Week Ahead | 04/10/2019
Weekly outlook: October 7th to 11th | Focus on Brexit and US economic slowdown
With last week intensifying fears of a possible US economic slowdown, the Eurozone showing further signs of weakness and Brexit entering another crucial phase, we expect the next week for further developments on these fundamental issues. Also, developments regarding a possible impeachment of US President Trump could meet the headlines as well as any developments in the US-Sino negotiations. On the monetary front, market focus is expected to be on the release of the Fed’s minutes of its latest meeting. As for financial releases in the upcoming week, we single out the release of the US inflation measures for September, UK’s GDP rate for August, Canada’s employment data for September and Germany’s Industrial orders and production (both for August), among a number of other financial releases.
USD – Worries for economic slowdown
President Trump announced yesterday that a Chinese delegation would be visiting the US next week, hence we could see some developments in the US-Sino relationships. It should be noted though, that should the US President actually request from the Chinese government to investigate Biden’s son, matters could become more complicated. Efforts by Democrats to impeach the US president, are expected to be intensified further and probably headlines will be made again, however the issue seems to have little impact on the markets right now. The main issue that seems to be worrying the US is the possibility of a slowdown in the US economy and the possible response by the Fed and we could see further developments on the issue as the US employment report for September will be actually out and investors will have more clues about the state of the US economy. On the monetary front, we expect the release of the Fed’s last meeting minutes to stir some interest as at the meeting, another rate cut was decided. Analysts are expected to scrutinise the document for any clues about the Fed’s future intentions as well as the balance of power in a deeply split Fed. Circumstances since then have changed substantially and probably for the worst for the US economy, leaving the possibility of a further rate cut by the Fed looming over the USD’s direction. It should be noted that the market has already priced in another rate cut of 25 basis points (according to Fed Funds Futures) in FOMC’s next meeting on the 31st of October. The fact that the market has already priced in another rate cut and seems to be flirting with the idea of a rate cut also in December, could be indicative of the market’s dovish predisposition. As for financial releases on the US front, we tend to single out inflationary measures such as the PPI rates on Tuesday and the CPI rates on Thursday, all for August. Should the rates show a retreat of inflationary pressures, we could see the greenback weakening further, as the picture of weak US financial data would be enhanced. Also, one should not overlook the release of the forward looking preliminary University of Michigan Consumer Sentiment for October which could provide some insight into consumption after the release of the US production data last week. Also please be advised that volatility deriving from the release of the US employment report today as well as the Fed Chairman Jerome Powell’s speech today could affect the USD’s direction on Monday’s opening under certain circumstances.
GBP – Brexit in the forefront
The UK finally submitted its Brexit proposals to the EU, albeit the Europeans do not seem to be much impressed. Media seem to report that the EU chief negotiator Barnier had stated that the UK Brexit plans fall far short of his conditions for a deal. The Irish seem to resist heavily the idea of a hard UK-Irish border for any deal, albeit the German and the French seem to be contemplating a possible time limit to the Irish backstop. For the time being the proposals seem to be enjoying at least some support in the UK, which may provide UK’s Prime Minister Johnson some confidence. Currently the UK and the EU seem to have allowed themselves a week, to intensely discuss the UK proposals and we could see Brexit headlines continue to dominate the pound in the coming week once again. Should the negotiations fall through, the UK will be set before the dilemma of either asking for another Brexit extension, or risking crushing out of the EU, with all the negative consequences for both the EU, but mostly the UK. Our position is that the UK could be asking for a Brexit extension has been strengthened after today’s media reports that the UK will be asking for an extension should there be no divorce deal by October 19th. With the hands of the Bank of England tied by Brexit uncertainty, next week’s other focal point for pound trader’s may possibly be the financial releases on Thursday. From a number of UK releases due out on Thursday, we tend to single out the release of UK’s GDP rate for August and the manufacturing output growth rate also for August. Financial releases last week didn’t do the pound any favours as the PMIs indicated a contraction of economic activity in all sectors of the UK economy and should next week’s results be also unfavourable, we could see the pound weakening. Never the less pound traders are expected to keep their eyes fixed on Brexit developments next week, once again.
EUR – Economic data eyed
Things are looking worse and worse for the Eurozone, especially after last week. Inflation rates rolled further down, and the final PMI readings retreated, if compared not only to the final readings of August but also the preliminary releases for September at some sectors. The drops indicated less economic activity than what was expected for September, with crucial sectors even showing a contraction wider than expected. On top of it all, bad news continued for the EUR bloc as WTO gave the US the green light for tariffs against European products, in retaliation for the subsidy of Airbus. Washington lost no time after the ruling on Wednesday and announced retaliatory tariffs on a number of European products, to come into force on October 18. The EU is to face tariffs of 10% on aircraft and 25% on other goods, like cheeses, whiskey, French wines and olive oil. Both the two sides, Brussels and Washington seemed to express willingness to negotiate the issue in order to find a solution, yet the leverage on the American side may be greater after the ruling. Finally, also on a fundamental basis, a EUR trader should bear in mind that possible developments on Brexit could also have an effect also on the single currency, albeit at a lesser degree probably.As for financial releases from the EUR area next week, we tend to focus on the release of Germany’s industrial orders and output (both for August) on Monday and Tuesday respectively, Eurozone’s Sentix indicator on Monday and maintain worries about the final HICP rate of Germany for September on Friday.
JPY – Safe haven flows to dominate
In the past week JPY’s direction seemed to be more influenced by safe haven flows, rather than the financial releases or statements made by BoJ officials. Especially worries of a possible US economic slowdown and Brexit uncertainty, seems to be providing support for the Japanese currency. We could see the two matters continue to affect the currency’s direction, albeit the US-Sino relationships could also play a role should there be further developments. As for financial releases, albeit a number of them are due out next week, our focus turns to Tuesday with the household spending growth rates and current account balance both for August. On Wednesday, we get the corporate goods prices growth rates for September and the machinery orders growth rate for August. Please bear in mind that the household spending growth rate and the corporate goods prices growth rate play a key role in BoJ’s efforts to boost inflation. On a fundamental level it should be noted that Japan has increased its consumption tax for the first time in five years, hiking it from 8% to 10%. It remains to be seen, on whether the tax hike will weigh on the JPY.