EUR/USD Ascends Towards 1.0550 Amid Bullish Market Sentiment
In a positive turn of events, EUR/USD continues its upward trend towards the 1.0550 level on Monday. Despite growing geopolitical tensions, the US Dollar (USD) weakens further as Wall Street opens with a bullish tone, giving the pair a much-needed boost.
The intensifying conflict between Israel and Hamas, coupled with the potential for an extensive assault on the Gaza Strip appears to have little impact on financial markets.
Asian stock markets witness some strain, yet European markets are trading positively, which contributes to modest gains in US futures. As government bond yields rebound, the USD experiences a slight downward push.
On the data front, September’s Wholesale Price Index from Germany indicates a monthly increase of 0.2%, albeit a yearly decrease of 4.1%. The Euro Zone reports a seasonally adjusted trade surplus of €11.9 billion in August, significantly outstripping the prior €3.5 billion. Simultaneously, the US unveils the NY Empire State Manufacturing Index, plunging to -4.6 in October from 1.9 in September.
As the day progresses, a speaker from the Federal Reserve (Fed) is set to address the market, while the earnings season will also be under the spotlight.
Market Watch: The Week Ahead, October 17-20, 2023
The upcoming week promises to be filled with significant economic events that could potentially sway global markets. Here’s a look at what’s ahead:
Tuesday, October 17, 2023
The day starts with the release of New Zealand’s Consumer Price Index (CPI) for Q3. The CPI is a key measure of inflation and impacts the monetary policy decisions of the Reserve Bank of New Zealand (RBNZ). As per Trading Economics, the CPI is expected to reach 1262.00 points by the end of this quarter. Any deviation from this forecast could affect the NZD.
Simultaneously, the Reserve Bank of Australia (RBA) will release its Monetary Policy Meeting Minutes, which provide in-depth insights into the economic conditions that influenced their most recent interest rate decision. This could potentially impact the AUD depending on the tone of the minutes.
In the UK, the Claimant Count Change and the Average Earnings Index for the past three months will be released. These are important indicators of labour market conditions and may influence the GBP.
Canada’s CPI data will also be released. Given the Bank of Canada’s focus on inflation, any surprises here could lead to volatility in the CAD.
In the US, Core Retail Sales m/m and Retail Sales m/m data will be released. These figures provide an indication of consumer spending and could impact the USD and equity markets.
Wednesday, October 18, 2023
The RBA Governor’s remarks will be closely monitored for any hints on future monetary policy.
China’s Industrial Production y/y and Retail Sales y/y data will provide insights into the health of the world’s second-largest economy. These figures could impact global commodity prices and the AUD due to Australia’s close economic ties with China.
In the UK, the CPI y/y data will be released, which could influence the GBP and UK government bond yields.
In the US, Building Permits reports will provide an indication of the health of the housing sector. Any comments from FOMC members could potentially impact the USD and US government bond yields.
Thursday, October 19, 2023
Australia’s Employment Change and Unemployment Rate data will be released. Given the RBA’s focus on the labour market, these figures could impact the AUD.
In the US, Unemployment Claims data will be released, which could influence the USD and equity markets. Additionally, any remarks from Fed Chair Powell could potentially sway global financial markets.
Friday, October 20, 2023
The week ends with the release of UK Retail Sales data. This is a key indicator of consumer spending and could impact the GBP.
Overall, the week ahead promises to be eventful, with several key economic releases scheduled. Market participants should brace for potential volatility as these events unfold.
Previous Week Recaps
Market Reactions to Global Events
Last week, the markets experienced two significant events. The ongoing war in Israel led to increased oil prices and a rise in the value of gold and the Swiss franc. Additionally, the US Treasury continued to issue a large amount of bonds, resulting in higher than expected producer and consumer prices. However, despite these factors, the yields on US 10-year and 30-year bonds fell by almost 20 basis points, marking a break in the six-week trend of increasing yields.
Potential Economic Shifts
The US economy is bracing for a change in direction, with indicators pointing towards a deceleration in Q4, following an already evident slowdown in Q3. The Atlanta Fed’s GDP monitor forecasts a downturn of more than 5%. Meanwhile, Beijing, despite its potential to provide additional monetary backing, is grappling with a stagnant CPI, potentially due to a drop in food prices ahead of the October holiday.
