding Auckland – would return to the lowest pandemic alert level from midnight today, thus leading to the removal of all gathering restrictions. Auckland will remain at level 2 until the next review on 5 October, although the public gathering limit in Auckland has been raised to 100 from 10 previously. The PM signaled that Auckland could move to level 1 on 7 October if the recent trend in case numbers is sustained.
Turning to this week’s Kiwi diary, most interest will centre on Wednesday’s RBNZ policy review. With the recent dataflow having shown a little more resilience than had been expected by official sector forecasters, there seems little prospect that the RBNZ will look to make policy changes this week. Rather we expect the Bank will simply repeat that it is preparing a package of additional monetary instruments – including negative interest rates – that could be deployed if it judges that further stimulus is required to meet its employment and inflation objectives. That judgement seems more likely to be made at the subsequent policy meeting on 11 November, at which the Bank will update its economic forecasts in light of the release of the employment and inflation reports for Q3. The only important statistical release this week is Thursday’s merchandise trade report for August.