Fiscal Deadlock/China data

This week kicked off with a heavy China’s Sep data slate and Q3 GDP today.  The data releases were positive, revealing yet more signs of strengthening recovery. Industrial production, retail sales, jobs and property investment all beat expectations while Q3 GDP fell short. The data supports the view that China will be one of the only major economies to record positive growth this year. This bodes well for China’s markets and will likely also filter into improving prospects for the rest of Asia.

In contrast US recovery continues to be at risk, with fiscal stimulus discussions remaining deadlocked; a 75-minute conversation between House Speaker Pelosi and Treasury Secretary Mnuchin yielded no progress at the end of last week.  Pelosi has now given a 48-hour deadline to agree on stimulus while Senate majority leader McConnell has scheduled a Senate vote on a more targeted $500bn bill tomorrow. Talks are scheduled to continue today but there still seems to be little chance of a deal this side of elections. 

On the data front, US Sep retail sales data registered broad-based gains on Friday, with headline sales up 1.9% m/m (consensus 0.8%). In contrast, industrial production fell a sharp 0.6% m/m in Sep (consensus +0.5%).  Lastly, Michigan consumer sentiment rose in the preliminary Oct report to 81.2 from 80.4 in Sep (consensus 80.5).  The lack of a fiscal deal means that the prospects of a loss of momentum in the US economy has grown, something that will become more apparent in the weeks ahead. US data is limited this week and instead focus will remain on progress or lack thereof, on fiscal stimulus as well as the Presidential debate towards the end of the week. 

Another saga that is showing little progress is EU/UK Brexit transition talks.  The stakes have risen, with UK PM Johnson warning UK businesses to prepare for a hard exit while threatening to abandon talks completely.  On a more positive note UK officials are reportedly prepared to rewrite the contentious Internal Market Bill, which may appease the EU.  Credit ratings agencies are running out patience however, with Moody’s downgrading the UK ratings by one notch to Aa3. The pound seems to be taking all of this in it stride, clinging to the 1.30 level against the US dollar, suggesting that FX markets are not yet panicking about the prospects of a no deal transition.

Several emerging markets central banks are in focus this week including in China (Tue), Hungary (Tue), Turkey (Thu), and Russia (Fri).  Of these Turkey is expected to hike by 150 basis points, but the rest are likely to stand pat.  Most central banks are taking a wait and see approach, especially ahead of US elections. Reserve Bank of Australia meeting minutes tomorrow will garner attention too, with clues sought on a potential rate cut next month.  

Still Buying On Dips

US stocks had a positive end to the week despite the ongoing uncertainty over a new fiscal stimulus package.  A buy on dips mentality continues to hold on any sell off in equities and risk assets in general.  Although President Trump is now calling for a much larger stimulus, Treasury Secretary Mnuchin has only edged close to Democrats demands for a $2.2 trillion stimulus, by offering $1.8 trillion.  This was subsequently rejected by House speaker Nancy Pelosi.  A deal this side of the election still looks unlikely given the differences between the two sides in not just the size, but also the content of further stimulus.  Either way it’s doubtful this will stop equity markets from moving higher in the interim.

Although markets will continue to keep one eye on the approach of US elections this week – especially on whether President Trump can try to claw back some of the lead that Democratic Presidential contender Joe Biden has built according to recent polls – it is a busy one for events and data, especially in Asia.  Key US data releases include US September CPI inflation (Monday) and retail sales (Fri) while in Australia a speech by the RBA governor (Thu) and employment data (Fri) will be in focus.  In Asia monetary policy decisions by central banks in Indonesia (Tue), Singapore (Wed) and Korea (Wed) will be in focus though no changes in policy are expected from any of them. 

In Singapore, the 6-monthly policy decision by the Monetary Authority of Singapore is unlikely to deliver any major surprises.  Singapore’s monetary policy is carried out via its exchange rate and the MAS is likely to keep the slope, mid-point and width of the Singapore dollar (SGD) nominal effective exchange rate (NEER) band unchanged amid signs of improvement in the economy. Singapore’s government has announced several fiscal stimulus packages (February 18, March 26, April 6, April 21, May 26, August 17) helping to provide much needed support to the economy, with total stimulus estimated to amount to just over SGD 100bn.  Much of the heavy lifting to help support the economic recovery is likely to continue to come from fiscal spending.

