– Antipodeans and Nordics lead sell off vs USD, Asian equities down 0.5-3%
– German factory orders and ECB bond purchases in focus today
– Global central banks to turn more cautious and neutral, keeping rates on hold
What to watch for today
GBP: Services PMI in focus. The consensus forecast is for a slight moderation to 54 from 55.4 in July. In general, UK data have not yet weakened consistently enough to warrant further policy easing from the MPC at this week’s meeting, in our view.
EUR: Orders falling. After three strong months, we expect German factory orders to have declined sharply in July. Our -2.5%mom estimate is weaker than the -1.9%mom consensus forecast.
Markets will also focus on the release showing the level of ECB bond purchases settling last week. The level of net purchases slowed to EUR7bn in the previous week from EUR15bn and EUR22bn in each of the two prior weeks. A slowing rate of purchases was not a concern when Italian and Spanish yields were stable, but markets would likely view a continued decline in the base of purchases negatively in the context of the rise in yields this past week. We expect EUR to continue to trade heavy vs. the USD and CHF heading into the ECB meeting this week.
TWD: Low inflation. inflation is likely to stay at a subdued 1.45%yoy in August, up slightly from 1.3% in July. With inflation tame and the export sector weak, we think Taiwan’s central bank’s policy bias is increasingly going to shift towards TWD weakness if global growth slows sharply.
US and Canada’s financial markets are closed today for Labor Day holidays.
What to watch for this week-central banks turn cautious
The data calendar is quieter this week but the policy calendar heats up. The ECB, BOE, Bank of Canada, RBA, Riksbank, BOJ, National Bank of Poland, Bank of Korea, Bank Negara Malaysia, Bank Indonesia, and Central Bank of the Philippines are all meeting, and President Obama will be delivering a key speech. We are not looking for any monetary policy changes this week, but we expect the general message from central banks to turn more cautious and neutral given the rapid slowing and stagnation evident in key macro indicators. We would look for this shift towards more accommodation to be supportive of higher yielding and commodity exporter currencies.
USD: In the US, the return from the Labor Day holiday will see attention directed to President Obama’s speech to a joint session of Congress. The topic of the speech is job creation, and hopes for measures to support the housing market have dimmed after White House comments this past week. Limited fiscal firepower means an announcement of very ambitious measures is unlikely, and markets are likely to be skeptical of the president’s ability to legislate new measures in a divided Congress anyway. The speech is scheduled for Thursday evening, but we would expect any significant policy announcements to be floated in the press ahead of time. On the data front, focus will be on weekly claims and the non-manufacturing ISM, which we expect to see fall to 50.
EUR: Policy will also be in the spotlight in Europe. President Trichet has indicated that the ECB may shift to a neutral inflation risk statement this week, and he seems likely to signal that policy is on hold for now. Indeed, there is some risk that he signals an easing in light of the rapid deterioration in data, or widens the gap between the repo and deposit rate to allow EONIA to trade lower. We would expect the EUR to react negatively to a dovish message, while a hawkish message would not be supportive given the likely negative impact on the risk environment in Europe.
Markets are also awaiting the results of a German Constitutional Court judgment on euro area aid programs expected on Wednesday. We do not expect the court to invalidate agreements already reached, although it is possible that it will provide guidance limiting scope for future independence of the EFSF and other constructs. Markets will also be looking for news on private sector participation, with the Greek government having requested that creditors disclose their plans by Friday (see our European economics team’s latest report for details).
GBP: In the UK, we expect policy to be left unchanged, implying no statement from the MPC at this time. The bias of monetary policy has shifted in a more dovish direction. However, financial conditions have not yet deteriorated to a point at which a significant number of MPC members – let alone a majority – would vote for more quantitative easing, in our view.
SEK: In Sweden, our economists expect the Riksbank to remain on hold with a possible downgrade to the interest rate projections. The July rate projections had around 50bps of rate hikes penciled in between now and the end of the year. However, we doubt that the Riksbank would tighten policy given the weaker growth prospects in Sweden and abroad. While we do not expect the domestic economic conditions to warrant a rate cut yet, a dovish statement is likely to remove interest rate support for the SEK in the short term, in our view.
CHF: In Switzerland, CPI data will give further guidance on the policy outlook. Our economist forecasts CPI to moderate to 0.1%yoy in August, below the consensus forecast of 0.3%yoy. Rising deflationary risk would help the SNB to justify its recent aggressive liquidity measures, which were engineered to drive interest rates lower, even into negative territory, so as to offset the tightening in monetary conditions stemmed from the CHF strength. If our below-consensus inflation forecasts were realized, we would expect EURCHF to squeeze higher as the market prices in more imminent and aggressive measures from the SNB.
AUD: We expect the Reserve Bank of Australia (RBA) to remain on hold on Tuesday. The statement is likely to be in line with the tone of RBA Governor Steven’s speech last week, in which he sounded cautious but in no way signaled a shift to an easing bias. Stevens will also be speaking in Perth on Wednesday. Such an outcome would likely reduce somewhat the 126bps of cuts priced over the next 12 months. Markets will also focus on jobs data on Thursday. The consensus forecast is that employment rose 10k in August and we would view the risks to the release as evenly balanced. Second quarter GDP on Wednesday will also be key to assess the strength of the recovery from the flood related contraction in Q1.
