The US dollar ended the week at its highest level since February in index terms. That’s left the Euro under pressure and breaking lower and the yen on the back foot, while the Chinese yuan is at fresh 6-year lows. Meanwhile the Australian dollar is back at 76 cents after moving above 77 for the 8th time in recent months.
While the USD cuts a swathe through forex markets, its strength also seems to be having a dampening effect on earnings season as traders worry about the impact a strong dollar will have on corporate earnings and the economy.
That’s also restrained global yields, coming off recent highs, even though the Fed continues to signal rates will rise this year.
Data is the only thing that appears able to knock the Fed from its course. That makes US Q3 GDP vitally important when it is released on Friday.
In Australia all eyes are on the consumer prices and whether they might be low enough to drive another rate cut, or will prices jump off the back of rising fuel, as they have around the world recently. We’ll know at 11.30am AEDT Wednesday.
Volatility is low across global markets but the risks haven’t gone away. That’s the message from Jarrod Kerr, senior interest rate strategist at the Commonwealth Bank, in a note Friday. He’s not convinced the world really is as benign as implied financial market volatility would suggest.
Here’s the list of things troubling him:
The US election is still a risk, although a dying one.
Fed tightening in December is a risk, albeit a risk well priced.
A Fed pause is a likely risk, but a risk nonetheless.
Brexit is still a big risk, and a big risk still under priced.
ECB tapering is a risk, and a risk least likely.
Extending ECB QE is the risk most likely.
European banking risk has subsided.
European election risks are growing.
China risk is all but forgotten.
And we may be reminded like we were last January.
A weak Aussie CPI print next week is a risk, and a risk under priced.
RBA rate cut risk over 2017 is light.
RBNZ rate cut risk in 2017, beyond November’s likely move to 1.75%, is non existent.
Of course commodity markets face all sorts of risks.
And commodity market risks are emulated in Australian rates.
Some of these risks are immediate. Most of these risks will linger.
(courtesy NAB Economics)
The major focus will be on Wednesday’s CPI and whether it will be on the RBA’s forecast track. We expect it will be, coming with a likely kick in headline inflation, thanks to fuel and some food. Otherwise quiet with Q3 merchandise trade prices due Thursday, guiding terms of trade expectations. The HIA New Home sales report is due Friday.
Australian third-quarter consumer price index
This is a big one after RBA governor Lowe signalled last week that inflation, and crucially inflation expectations, are critical to the outlook for Australian interest rates.
The NAB says that’s even more important after the weak jobs data last Thursday.
As a result the NAB said “the RBA will be looking to next week’s CPI for guidance about the consumer side of the economy and indeed how it fits (or does not) with the RBA’s August Statement on Monetary policy inflation track. NAB’s forecast is that headline CPI will rise by 0.8%, taking the annual CPI – the one that will get all the front page media focus and arguably serves to influence wage expectations more than the idiosyncratic underlying CPI – from 1.0% to 1.4%. This would be right on the RBA’s August inflation forecast track and something of a relief to the central bank”.
(also courtesy NAB Market Economics)
Global : At the start of the week, Fed speakers, Euro PMIs and the German Ifo survey are under the spotlight, then the focus will be on the first cut of UK and then US Q3 GDP ahead of the BoE and FOMC meetings the next week.
US: After speeches from Fed president’s Bullard and Evans on Monday, the Fed goes into media lock-down ahead of the 3 November FOMC.
On the data front, it’s lighter with Friday’s advance Q3 GDP print a focus; the Atlanta’s Fed’s GDPNow sits at 2.0%, under the current 2.5% market consensus. Markit’s Manufacturing PMI (Monday), then House prices and Consumer Confidence (Tuesday), New Home Sales (Wednesday), Durable goods orders and Pending Home Sales (Thursday),and Consumer Sentiment (Friday) are also on the slate.
China: Very scant for releases with the Conference Board’s Leading index (Monday), Consumer Sentiment (Wednesday), and Industrial Profits (Thursday).
Japan: Trade and Nikkei Manufacturing PMI (Monday), then quiet ahead of Friday’s Jobless report and all-important CPI.
Euro: Preliminary Manufacturing PMIs (Monday), German Ifo Survey (Tuesday); the ECB’s Coeure speaks on Friday.
UK: The first cut of Q3 GDP (Thursday) a major focus in the wake of the Brexit poll. Also due CBI Trends (Monday), then CBI Retail Sales (Thursday).
Canada: After tonight’s Retail Sales and CPI, only second tier data on the schedule.
NZ: After the public holiday on Monday, the main interest will be in Thursday’s trade data.
Here’s the NAB diary of all the key data and events for the week ahead: