– KRW and EUR lead modest rally vs USD, Asian equities mixed
– Germany and France pledge plans to stabilize Europe by end-October
– EFSF progress in focus
– US retail sales growth expected to accelerate
– MAS likely to ease SGD appreciation, BoK and BI to remain on hold
What to watch for today
US fixed income markets will be closed for Columbus Day, but equity markets will trade. Japan and Canada’s markets are closed for bank holidays.
EUR: Production update. August industrial production data are due from France at 6:45 GMT and in Italy at 8 GMT, along with the Bank of France’s business sentiment indicator for September. We expect French production to drop 1%mom, more than the consensus for a 0.7%mom drop, after rising 1.5%mom in July. In contrast, Italian production likely rose 0.5%mom after three consecutive monthly declines. We think the EUR is likely to be more sensitive to downside data surprises and continue to see scope for renewed downside towards 1.3050 in EURUSD given the ECB failed to signal outright policy accommodation last week.
SEK: Production update. August industrial production is likely to have fallen in line with the weaker Swedish PMI. The deterioration in growth in core Europe, especially Germany, bodes ill for the manufacturing intensive Swedish economy. Against this background, the ECB’s reluctance to spur euro area growth with interest rate cuts is negative for Sweden. We hold a one-month EURSEK topside seagull in our model derivatives portfolio as an expression of this view.
What to watch for this week
Focus this week will be on US corporate earnings and the progress of EFSF ratification in Europe. In emerging markets, we expect the Bank of Mexico to cut rates and for the Monetary Authority of Singapore to ratify the implicit policy easing that has already occurred via the exchange rate. We expect Bank Indonesia and Bank of Korea to remain on hold.
USD: Corporate earnings, retail sales, and confidence. The US Q3 earnings season begins Tuesday with correlations in Exhibit 1 below suggesting the AUD, CAD, and NZD are most exposed to US equity market moves. Over the next four weeks, 320 companies from the S&P 500 comprising of 71% of the index by market cap will report their calendar quarter Q3 earnings. Our equity analysts are looking for the earnings beat ratio to be around 66%, the lowest level since Q1 2009. They argue that, in this environment, a straight positive surprise may not be enough for a stock to rally – results need to be clearly solid on both the top and bottom lines. We think any earnings disappointment will encourage concerns that financial market stress has begun to spill from the sovereign and banking sectors to the real economy and could weigh on risk and growth sensitive currencies.
US September retail sales data on Friday should rise of 0.7%mom, in line with the consensus expectation. Our economists expect ex-auto sales to surprise positively, rising 0.4%mom. The preliminary University of Michigan survey also comes out on Friday. Our focus will be on the unemployment expectations component. In other news, the Fed releases minutes from the September FOMC meeting on Thursday.
EUR: Industrial production and EFSF ratification. Malta and Slovakia are the last two countries to vote on amendments to the EFSF. Slovakia’s outcome is more uncertain given divisions in the coalition. Passage would be viewed as good news, though in many ways markets have already moved beyond this round of EFSF enhancement and are looking for indications of new measures to support the larger peripheral borrowers. Slovakia is scheduled to vote on Tuesday.
On the data front, the euro area industrial production composite is out on Wednesday. Our economists note downside risks given early evidence on activity in August. Italy is scheduled to be in the market selling bills on Tuesday and bonds on Thursday.
GBP: IP and employment expected to support BoE return to QE. Despite the resumption of QE by the BoE last week, UK cyclical indicators are likely to remain of interest, if only because the weaker the economy is as it goes into 2012, the more likely will be a further extension of QE. The key indicators this week will be August industrial production (Tuesday) and September labor market statistics (Wednesday). Given the weakness in the PMI data in August, our economists expect both industrial and manufacturing production to drop 0.2%mom, in line with the consensus forecast. The labor market should be weak with the claimant count measure of unemployment expected to rise by 25K in September. We remain bearish on sterling following the BoE’s decision to reinitiate QE and favor positioning for Cable downside.
NOK/SEK: Inflation focus. Our economists expect Norwegian headline inflation (Monday) to have remained unchanged at 0.8%yoy in September, higher than the consensus forecast for a fall to 0.5%yoy. Swedish inflation (Tuesday) is expected to moderate to 3.2%yoy in September from 3.4%yoy.
CAD: Export update. In Canada, markets will focus on the August trade data. Markets will be sensitive to evidence that the combination of a rich currency and a faltering US economy is further damaging exports.
AUD: September employment. The consensus forecast is for a 10k gain in employment, keeping the unemployment rate steady at 5.3%, after the sharp jump to 5.3% in August from a low of 4.9% in April. A further rise in the unemployment rate could bias the Reserve Bank of Australia to cut its policy rate. Meanwhile, positions in AUDUSD have eased and already elevated pricing for rate cuts suggests a positive surprise could have a larger impact.
JPY: Normalization. Our economists expect to see more evidence of post-earthquake normalization, with core machinery orders (Wednesday) expected to rise by 3%mom in August. The JPY remains more a play on offshore central bank policy than on developments in Japan, although evidence of firming overseas orders could help support expectation for a recovery in exporter hedging flows.
MXN: Rate cut. We expect Mexico’s central bank to cut its policy rate 25bps on Friday, the first cut since the easing cycle ended in July 2009. Our economist notes that the minutes of the August policy meeting show an inclination to cut, despite the recent weakening of the currency.. The peso sold off aggressively in August and September as markets priced in US recession risk and penalized countries dependant on US growth. At current levels, we think the peso is unlikely to be hurt much more by the modest policy easing we expect from Banxico this year (25bps easing in December in addition to the rate cut this week). We continue to see scope for modest MXN recovery as markets grow more comfortable that the US economy has avoided outright recession.
IDR: On hold. Bank Indonesia (BI) is widely expected to keep rates unchanged at 6.75% at its Tuesday policy meeting after inflation softened to 4.6%yoy in September. While monetary policy is likely neutral at the moment, BI has intervened aggressively to establish a floor under the IDR. As a result, we think the policy bias is towards currency appreciation as it helps to contain imported inflation and allows policy makers to keep policy rates stable for longer.
KRW: On hold. We expect Bank of Korea to keep the policy rate unchanged at 3.25% at Thursday’s policy meeting. Inflation moderated to 4.3%yoy in September from 5.3%yoy in August and should allow the BoK to remain on hold. We think the central bank is also more tolerant of currency depreciation given the softening external outlook.
CNY: Inflation still elevated, exports set to slow. We expect inflation (Friday) to ease slightly, but stay at a high 6.1%yoy in September from 6.2%yoy in August. Export growth (Thursday) likely slowed to 18.7%yoy in September from 24.5%yoy in August. September new loans should remain flat, while money supply growth should rise to 14.5%yoy from 13.5% in August. Although inflation has likely peaked, it should still stay stubbornly high and this should incentivize policy makers to keep the CNY on a 4-5% annualized trend appreciation vs. the USD, in our view.
SGD: Singapore’s central bank (MAS) looks set to ease policy. We think the most likely scenario is for the MAS to keep the SGD nominal effective exchange rates (NEER) on an appreciation trend, but slow the pace to about 1-2% per annum from the current 3% at Friday’s policy meeting. Q3 GDP data, which are also released on Friday, should see growth rise to 6.2%yoy from 0.9%yoy in Q2. We recommend going long the SGD ahead of the MAS meeting.
INR: Inflation expected to stay high, output still soft. Our economist forecasts that WPI inflation (Friday) remained at a high 9.8%yoy in September. Industrial output growth (Wednesday) likely rose to 3.6%yoy in August from 3.3% in July, but the pace of growth remains sluggish. With inflationary pressure still high, it increases the risk that the RBI will continue to hike 25bp at the 25 October meeting.
What happened overnight
USD weaker, Asian equities mixed. EURUSD has pared back part of the losses in the late US session to trade around 1.345 after positive headlines out from Europe over the weekend. AUDUSD has traded above 0.98, with markets largely ignoring a 2.1%mom fall in the ANZ job adverts which suggests that Australian employment may remain soft. However, USDJPY is slightly lower to 76.7 as risk appetite is still tentative. US employment data on Friday show that the US is not yet in a recession but growth remains sluggish, while uncertainties still remain in Europe.
The KRW is leading the modest Asian FX rally vs the USD today. The PBoC today fixed USDCNY 37 pips higher after the onshore Chinese markets return from a week-long holiday. This is in line with our observation that the USDCNY tends to track the performance of the broad USD index. We note that the USD is up about 0.2% since September 30. Equity markets are mixed with the Hang Seng down 0.9% while the Taiwan Taiex is up 1.1%.
EUR: More constructive news. German Chancellor Merkel and French President Sarkozy announced an objective of reaching agreement on a comprehensive package of measures to stabilise the euro area by the 3 November G20 meeting. This includes recapitalisation of European banks. No details have been released, but it at least shows that European policy makers are in the midst of coming up with a plan that should ease credit market stress. Also, the governments of France, Belgium and Luxembourg have approved a plan to bail out a troubled European bank.
What to read today
– EUR: Private sector involvement, part 2. Our European economics team argue that while some adjustments are likely, they think that the current July 21 agreement is sufficient to ease Greece’s financing needs over the next several years. They believe a further large haircut on Greek bonds would not help the situation significantly and would be likely to create additional disruption for financial markets.
– USD: Monthly jobs review. Our US economists argued that the September jobs data are consistent with their forecast that we are not at the threshold of an imminent recession. They have revised up their Q3 GDP forecast to 2.5%qoq saar from 1.7%qoq saar previously. However, at the current pace of jobs creation, it will take till July 2017 before employment reaches the January 2008 peak.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS