Jinyue Dong, research economist at BBVA, point out that Chinese data released today showed the economy moderated further.
“September economic indicators, together with the Q3 GDP, were reported today. Among which, Q3 GDP growth slowed down to 6.5% y/y, compared with 6.7% y/y in the previous quarter and 6.6% of the market consensus. This suggests that Chinese economy further moderated amid the escalation of trade war with the US and domestic deleveraging.”
“We expect monetary and fiscal policy to become more pro-growth in the rest of the year to offset the external shock of the trade war, although the authorities remain vigilant on financial vulnerabilities including indebtedness in the corporate and shadow banking activities. Altogether, we maintain our 2018 growth projection at 6.5% y/y, compared with the official target rate at 6.5% and the Bloomberg consensus at 6.6%.”
AUD/USD 4-hour chart
Spot rate: 0.7118
Relative change: 0.28%
Main trend: Bearish
Resistance 1: 0.7144 September 5 low
Resistance 2: 0.7174-0.7200 zone, 200 SMA (4H) and August 15 low
Resistance 3: 0.7300 figure
Support 1: 0.7100 figure
Support 2: 0.7085, September 11 low
Support 3: 0.7041 October low
Support 4: 0.7000 figure
Support 5: 0.6830 January 15, 2016 low
Next Thursday is the European Central Bank meeting. No change in rates is expected. According to analysts from Wells Fargo, the language and tone of the statement will be key to watch for clues on its next policy move.
“While the European Central Bank’s (ECB) is unlikely to adjust policy at its announcement next week, the language and tone of the statement will be key to watch for clues on its next policy move. The ECB’s current guidance is that it will end bond purchases in December and keep rates on hold at least through summer 2019.”
“Policymakers’ recent comments have been leaning more hawkish, as ECB President Draghi discussed “vigorous” underlying inflation pressures and other policymakers have highlighted the possibility of bringing forward the timing of the first rate hike.”
“Also out next week are the manufacturing and service sector purchasing managers’ indices (PMIs) for the Eurozone. These PMIs have clearly softened since the start of the year but remain firmly in expansion territory (i.e., above 50), consistent with an economy that is growing steadily, albeit modestly.”
According to National Bank of Canada’s analyst Kyle Dahms, lackluster retail numbers countrywide coupled with an earlier reported weakness for shipments in the month, suggests GDP should not be stellar in August.
“Canadian retail sales disappointed consensus expectations in August, edging down 0.1% m/m in nominal terms to C$50.8 billion.”
“Canadian retail sales came in below consensus expectations in August. Falling outlays at gasoline stations, caused entirely by a drop in volumes, accounted for a significant portion of the decline.”
“The lackluster retail numbers countrywide coupled with an earlier reported weakness for shipments in the month suggest GDP should not be stellar in August. On a quarterly basis, growth in real retail sales appear to be fading. True, after having expanded 3.5% in the second quarter, retail spending growth may have been no better than 0.9% annualized in Q3. This could translate into a weaker contribution to growth from goods consumption in the third quarter.”
In the euro area, we have a busy week ahead of us, explained analysts at Danske Bank. Events include the ECB meeting, EU verdict on Italy’s budget and the PMIs.
“On Thursday, we have the ECB Governing Council (GC) meeting, which we expect to be a meeting with little action. Since the last meeting, incoming data has not warranted a change in policies, not least the wording on ending its APP. Therefore, we expect, the word ‘anticipate’ to remain. Should it be changed (meaning an official end to APP), it could lead to a knee-jerk market reaction, without long-lasting implications. We do not expect discussions on the capital key update but will scrutinise any hints on this. Further, we expect a ‘vigorous’ Mario Draghi, pointing to continued solid wage dynamics but still somewhat moderate inflation assessment.”
“On Wednesday, the euro area flash PMIs for October are due. In September, manufacturing numbers continued this year’s declining trend and fell to 53.2, while services rose slightly to 54.7. We expect services PMI to extend the pickup and rise to 54.9; in contrast, we see a downside risk for manufacturing PMI, declining further to 53.0 due to the deteriorating new orders component in the latest reading. In Germany, IFO business climate for October is on the agenda on Thursday, which has defied the recent downward trend in the PMI, and it will be interesting to see whether this divergence persists in Q4.”
“Last but not least, markets still await the European Commission’s verdict on Italy’s budget draft and we expect it to issue a negative opinion and request for revision within the coming week.”
