Tuesday 4 October 2016

Oct 2, 2016 - Weekly Macro Outlook 40W

Among few important economic data the last week was mostly about Deutsche bank, its ability to pay the US fine and the OPEC meeting where members finally agreed on production cut.  Next week we have PMIs (UK, US) and RBA rate decision but the most watched data will be the US Employment report including Non-Farm payrolls.

Previous week

European business sentiment seems to be improving as the German Ifo Business Confidence unexpectedly spiked 3.2 pts above forecasted 106.3 points on Monday. The economic activity in the Eurozone will likely expand at moderate pace in the coming months, however, there is a number of risk factors that can offset the medium term positive view.
The US consumer confidence showed a similar pattern when it jumped above the hundred points level where it was last time a year ago. The US final GDP grew a little faster (at 1.4% vs 1.1%) than initially expected, but still well below the last years growth. One component of the GDP, residential investments are slowing and the decline in housing activity is expected to continue in Q3. If you look at the housing data released in September (overview below), the picture is far from optimistic. On the other hand according to NAHB, the construction companies see an increased interest from prospective buyers supported by still low interest rates.



The last topic from previous week is oil and the OPEC meeting in Algeria. The members of the cartel managed to surprise the markets by announcing an agreement to cut production, but… the planned cut 740,000 barrels/day is yet mainly the only detail we have and Iran, Niger and Lybia’s  will enjoy an exception. Their rising production can largely compensate the cut. Other challenges are the US shale production which is getting more and more efficient and production recovery after the fights eased in the African countries. The shares of each member state on the production cut has to be still agreed on the November meeting and it’s important that other large producers outside the cartel, like Russia will follow the decision to cut the output. Conclusion, modest positive outlook but nothing decided yet so be cautious in bets until the November meeting.


Next week

Monday
We focus on the UK manufacturing PMI which surprisingly spiked last month which could be a result of the weak pound which will help the country big time in the coming months if there is no significant change. Later the day the US manufacturing PMI can give us a little colour if the last surprise dip below 50 pts was a one-time event or the US manufacturing sector still feel the pain from the strong dollar and low commodity prices.

Tuesday
We start the day with Australian Building approvals but the main event is the RBA rate decision (last rate cut was in august). The first monetary policy meeting under Philip Lowe governance will most likely not result in a rate cut as the recent comments from central bank officials had mainly neutral tone. Country’s main problem is the sub 2% inflation and large Current account deficit but the economy is rising and a solid 3.3% pace with unemployment at 5.6%. In the first half of the European session the UK Construction PMI is expected to hold close to the 49 pts level. Later the day the GDT diary price index is expected to be released from New Zealand which increased in the last 4 releases. For CAD and NOK traders the API weekly oil stocks are worth to watch. The Oil stocks keep declining which goes against the seasonal expectations and a surprise increase may put some pressure on the Crude and oil currencies as well.

Wednesday
In the first half of Tokyo session we have the Aussie retail sales and later on RBA Kent is due to speak and maybe give some insights on the background of the rate decision. The UK Services PMI In the afternoon follow the ISM services PMI from the US which declined last month but didn’t sink below the 50 pts level. The EIA Crude inventories will be also closely watched as they keep declining for the 4th week despite the analysts expect seasonal rise each time...

Thursday
The Trade balance of Australia will be the first data of the day. As I mentioned earlier the international trade is one of the main problems of the economy and Australia needs weaker currency to boost exports. The last time the country had positive trade balance was in May 2014 and a there is no surplus in sight anytime soon if the AUD would strengthen. The Canadian building permits will be released with the US Initial jobless claims, the latter is close to historical lows and is expected to stay close to recent levels as US economy is close to maximum employment.

Friday
Since the Brexit vote Manufacturing production in UK is on decline and the question is whether we can see in the next august figures the positive effect of the weak pound. The data of the day will be however the US Employment situation report. No major changes are expected and close to full employment economist don’t expect the Non-farm payrolls won’t be higher than 171-176 as well the Unemployment rate should hold at 4.9%. The number worth to watch could be the Labour force participation rate, which is still below long term average 63% however a change in the declining trend seems to have started a year ago when the participation rate bounced from 62.4 which was the lowest level since the seventieth. Another interesting part of the data will be the change of the Average hourly earnings, which could be a leading indicator of inflation. The more money in the pocket, the more could be spent...

Remember to watch your risk and be consistent

Mr. TechMan 



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