Market movers ahead
In the US, we will look out for the last Fed speeches before the blackout period begins.In the euro area, we expect another dire set of industrial production figures for August. We hope the ZEW prints bring better news for October.In the UK, we expect Brexit negotiations to take centre stage. We also expect several economic releases and Bank of England speeches.We are likely to see a further decline in Chinese GDP growth for Q3. The trade war is one reason but structurally growth also looks set to be on a declining path over the next decade.In Sweden, we are due to get the September unemployment rate. Unemployment has soared over the past few months and we expect a correction. Even so, we believe it remains far higher than the Riksbank forecast.
Weekly wrap-up
It was a bit of a roller coaster week up to the US-China trade talks. We see a 60% chance that the two sides will strike an interim deal at the beginning of the weekend.
The minutes from the most recent policy meetings revealed a great deal of disagreement among the governing councils of the ECB and the Fed.
Ireland and the UK indicated they could find a solution for Brexit. Yet, even if the UK and EU come to an agreement, Boris Johnson's government still faces limited parliamentary backing, making it hard to pass a deal in the UK parliament.
Market movers
Global
In the US, it is the last week before the Fed’s blackout period begins on 19 October and hence we will listen very closely to Fed speeches during the week to find out whether the Fed is going to cut or not. We expect the Fed will talk down expectations if they are not going to cut. We have said for some time that weak economic figures even in the US will force the Fed’s hand.
In terms of economic data releases, it is a quiet week but the retail sales in September due out on Wednesday will be important. Some hawks argue that the Fed does not need to ease much (or at all), as private consumption growth remains solid, so a weak print here may persuade them to support another cut. Retail sales have risen for six months in a row and since retail sales is a very volatile indicator it would not be a big surprise if we get a negative print soon.
In the euro area, next week will bring the August industrial production figures on Monday. The latest year’s crumbling production data has mainly been driven by Germany, where production in August fell 4.0% y/y. Hence, the euro area print is not likely to bring any cheer, showing the industrial recession dragging out in Q3.
On Tuesday we get the first sentiment indicators for October when the ZEW prints are due out for both the euro area and Germany. It will be interesting to see whether the rebound in expectations and the fall in current situation continues.
Also on Tuesday, we have the official deadline for euro area countries to submit their 2020 budget plans to Brussels. The focus here will be particularly on how the Italian budget is received, with the government planning a slightly higher budget deficit of 2.2% of GDP than previously agreed with the Commission in June. However, we currently do not envision a replay of the budget fight to the same degree as in 2018. Lastly, Wednesday will bring the final September inflation figures and with it a decomposition of the different categories, which will show us what drove the small uptick in core inflation to 1.0%.
In the UK, the focus is on the Brexit negotiations ahead of the EU summit on Thursday to Friday. The negotiations seemed to have broken down early this week but got back on track after the meeting between Irish PM Varadkar and UK PM Johnson. Unless a deal is reached over the weekend, the EU leaders may not feel confident ratifying a deal at the EU summit. There is, however, always the possibility to call an extraordinary summit.
With respect to economic releases next week, the labour market report for August is due out on Tuesday, CPI inflation in September on Wednesday and retail sales in September on Thursday. We also have plenty of Bank of England speeches, which may give us more insight into whether the central bank is on the brink of cutting rates in line with other major central banks.
In Japan, we get September CPI inflation figures on Friday. Inflation remains far off the 2% target in Japan and momentum is currently downwards. Energy prices are set to lift inflation in September temporarily on the back of the drone strikes on Saudi oil plants in mid-September. A 2pp p VAT hike took effect on 1 October, which is likely to lift inflation another approximately 1pp over the coming year. The risk is that this price increase hampers private demand and puts an end to the economic recovery. Several exemptions on food etc. and increased public spending are set to counter the negative effect on private demand, though.
It is time for China GDP for Q3. We are likely to see another headline saying lowest growth since the 1990s because the economy probably grew 6.1% y/y in Q3 down from 6.3% y/y in Q2. The trade war has caused headwinds but structurally growth is also on a declining path over the next decade.
China also releases data on exports, industrial production and retail sales. We expect the key figures to point to some stabilisation in growth following the decline over most of the year. Recently Chinese PMI and a few other indicators have pointed to stabilisation and even improvement. CPI inflation is set to rise further from 2.8% y/y to 2.9% y/y as pork prices continue to rise due to African swine fever. We look for PPI to move a bit further into deflation from -0.8% y/y in August to -1.2% y/y in September.
This should be the bottom, though, judging from our model based on developments in commodity prices.
We will also look for more signals on the US-China trade war and the outlook for a possible trade deal.
Scandi
There are no market movers in Denmark in the coming week.
We have seen an unexpectedly hefty rise in unemployment in Sweden over the past months. In fact the steep rise made us look for a correction last month but that did not happen; instead unemployment picked up again. Comments from the Riksbank range from concern to various explanations as to why the data are not very reliable. The latter is a bit worrying to us since several other job related data confirm that the labour market is cooling off.
Having said that, we too have a feeling that unemployment data may be a bit exaggerated. We were wrong about a correction last month but we make another attempt this time around. Admittedly, putting down numbers is to some extent a matter of guessing. We have assumed a decline from 7.4% to 6.8% (i.e. 0.6pp). With a standard seasonal factor for September of -0.5pp we end up with an unadjusted unemployment rate at 6.3%. If correct, adjusted unemployment for Q3 will be on average 7.1% (notice though that previous months may be revised) compared with the RB’s upward revised forecast of 6.8%. In Nordic Outlook our implicit assumption was that September would print 6.5% s.a.
Now, the Riksbank’s 6.8% of course only represents a starting point. The more interesting question is of course how the Riksbank now sees the outlook for the job market going forward and that in turns depend on the outlook for the economy as a whole. In that respect we find the National Institute of Economic Research’s newly released forecast more realistic that the RB’s September projection (and more in line with our own).
There are no market movers in Norway in the coming week.
Market movers ahead