“GBP/USD’s slide from 1.32 towards 1.30 was largely a US dollar story – and to a lesser extent a Brexit impasse story (this was largely in the price at the start of the week),” argue ING analysts.
“As another crunch EU Council meeting comes and goes without an agreement, the critical issue of the Irish backstop – the insurance policy that would kick in in the event of the UK leaving the single market and customs union – remains unresolved. UK data was also mixed – and this didn’t help GBP’s cause (despite wage growth ticking up to 3.1%). All of this leaves GBP/USD sitting at a crucial Brexit inflection point around the psychological 1.30 level – which is likely to now be a gauge of market sentiment.”
“The slippery slope of a May leadership challenge, no Tory front-runner, calls for a general election and UK political impasse at a crucial juncture could come back on to the table and tip GBP/USD below the 1.30 level in the coming week – though it’s getting pretty hard to make a solid forward-looking assessment of these short-term UK political risks (sentiment seems to be shifting every day).”
“Our economists make the point that as Brexit negotiations stall, the ever-increasing uncertainty surrounding ‘no deal’ could see businesses take more concrete action and consumers turn even more cautious. For the Bank of England, this makes a rate hike unlikely before March 2019. They do not know for sure whether a ‘no deal’ will be averted until much closer to the UK’s scheduled exit date (29 March 2019) – although we feel GBP markets will have a good sense of where things are going sooner rather than later.”
“That suggests we’re in a big move over the next couple of months (2M GBP/USD volatility particularly elevated relative to the rest of the term structure) – with the relative outcomes pretty binary: ‘deal’ seeing GBP/USD above 1.35 and ‘no deal’ seeing GBP/USD below 1.25. For the time being, with sentiment shifting every day – we doubt that spot investors will collectively be willing to chase a bearish GBP story. We suspect GBP/USD remains at a neutral point (1.30) – while bouncing around either side of that until we get clarity. The week ahead sees some BoE commentary (Haldane and Carney – both Tue) – though we doubt comments will shift short-term GBP sentiment too drastically.
Summarizing British Prime Minister Theresa May’s call with business leaders in the UK, “PM May told businesses that she had a very real sense from EU leaders that they wanted to reach a deal as soon as possible this autumn and said any Irish backstop would only be necessary for a temporary period,” May’s office said in a statement, as reported by Reuters.
Canadian retail sales dropped 0.1% in August. Paul Ferley, Assistant Chief Economist at RBC Capital Markets, points out that so far during 2018, the monthly increase is one-half of the average reached in 2017.
“The nominal value of August retail sales declined 0.1% with the volumes measure down 0.3% following a 0.2% drop in July. These volumes declines continue to unwind an outsized 2.1% monthly surge in May.”
“It is still the case that the average monthly increase in volumes to date this year is one-half the 0.3% average gain achieved in 2017. This difference has contributed to the year-over-year rate moderating to around 1% from the almost 6% gain recorded through 2017.”
“This slowing in retail sales volumes is not necessarily unwanted. With the economy operating at capacity, monetary policy is being tightened to slow overall GDP growth closer to the economy’s long-run potential rate of around 1.8%. The Bank of Canada has long wanted to see a shift away from robust consumer spending, which has contributed to rising household debt, and towards greater expenditure in investment and exports.”
“Today’s decline in retail sales volumes follows indications earlier this week that the volume of manufacturing sales dropped 0.3% in August. However we are assuming offsetting gains in mining output along with continued trend increases in most other service-producing sectors that will result in overall August GDP rising 0.1% in the month. This is consistent with Q3 GDP growth likely rising 2.3%. With this rate slightly above potential, and being achieved despite a temporary shutdown of a key oil sands production facility, it is expected to keep the Bank of Canada tightening.”
GBP/USD 4-hour chart
Spot rate: 1.3070
Relative change: 0.4%
Main trend: Bearish
Resistance 1: 1.3100 figure
Resistance 2: 1.3140 October 16 low
Resistance 3: 1.3200 figure
Support 1: 1.3050 August 30 swing high, key level
Support 2: 1.3028 October 8 low
Support 3: 1.3000 figure
Support 4: 1.2957 July 19 swing low
Support 5: 1.2900 figure
Additional comments from Bank of England Governor Mark Carney cross the wires as he continues to speak at the Economic Club of New York.
Citing a source familiar with the content of the call UK business leaders received from British Prime Minister Theresa May, Reuters recently the below-seen highlights.
Below are some key takeaways, via Reuters, from the prepared speech delivered by Bank of England Governor Mark Carney to the Economic Club of New York.