Weekly Recap, And Upcoming Calendar - Here Are The Main Events To Look For
Week in Review – QE2 and Asian FX Stays in the Spotlight
Following the IMF and G7 meetings last weekend, most markets continued along the patterns seen in recent weeks. Stocks continued to grind higher, the Dollar weakened, and Asian currencies strengthened.
The main focus last week was again on QE2 with a number of key speeches strengthening the market view that significant additional easing will be delivered at the next Fed meeting. The likely implications on the US Dollar dominated FX related discussions. Within this theme, one highlight was the quarterly monetary policy meeting in Singapore which ended with the decision to accelerate the pace of trade weighted SGD appreciation. In light of recently weaker Singaporean data this was a big surprise and hence seen as one of the strongest signs that Asian policymakers may become sufficiently confident to do their bit to rebalance the global economy. Notably lower fixes in $/CNY added to this flavour, while the US Treasury decision on Friday to delay the publication of the semi-annual currency report adds to the political pressure ahead of the G20 finance ministers meeting next week-end. We remain short $/CNY in our tactical recommendations - but having reached our initial 4% return target last week, we have shifted to a trailing stop.
Last week's data remained mixed overall. The US trade balance was wider, and initial claims higher than expected after a few weeks of small improvements. The preliminary reading of the U Michigan consumer sentiment was weaker, though US retail sales and the Empire survey surprised to the upside. Eurozone industrial production was stronger than expected. The batch of China data showed more lending, though external trade appeared to slow.
Week Ahead – More on QE2, Asian FX and Business Surveys
Four issues will likely preoccupy markets in the upcoming week. QE2, Asian FX, business surveys, and maybe French politics.
Market participants will continue to scrutinize any news relating to the upcoming Fed decision on QE2 and the extent to which the FOMC will manage to surprise markets, given that a fair amount of QE appears priced across asset classes.
The upcoming G20 finance ministers meeting will be the second focus for FX markets. The evolution of daily $/CNY fixes will be key and the impact on the trade weighted CNY. We think the Chinese authorities need to show at least some genuine CNY TWI strength to alleviate external political pressures. So far this has not been the case. Overall the chances are good that the upcoming G20 statement will include some explicit language about the need to broadly share the cost of global rebalancing though it seems unlikely the Dollar gets an explicit mention.
We will get more business surveys in the upcoming week, in particular the Eurozone flash PMIs, the German Ifo and the Philly Fed business survey. Given the global decline in order-inventory gaps in recent months, it will be key to see how much industrial momentum has slowed. Markets expect a further gradual decline in European headline readings and a small improvement in the Philly Fed index. China Q3 GDP data on Thursday is important in this context of Asian FX policy and our decoupling views.
Finally, it is worth having a look at the political situation in France. The intensity and frequency of general strikes is clearly going up, with students now increasingly participating and oil refineries being affected.
Monday Oct 18
US Industrial production (Sep): We estimate that industrial output rose modestly in September (GS: +0.3%, consensus: +0.2%, last +0.2%)
TICs data (Aug): Long-term portfolio inflows into the US have recently improved but we consider that much of this reflected additional reserve accumulation. Very little if any private sector inflows into US assets have been seen in recent months and the Dollar positive impact has likely been fully offset by widening trade deficits. July TIC inflows ran at $61.2bn.
Tuesday Oct 19
RBA minutes: Following the surprise decision to stay on hold, there will be some focus on the specific RBA concerns to be revealed in the RBA minutes.
US Housing starts (Sep): We look for a partial reversal in housing starts as the surge in multifamily projects reported for August does not appear to rest on firm foundations (GS: -5.0% mom, Consensus: -3.0%, August: +10.5%).
Canada monetary policy meeting: We expect rates to be on hold, in-line with consensus
French General Strike: France is getting ready for yet another general strike against the pension reform, one day before the final vote takes place in the Senate. This follows last week’s large strike which brought possibly more than 3 million people onto the streets affecting transportation and refineries, thereby increasing the risk of gasoline shortages.
Wednesday Oct 20
Bank of Thailand Meeting: We still believe the central bank will likely raise interest rates by 25 bp at the meeting, taking the policy rate to 2.00%, and then pause for the rest of the year.
Bank of Canada Monetary Policy Report: Market focus will be on the extent of downwards revisions for growth.
BOE MPC minutes: Watch out for comments about more QE, though we doubt it makes much sense with nominal GDP growing at about 6% in the UK.
Brazil central bank meeting: We expect COPOM to leaves rates unchanged, in-line with consensus
Thursday Oct 21
China 3Q GDP, monthly activity indicators, inflation (Sep): We expect 3Q2010 yoy GDP growth to moderate to around 9.3% from 10.3% in 2Q2010. For the monthly activity data of industrial production, retail sales and FAI, we are expecting improvements in yoy terms in general, boosted by a relaxation of previous tightening measures. For CPI, we expect it to edge up to 3.6% yoy from 3.5% in August.
French INSEE (Oct): The reading may decline to about 97 from 98.0 in September.
Euroland flash PMIs (Oct): We see the Euro-zone manufacturing index easing from 53.7 to 53.2, and the services counterpart from 54.1 to 53.6.
US jobless claims: Last week’s move higher in initial claims to 462k marked a reversal after several weeks of gradual declines. Consensus expects a renewed drop to 455k.
Philly Fed (Oct): The market focus will be on whether the Philadelphia Fed’s index for October echoes the stronger-than-expected Empire index (GS: 0.0, Consensus: +1.8, September: -0.7).
Friday Oct 22
German IFO (Oct): We expect a slight drop to 106.0 from 106.8 previously.
From Thomas Stolper, Goldman Sachs