CAD: The Bank of Canada (BoC) is also expected to leave policy unchanged this week and maintain neutral guidance. It is possible that the BoC softens its language on eventual policy tightening in light of elevated global uncertainty and a soft run of local data. We are neutral CAD heading into the result. Canadian employment data are due at the end of the week as well.
We expect the central bank of Poland’s monetary policy committee (MPC) to keep the policy rate on hold at 4.5%, in line with the consensus forecast. Recent comments from several MPC members, including Governor Belka, suggested the MPC has shifted to a “wait-and-see” mode, in our view.
CNY: In China, inflation likely eased in August but remains high. Our economist forecasts CPI inflation fell to 6.0%yoy in August (data due out Friday), below the consensus forecast of 6.2%yoy and the 6.5%yoy in July. A peaking of inflation and the recent run of weak global growth data may lead Chinese policy makers to turn slightly more cautious and slow the pace of CNY appreciation. But, with inflation still elevated and way above the policy target, the trend CNY appreciation stance remains intact, in our view. China will also be reporting industrial output, retail sales, fixed assets investment and PPI data on Friday. We expect the growth data to be resilient and point to a slowdown rather than a hard landing.
KRW: We expect Korea’s central bank (BoK) to keep the policy rate unchanged at 3.25% on Thursday, in line with the consensus forecast. While the acceleration in CPI inflation to 5.3%yoy in August increases the pressure for BoK to hike its policy rate, we think it will be cautious given the sharp deterioration in the US and European growth outlook. The strength of the export sector and still high imported inflation suggest that gradual won appreciation is likely the preferred policy tool near term.
MYR: Our economist expects BNM to keep its policy rate unchanged at 3.0% at its Thursday policy meeting, in line with the consensus. We think inflation has likely peaked, while the weakness in the export and manufacturing sectors has depressed growth. With Malaysia’s growth highly vulnerable to a US/Europe demand shock, we think BNM is unlikely to tighten monetary conditions near term and the FX policy bias is increasingly against significant MYR strength.
IDR: Bank Indonesia (BI) is likely to maintain policy rates at 6.75% at its policy meeting on Thursday. We believe that CPI inflation staying below 5.0%yoy will allow BI to stay on hold over the next quarter. BI is likely to continue preferring IDR strength to play a leading role to moderate our expectations for a rise in inflationary pressures towards end year.
PHP: Our economist expects Philippine CPI inflation (Tuesday) to stay around 5.0%yoy in August, but that is unlikely to lead the Philippines’ central bank (BSP) to hike rates on Thursday. With Q2 GDP growth disappointing and dragged lower by the weak export and manufacturing sectors, we think the monetary policy bias is increasingly going to turn neutral. We expect the BSP to leave policy rates unchanged at 4.5%yoy on Thursday and to turn more cautious against PHP strength.
What happened overnight
Risk off in Asia. Asian markets greeted the disappointing US non-farm payroll data negatively, with equities mostly lower and the USD stronger. The Nordics and Antipodeans are leading the sell-off vs the USD. AUDUSD fell to 1.059 amid mixed local data. Likewise, the KRW is leading Asian currencies’ weakness vs the USD following the 0.5-3% sell-off in Asian equities.
EURUSD opened the Asian session weaker before trading flat around 1.416. Several negative headlines over the weekend have seemingly weighed on the euro. Reports cited a senior IMF economist as saying that Greece will likely face a “hard default” before March 2012. Meanwhile, exit polls suggest that German Chancellor Angela Merkel’s party was defeated in regional elections in her home state of Mecklenburg, which fuelled concerns that opposition to bailouts is growing.
AUD: Mixed data. Jobs adverts were a weak -0.6%mom in August which follows the soft -0.7%mom print in July. Today’s job adverts suggest another weak employment reading for August, and should assist the bid tone in fixed income. The strong Q2 company profits growth of 6.7%qoq suggests the corporate sector is healthy and cutting costs. These data are not enough to reduce the market’s pricing of RBA rate cuts, in our view. We will focus on the RBA decision on Tuesday and, more importantly, the speech by RBA Governor Stevens the following day in Perth (see above).
CNY: The HSBC services PMI fell sharply to 50.6 in August from 53.5 in July. This is the lowest print this year and suggests that the credit tightening measures that Chinese policy makers have imposed are starting to slow the service sector as well.
IDR: Inflation rose slightly. CPI inflation rose 0.93%mom in August, higher than the consensus forecast for 0.8%mom. Year-on-year inflation rose to 4.8% from 4.6% in July. Export growth slowed to 39.6%yoy in July, lower than the consensus forecast for 47.2%yoy. Imports growth also slowed to 27.2%yoy in July. This helped to drive the 12 month rolling trade surplus up to $29.1bn in July from $27.6bn in June. We think that with inflation still at very subdued levels and the external outlook uncertain, Bank Indonesia (BI) will be cautious about tightening monetary conditions and is likely to maintain the policy rates unchanged at 6.75% at Thursday’s meeting and keep USDIDR trading in a range around current levels.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS