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Drivers for the Week Ahead

Summary:
We continue to think that the US economy is in better shape than most appreciate, and that underpins our strong dollar call Tensions are likely to remain high after reports emerged last week that the US will look into limiting capital flows into China US September jobs data Friday will be the data highlight of the week; there is a heavy slate of Fed speakers this week UK, eurozone, and Japan are expected to report weak data this week RBA meets Tuesday and is expected to cut rates 25 bp to 0.75%; Reserve Bank of India is expected to cut rates 25 bp Friday We continue to think that the US economy is in better shape than most appreciate, and that underpins our strong dollar call.  US yields have crept higher but we need to see higher inflation numbers to get yields

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  • We continue to think that the US economy is in better shape than most appreciate, and that underpins our strong dollar call
  • Tensions are likely to remain high after reports emerged last week that the US will look into limiting capital flows into China
  • US September jobs data Friday will be the data highlight of the week; there is a heavy slate of Fed speakers this week
  • UK, eurozone, and Japan are expected to report weak data this week
  • RBA meets Tuesday and is expected to cut rates 25 bp to 0.75%; Reserve Bank of India is expected to cut rates 25 bp Friday

Drivers for the Week AheadWe continue to think that the US economy is in better shape than most appreciate, and that underpins our strong dollar call.  US yields have crept higher but we need to see higher inflation numbers to get yields back to the September highs.  August core PCE came in at 1.8% y/y, the highest since December.  Yet WIRP is still showing 44% odds of a cut October 30, which still seems too high.  When market expectations adjust, the dollar should continue to strengthen.

Let’s talk about duration and magnitude.  Duration?  We think the strong dollar call is good for well into 2020.  The US economy has good momentum going into the new year.  Magnitude?  Near-term (Q4), we target $1.0840 for the euro.  Medium-term (Q1), we target the February 2017 low near $1.05.

What could derail our call?  Plain and simple, a US recession.  That’s why the trade war remains our biggest worry.  We think the economy can weather the political uncertainty, but the tariffs could choke off consumption.  We need to watch this closely, as another slug of tariffs just hit September 1 and more are due in mid-December.

Tensions are likely to remain high after reports emerged last week that the US will look into limiting capital flows into China.  Quite simply, this is an unprecedented move against a non-terrorist country.  It’s also nearly impossible to enforce.  What about a US fund that’s domiciled in Ireland?  Regardless, this supports our view that Trump will maintain the hardline stance that he previewed whit his UN speech this month.  This is negative for EM.

For now, the US economy is in solid shape.  The Atlanta Fed’s GDPNow model is tracking 2.1% SAAR growth in Q3, up from 1.9% previously, which is around trend (~2%) with no drop-off from 2.0% in Q2.  Elsewhere, the NY Fed’s Nowcast model is tracking 2.1% SAAR growth in Q3, down from 2.2% previously.  Its forecast for Q4 growth is now 1.8% SAAR, down from 2.0% previously.

US September jobs data Friday will be the data highlight of the week.  Consensus sees 145k jobs added vs. 130k in August, unemployment steady at 3.7%, and average hourly earnings steady at 3.2% y/y.  ADP will report private sector employment Wednesday and is expected at 140k.  Weekly claims for the September survey week were low, suggesting a solid jobs number.

Ahead of that, we will see several other important US data points.  In manufacturing, Chicago September PMI will be reported Monday and is expected at 50.0 vs. 50.4 in August.  Dallas Fed manufacturing survey also comes out Monday and is expected at 1.0 vs. 2.7 in August.  ISM September manufacturing PMI will be reported Tuesday and is expected at 50.1 vs. 49.1 in August.

September auto sales will also be reported Tuesday and are expected at 17.0 mln vs. 16.97 mln in August.  August construction spending (0.4% m/m expected) will also be reported Tuesday.  August factory orders, September Challenger job cuts, and ISM non-manufacturing PMI will be reported Thursday.  August trade data will be reported Friday.

There is a heavy slate of Fed speakers this week.  Evans, Clarida, and Bowman speak Tuesday.  Barkin, Harker, and Williams speak Wednesday.  Evans, Quarles, Mester, Kaplan, and Clarida speak Thursday.  Rosengren, Bostic, and Powell close out the week with speeches on Friday.

Germany reports September CPI, retail sales, and unemployment Monday.  Final eurozone manufacturing PMI readings and preliminary September CPI will be reported Tuesday.  Final eurozone services PMI readings and August retail sales will be reported Thursday.  We see downside risks to the eurozone data, which should continue to weigh on the euro.

UK reports final Q2 GDP data Monday.  The October PMI parade starts with manufacturing (47.0 expected) Tuesday, followed by construction (45.0 expected) Wednesday and ending with services and composite (50.3 and 50.0 expected, respectively) PMIs Thursday.  The economy continues to weaken ahead of the October 31 Brexit deadline.  WIRP suggests 18% odds of a cut at the October 31 meeting, rising to 31% December 19.  Sterling should remain heavy.

Japan reports August unemployment and Q3 Tankan report Tuesday.  On Monday, the data were mixed as retail sales came in stronger than expected and IP came in weaker than expected.  Overall, the economy remains sluggish ahead of the consumption tax hike Tuesday, leading many to believe that the BOJ will ease policy soon.

BOJ tweaked its bond-buying operations in an effort to steepen the curve.  It reduced the amount of 3 to 5-year bond purchases whilst boosting the amount of 1- to 3-year bond purchases.  WIRP suggests 61% odds of a cut at the November 7 meeting, rising to 67% December 19.  USD/JPY should continue to creep higher along with US rates.

Reserve Bank of Australia meets Tuesday and is expected to cut rates 25 bp to 0.75%.  However, a handful of analysts see no change.  Just ahead of the decision, Australia reports August building approvals.  August trade will be reported Thursday and retail sales Friday.  With the US-China trade war showing no signs of letting up, AUD should remain heavy.

Canada reports July GDP Tuesday and is expected to grow 1.4% y/y vs. 1.5% in June.  September Ivey PMI and August trade will be reported Friday.  The economy remains sluggish, leading many to believe that the BOC will eventually ease policy.  WIRP suggests 11% odds of a cut at the October 30 meeting, rising to 20% December 4.

China celebrates the 70th anniversary of the founding of the People’s Republic of China Tuesday.  Ahead of this, policymaker have pressed for calm and stability and so far, so good.  Yet protests in Hong Kong remained violent over the weekend and could pick up again during the Chinese celebrations.

Reserve Bank of India is expected to cut rates 25 bp Friday.  Poland is expected to keep rates steady but retains a dovish bias.  Korea, Turkey, Indonesia, Thailand, and the Philippines will all report September CPI readings that are expected to allow further rate cuts.


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About Win Thin
Win Thin
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH

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