In Indonesia, the central bank, Bank Indonesia (BI), has been on hold since July and a similar outcome is expected at its meeting on Tuesday, with the 7-day reverse repo likely to be left unchanged at 4%. However, the risk is skewed towards easing. Since the last meeting the economy has suffered setbacks. Manufacturing confidence deteriorated in Sep, consumer confidence has also slipped while Inflation continues to remain benign. However, BI may want to see signs of greater stability/appreciation in the Indonesia rupiah (IDR) before cutting rates further.

Chinese data including September Trade data and CPI inflation (both on Thursday) will also be scrutinised and will likely add to the growing evidence of economic resilience, that has helped to push China’s currency, the renminbi (CNY) persistently stronger over recent weeks.  Indeed, the CNY and its offshore equivalent CNH, have been the best performing Asian currencies over the last few months.  This is a reflection of the fact that China’s economy is rapidly emerging from the Covid crisis and is likely to be only one of a few countries posting positive growth this year; recent data has revealed both strengthening supply and demand side activity, amid almost full opening up of China’s economy.

US Elections Take Yet More Twists & Turns

Amidst mixed messages from the White House about President’s Trump’s health and a growing circle of US administration officials and Senate Republicans infected with Covid-19, markets will kick of this week with many questions about the running of government, prospects for fresh fiscal stimulus and the nomination of the new Supreme Court Justice. President Trump pushed for stimulus in tweet while in hospital but obstacles in the Senate remain, including the fact that the Senate has adjourned until Oct 19, a factor that will also delay the Supreme Court confirmation process. 

In what was already an election fraught with various issues, President Trump’s Covid infection has added another layer of uncertainty.  The fact that several of his campaign aides have tested positive also complicates his ability to campaign to try to close the gap with ex- VP Biden.  There is also the question of whether the President will be well enough to take part in the second Presidential debate scheduled for October 15.  Markets initial sharp negative reaction to the news that Trump had contracted the virus, on Friday was tempered by the end of the session suggesting some calm.  However, every piece of news on Trump’s health will be closely scrutinized in the days ahead.  

The US dollar ended last week firm and this trend is likely to continue given the uncertainty about events in the weeks ahead, which despite the fact that much of this uncertainty is US led, will still likely lead to some safe haven dollar demand. 

A weaker than consensus US September jobs report didn’t help markets at the end of last week, with non-farm payrolls coming at 661k (consensus 859k) while a 0.5% drop in the unemployment rate was due a drop in the participation rate.  US non-farm payrolls are still down 10.7 million from the levels seen in February, highlighting the still significant pressure on the US labour market despite the job gains over recent months. 

Attention this week will focus on Federal Reserve Chair Powell’s speech on Tuesday and Fed FOMC minutes on Wednesday, which will be scrutinised for details on how the Fed will implement average inflation targeting.  Also on tap is the US Vice Presidential debate on Wed between Mike Pence and Senator Kamala Harris, which hopefully will not be a fractious as the debate between President Trump and ex-Vice President Biden.  

Monetary Policy rate decisions in Australia (consensus 0.25%) on Tuesday and in Poland (consensus 0.1%) on Wednesday as well as the Australian Federal budget on Tuesday will also garner attention this week. 

Rocky Road

Despite the rally in US stocks on Friday, led by the technology sector, US stocks have fallen for four straight weeks.  The jury is still out on whether equities and risk assets in general can rally in the face of a host of uncertainties in the weeks ahead including the potential for a contested US election, fading US economic momentum, lack of progress on “Phase 4” US fiscal stimulus and a resurgence in virus cases globally.  What is clear, is that the road ahead is a rocky one, reflected in the fact that equity volatility (VIX) remains elevated and G10 FX options implied volatility around the time of the US election has spiked. 

One of the main beneficiaries of this uncertainty has been the US dollar lately, much to the detriment of precious metals given their strong inverse correlation.  It wasn’t that long ago that most commentators were writing off the USDs prospects and it’s still not clear that its recovery can persist.  The USD has hit its highest level in 2 months but will likely struggle if equities can eke out further gains in the days ahead.  In contrast, gold is trading around its lowest levels in 2 months.  While these trends may persist in the very short term, technical indicators (eg Relative Strength Index) indicate approaching overbought USD and oversold gold levels. 