Economic Data Releases
The focus now is on the economic specifics of September and the GDP figures for Q3. Furthermore, both the UK and Canada will be releasing data on their September CPI, while the UK will also share insights on the employment sector.
Central Bank Strategies
These granular data points are expected to influence the future strategies of each country’s central bank. As it stands now, the swaps market indicates a slightly less than 50% probability for the Bank of England and a slightly more than 50% likelihood for the Bank of Canada.
Unexpected Economic Predictions
Prepare for unexpected twists and turns in economic predictions! Previously in December, it was speculated that the economy would witness a meager growth of 0.4%. However, brace yourselves as the Atlanta Fed’s latest figures suggest a meteoric rise to 2.1%. Contrarily, Bloomberg’s survey anticipates a 3.0% augmentation, which alarmingly plummets to 0.5% for the current quarter.
Nonfarm Payroll Figures and Retail Sales
Adding to the intrigue are the recent nonfarm payroll figures. A staggering increase of 336k jobs has been reported, but a deeper look uncovers some troubling patterns. Additionally, retail sales may have suffered a setback in September, possibly marking the first decline in half a year.
Industrial Production and Housing Statistics
Following strong performances in July and August, industrial production is likely to experience a minor slump. The manufacturing sector could bear the brunt with an estimated fall of 0.2%. However, housing starts offer a silver lining, expected to recover after a substantial dip in August.
Regional Fed Surveys
It’s also crucial to monitor two regional Fed surveys for October. While the NY State manufacturing survey recovered in September, it’s speculated to have dropped again in October. The Philadelphia Fed’s business outlook report, consistently negative since September 2022, is slated for release on October 19.
Dollar Index and US CPI
Adding another layer of complexity, the Dollar Index reacted intriguingly to the US CPI. Despite a marginal miss of the forecast by 0.1%, it registered an outside up day, hitting its retracement target of 106.65. This could imply potential gains for the dollar. However, a breach of the 105.25 support level might indicate the emergence of a new trend.
Germany’s Trade Performance
In August 2023, Germany’s export figures fell more than expected. A decline of 1.2% from the previous month was recorded, compared to a predicted drop of just 0.4%. This marked the second consecutive monthly fall in exports. However, despite the decline in exports, Germany’s trade surplus widened to €16.6 billion, surpassing market expectations.
Germany’s Economic Outlook
Despite these challenges, Germany’s current account surplus saw a sharp increase to €16.6 billion in August 2023, a significant rise from €0.7 billion in the same month last year. However, business confidence in Germany took a hit in August, even as the economy exited a recession in the second quarter .
Euro and its Market Dynamics
The euro has been retracing after a recent rally. There are speculations about it breaking key support levels and potentially returning to the low levels seen in September last year.
UK Economy and Interest Rates
The Bank of England is facing the possibility of a rate hike next month. Key data such as employment figures and CPI will shape expectations around this decision. Additionally, the slowing pace of inflation could have a significant impact on interest rates.
Consumer Strength in the UK
The upcoming retail sales report will provide insights into the strength of the consumer in the UK.
Canadian Economic Updates
Canada’s economic calendar is packed with key reports that will provide insights into the country’s economic health. One such report is the Bank of Canada’s business survey results.
Inflation in Canada
The September CPI could rise above expectations, and the underlying core measures could have a significant impact on potential rate hikes in Canada.
Australia’s Economic Outlook and the Australian Dollar
The Australian dollar is expected to face pressure in the run-up to the release of employment data on October 19. Through August 2023, Australia has seen a monthly average job growth of 37.7k, with full-time positions accounting for 23.3k. This marks a decrease from the averages of 50.1k total jobs and 51.1k full-time jobs recorded during the first eight months of 2022.
The Reserve Bank of Australia’s interest rate decision, due on November 7, is not anticipated to result in a hike, with market odds at approximately 6%. The prospect of a rate increase before year-end is also low, at less than 25%, down from previous expectations. These factors could leave the Australian dollar vulnerable to a rise in US rates.
In political developments, Australians are likely to vote against a proposal to institute an indigenous advisory committee to parliament. While the immediate political fallout for the Albanese-led government is expected to be minimal, the economic implications could be more significant.
