Mood music is improving slowly, despite a stubbornly cynical drone nonetheless in the background. The positive notes this week came from official confirmation that the US and China are singing from the same song sheet as both parties work towards a phase one deal by mid-November.
US Week Ahead
With Fed officials in their pre-FOMC media blackout, investor focus will fall on this week's US economic data calendar which is typically sparse at this time in the month. But, as we bore witness to last week, there is more than enough headline risk around Brexit and trade talks to keep investors in a permeant state of toggling risk on and off.
While it's a relatively light economic calendar, the focus will fall on three primary sectors of the economy: consumers, manufacturing and housing.
With manufacturing stammering and the housing sector only counting for a small slice of overall US GDP, most of the focus will fall on the consumer data as US shoppers continue to do the bulk of the heavy lifting to buttress the US economy. Meaning, Friday's final release of October's University of Michigan consumer sentiment data will be critical to watch for any signs of weakness in consumers’ willingness to open their purse strings.
As to manufacturing, the most significant releases are due Thursday, when the Kansas City Fed's regional manufacturing survey and the Markit PMIs, as well as hard data on durable goods orders and shipments, hits the wires.
Last week's Fed-speak did not walk back the market pricing for another 25-basis point cut at the October meeting, but Fed officials were non-committal about the policy outlook beyond. The overriding concern of market participants is that as trade policy uncertainly continues to sour business sentiment, firms slow the pace of reinvestment which could then leak into labour market conditions. This is the primary reason why the market has fully priced in a rate cut in October while expecting a series of rate cuts between 50-75 basis point over the next three meetings. All of which begs the question: Will monetary stimulus alone be enough to ward off the recessionary Grim Reaper?
Source: CME FedWatch Tool
Key dates and events on the ASEAN Docket
The latest IMM data showed the beginning of a more significant reversal in risk-off positioning. This can be attributed to two critical emerging narratives: (i) the reduction in Brexit tail risk as no-deal received quickly and (ii) the development of a 'multi-phase' US-China resolution appear to be heading in the right direction. Together these positive position shifts mesh well with the week 10 US bond yields nudge above 1.75%, S&P took a look above 3,000 and DXY and ADXY near its August low - the later a excellent signal for ASEAN risk markets.
Chart of the Week ahead
Asia’s key bellwether USDCNH, and phase one trade talk FX implications for the RMB.
The market was likely starting to position for a China backtrack of phase one. So, it was an about-face for the Yuan bears after China's Commerce Ministry inferred trade talks were entering the phase 2 level which seemed to evaporate a lot of pent up trade talk scepticism as the key ASEAN risk bellwether RMB rallied.
While the markets have entered a phase of de-escalation with previously agreed components re-tailored to serve both parties current interests and most pressing needs providing a suitable background to build on stage 2 and 3.
What may now be critical for the Yuan and ASEAN currencies is the outcome of the more significant issues, specifically the December tariff detente, a rollback of some existing tariffs and the Trump administration removing the trade ban on Huawei.
With CPI inflation reaming stable at 3.4 % in September, analysts expect the Bank of Indonesia to deliver another 25 basis point cut on October 24 – it’s fourth cut since July and unwinding much of three rate hikes from last year that were initiated to buttress the Rupiah which fell under intense selling pressure amid global risk aversion. The market continues to price on two more cuts, one likely in December to be followed by another reduction in Q1 2020.
The Bank of Korea delivered another rate cut on 16 October, as expected, to leave the policy rate at a historic low of 1.25%. However, economists expect South Korea to post another quarter of below-trend growth of 1.9% in Q3 vs 2% prior quarter. The near-term outlook remains challenging for Korea. Soft global trade, a weak semiconductor cycle and China's economic data all indicate that South Korea's exports will continue to be relatively weak.
The Budget for 2020 presented end of last week mostly met expectations, with a fiscal deficit target of 3.2% of GDP, which still misses the medium-term fiscal consolidation path, but takes little away from the government’s commitment to fiscal prudence. Focus this week shifts to the CPI data where economists are expecting CPI inflation to remain unchanged for August at 1.5%.
The world is focusing on Hong Kong every weekend. Recall that the Hong Kong Protester Bill was put through the US legislature this week which is heightening market sensitivities around weekend protests as any perceived heavy-handed response from the police against the pro-democracy protesters could trigger a US response.
Expanded ASEAN Calendar
To view all the events, go to: AxiTrader Economic Calendar
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies