RBA policy meeting, US employment report, other key data in focus
Next week’s market movers
- The RBA is likely to stand pat once again. Policymakers may appear somewhat more upbeat about the economy, but may also reiterate their exchange rate concerns.
- In the US, the employment data for September are expected to show some further tightening in the labor market, despite the recent hurricanes.
- In Japan, the BoJ will release its Tankan survey. Even though strong prints could spur speculation for a reduction in BoJ stimulus, we maintain our view that such a scenario remains unlikely for now.
- We also get key economic data from the UK, the US, and Canada.
On Monday, during the Asian day, the BoJ will release its quarterly Tankan survey for Q3. This is one of the most important indicators that comes out of Japan and thus, it is always watched closely. The forecast is for all of these indices to have risen, or to have remained unchanged, something that would add to the recent streak of strong data out of Japan. Even though further improvement in this forward-looking survey would probably be pleasant news for the BoJ, and could raise some speculation for a gradual reduction in stimulus, we will maintain our view that such a scenario remains highly unlikely. As long as inflation remains so far away from the Bank’s target, we doubt that any signs of strong growth will motivate officials to alter their ultra-loose policy framework.
In the UK, the manufacturing PMI for September is due out. Then on Tuesday we get the construction index and subsequently on Wednesday, we get the services print for the same month. The forecast is for these indices to have declined slightly, or to have remained unchanged. Even though something like that could be seen as discouraging news for BoE policymakers, we doubt that such modest declines will be enough to curb market expectations for a BoE rate hike this year. At the time of writing, the probability for a hike by year-end is almost 100% according to the UK OIS. Meanwhile, the probability for such action at the November meeting is roughly 70%. In our view, any near-term hike is far more likely to occur in November, as that gathering includes an Inflation Report as well as a press conference. Indeed, a rate increase as early as then appears quite likely at this point, following the latest hawkish comments from the Bank’s chief economist Andy Haldane, who said yesterday that a hike would be a “good news story” for the UK economy.
From the US, we get the ISM manufacturing PMI for September, and then on Wednesday, we get the non-manufacturing index for the month. Both of these indices are anticipated to have declined, but to still remain at relatively elevated levels, consistent with healthy growth in their respective sectors. Although a pullback in these figures could raise some doubts as to whether the Fed is indeed set to raise rates again this year, we maintain the view that the primary determinants of such an action may be employment and inflation data.
On Tuesday, during the Asian day, the RBA rate decision will be in focus. Without a forecast available yet, we see the case for the Bank to keep its policy unchanged yet again. Since the latest meeting, the only noteworthy data we got from Australia was GDP growth for Q2, which accelerated notably, as well as the employment figures for August, which showed further tightening in the labor market. If seen in isolation, these suggest that the RBA may appear somewhat more optimistic this time, at least with regards to the economy. However, at the latest gathering the Bank also expressed its discomfort with regards to the exchange rate, noting that the Aussie’s recent appreciation is expected to contribute to subdued price pressures, and that it is weighing on the outlook for growth and employment. Considering that AUD/USD is trading at very similar levels as back then, we consider it likely that the Bank reiterates its currency-related concerns.
On Wednesday, in the US, the ADP employment report for September is expected to show that the private sector added 172k jobs, less than the robust 237k, but still a decent number overall. In fact, considering that the consensus for nonfarm payrolls this month is only 140k, an ADP print of 172k is could heighten speculation for a better-than-anticipated NFP number. That said, we have to repeat for the umpteenth time that even though the ADP is the only major gauge we have for the NFP print, the correlation between these two figures has fallen notably in recent years.
On Thursday, the economic calendar is very light, with no major events or indicators due to be released.
Finally on Friday, the all-important US employment report for September will take center stage. The forecast is for nonfarm payrolls to have risen by 140k, less than the 156k in August. Even though this number appears to be very low at first glance, we believe that most of the softness may be attributed to the recent hurricanes that plagued the southern US states in September. Bearing that in mind, 140k may actually be a decent figure, considering also that anything over 100k (roughly) is still consistent with further tightening in the labor market. Meanwhile, the unemployment rate is expected to have held steady at 4.4%, while average hourly earnings are expected to have accelerated on a monthly basis, though that would keep the yearly rate unchanged. Overall, this appears to be yet another set of decent employment data, something likely to enhance even further speculation for a December rate hike by the Fed. At the time of writing, the probability for such an action rests at 70% according to the Fed funds futures, and another set of solid jobs prints could push it even higher.
We also get employment data for September from Canada.