New Zealand Political Landscape and the New Zealand Dollar
In New Zealand, political shifts are underway with the National Party and its ally ACT poised to form a new government, potentially with the support of the New Zealand First Party. Despite these developments, the New Zealand dollar may still face pressure from a strengthening US dollar and may retest the $0.5860 mark.
China: Key Factors to Monitor in the Coming Days
Interest Rates: Beijing is poised to set the benchmark one-year Medium Term Lending Facility (MLF) rate, which is expected to remain unchanged at 2.50%. This decision will likely lead banks to maintain prime rates despite the last MLF cut not being fully passed through.
Q3 Economic Performance
On October 18, Beijing will disclose Q3 economic data, including GDP growth, industrial production, retail sales, fixed asset investment, and property market readings. It is anticipated that China’s economy grew by 1% in Q3, bringing the cumulative growth for the year to around 4%.
Potential Government Borrowing Increase: Reports suggest that Beijing may boost government borrowing by CNY1 trillion (~$137 billion) and exceed the 3% budget deficit cap to provide more support for the economy. These funds would be used for infrastructure and water projects.
China Market Update
While Chinese stocks fell last week despite efforts to support equities, other regional markets like Japan and Taiwan experienced rises. The yuan has been fluctuating between gains and losses since late August, with a possibility of weakening if policy divergence persists.
If the dollar strengthens further against the yen or more broadly, Beijing may reluctantly accept gradual yuan weakness.
Japan: Recent Economic Trends
Japan’s industrial production decreased by 1.8% in July and is expected to show no change in August pending revisions. The average monthly change this year stands at -0.1%, assuming August remains flat.
September trade figures are due soon; historically, September trade balance improves compared to August.
Despite a weak yen on a trade-weighted basis, Japanese goods exports declined year-over-year in July and August.
National CPI Outlook
While national CPI figures are forthcoming, attention has focused on Tokyo’s recent inflation data.
Tokyo’s headline inflation slowed to 2.8%, slightly below expectations, and core rates excluding fresh food and energy also experienced a decline.
Nationwide headline inflation has been stable at 3.2%-3.3% since May, down from a peak of 4.3% in January. The core rate stood at 3.1% in August, while nationwide inflation excluding fresh food and energy reached a cyclical high of 4.3%.
USD/JPY Exchange Rate
Following the release of US CPI data, the dollar reached its highest level against the yen since early October. Market caution remains despite no conclusive evidence of BOJ intervention.
Rising US yields may provide further support for the dollar.
A potential close below the 20-day moving average (~JPY148.85), coupled with softer US yields, could be influenced by weaker economic data.
Economic Influence of China on Global Markets
China’s economic influence on global markets continues to grow. Two key factors playing significant roles are its burgeoning consumer market and the government’s monetary policies. Despite this, there’s a noticeable shift in Chinese consumers’ behavior, which could impact global trade dynamics (US Bank).
China’s Rapid Growth: The Driving Factors
China’s unparalleled growth can be attributed to a surge in productivity, rather than just capital investment. This shift in development strategy has positioned China as a global economic powerhouse (IMF).
The Future of China: Innovation and Sustainability
As China looks towards the future, innovation will play a pivotal role in reducing carbon emissions without compromising productivity or living standards (IMF F&D).
China as a Source of Global Demand
China’s growing economy is an important source of global demand. The results of World Bank-supported projects in China further highlight the country’s economic achievements (World Bank).
Stocks to Watch in China’s Slowing Economy
In light of China’s weakening economic data, investors should keep an eye on specific stocks that could potentially weather the downturn (CNBC).
Factors Influencing Views of China
Views of China are influenced by a multitude of factors, including political, economic, and social elements. These factors shape global perceptions and attitudes towards China (Pew Research).
Investing in China: Key Considerations
Increasing global protectionism is a significant factor to consider when analyzing economic trends in China. Understanding these dynamics can help guide investment decisions (Deloitte).
China’s Economy in 2023: Key Questions
Predictions for China’s economy in 2023 point towards an average headline CPI inflation of 2% year-over-year (J.P. Morgan).
Driving Investment in China
Factors such as Foreign Direct Investment (FDI) trends, economic stability, and government policy will continue to drive investment in China’s economy.
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