This week, the main focus will be on the first US Presidential debate on Tuesday and US September jobs report at the end of the week.  While the US jobs report will likely show a relatively strong (when compared to pre-covid levels) increase in hiring (consensus around 900k), the pace of hiring is likely to slow and employment is still likely to be at least 11 million lower compared to February.  The battle for the new US Supreme Court Justice adds another twist, with President Trump announcing the nomination of Amy Coney Barrett and the Senate moving ahead to vote on this nomination this side of the election.  This has changed the dynamics ahead of the election battle, energizing voters on both sides. 

In Asia, China’s September purchasing managers indices (PMIs) and monetary policy decisions in India and Philippines will garner most attention this week.  China’s economy is emerging from the Covid crisis in good shape, helped by resilient exports performance, with medical goods and electronics exports performing particularly well.  This is likely to be reflected in China’s PMIs this week, which are set to remain in expansion territory. Meanwhile US government pressure on Chinese technology companies continues to rise, with the US government reportedly sanctioning China’s biggest chipmaker, SMIC.  This may draw a retaliatory response from China, such as adding US companies to China’s “unreliable entities” list.  

India’s Reserve Bank of India (RBI) monetary policy decision is likely to result in an unchanged outcome on Thursday.  While growth has been hit badly due to Covid-19, inflation has also spiked to well above the RBI’s target, leaving the central bank in a difficult position on policy.  Ultimately the RBI will have to ease monetary policy further, but it is unlikely to do so at its meeting on Thursday.  India’s economy is fast heading for a double-digit plunge in growth this year and unfortunately virus cases remain at very high levels.  The rupee has been resilient, however, and is unlikely to weak much further in the short term, even as the economy softens. 

Lingering Disappointment

Another soft close to US stock markets at the end of last week sets up for a nervous start to the week ahead.  The S&P 500 has now declined for a third straight week, with tech stocks leading the way lower as more froth is blown way from the multi-month run up in these stocks.  Lingering disappointment in the wake of the Federal Reserve FOMC meeting is one factor that has weighed on risk assets.  More details on how the Fed plans to implement its new policy on average inflation targeting will be sought. Markets will also look to see whether the Fed is pondering any changes to its Quantitative Easing program. This week Fed officials will get the opportunity to elaborate on their views, with several Fed speeches in the pipeline including three appearances by Fed Chair Powell. 

Disappointment on monetary policy can be matched with a lack of progress on the fiscal front, with hopes of an agreement on Phase 4 fiscal stimulus ahead of US elections fading rapidly.  A loss of momentum in US economic activity as reflected in the NY Fed’s weekly economic index and declining positive data surprises as reflected in the Citi Economic Surprise Index, are beginning to show that the need for fresh stimulus is growing.  On the political front, the situation has become even more tense ahead of elections; following the death of Supreme Court justice Ruth Bader Ginsburg attention this week will focus on President Trump’s pick to replace her, adding another twist to the battle between Democrats and Republicans ahead of the election.    

Another major focal point ahead of elections is US-China tensions, which continue to simmer away. China’s economy and currency continue to outperform even as tensions mount.  August’s slate of Chinese data were upbeat and China’s currency (CNY) is increasingly reflecting positive economic momentum, with the CNY CFETS trade weighted index rising to multi week highs.  There is every chance that tensions will only get worse ahead of US elections, likely as the US maintains a tough approach in the weeks ahead but so far Chinese and Asian markets in general are not reacting too much.  This may change if as is likely, tensions worsen further. 

After last week’s heavy slate of central bank meetings, this week is also going to see many central banks deliberate on monetary policy.  The week kicks off with China’s Loan Prime Rate announcement (Mon), followed by policy decisions in Hungary and Sweden (both Tue), New Zealand, Thailand, Norway (all on Wed), and Turkey (Thu).  Markets expect all of the central banks above to keep policy unchanged as was the case with the many central banks announcing policy decisions last week.  The lack of central bank action adds further evidence that 1) growth is starting to improve in many countries and 2) the limits of conventional policy are being reached.  While renewed rounds of virus infections threaten the recovery process much of the onus on policy action is now on the fiscal front. 

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