- Focus on UK inflation data, as markets digest better than expected China
growth metrics and improved Japan Business sentiment, along with
'dovish' Brainard; US 30-yr, Dutch 6-yr and mix of Italy BTPs to be
auctioned, BoE to conduct >15-yr QE buyback
- UK inflation: base effects and seasonal unwinds to push CPI higher, RPI
rise to be restrained by mortgage rate cuts, focus on forward inflation
signals from PPI
- Fed: Brainard sticks to usual dovish script, FOMC meeting still likely
to see very robust, heated debate on policy outlook, more dissents
- Oil: weekly inventories set to show rebound, risks upside of consensus,
China demand data implies continued pressure from product exports
- China: welcome rebound implies period of growth stability, but also
due to post-floods rebound
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** EVENTS PREVIEW **
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Having overcome this week's dose of Fed speak, attention turns to the busy run of economic data, which has kicked off with the better than expected overnight run of China monthly growth metrics and Japan's quarterly Business Sentiment Indices, ahead of the raft of UK inflation indices, Swedish CPI, along with the German ZEW and US NFIB Small Business Optimism surveys. Following on from last week's market 'disappointment' with the ECB policy meeting, Draghi, Lautenschlaeger and Nowotny (the latter at the OeNB/BIS conference) have an opportunity to lean against any 'misperceptions'. However the message from the ECB since the meeting appears to be that there will be no policy shifts before December, and per se today's run of speeches may offer few, if any fresh insights. The US rounds off its refunding with $12 Bln of 30-yr Treasury Bonds, while the Eurozone digests roughly half of this week's EUR 22.0 Bln of govt bond sales with EUR 3 Bln of 5-yr DSL from the Netherlands, and up to EUR 8 Bln of various BTPS. It should however be noted that redemptions (ca. EUR 50 Bln) and coupon payments (CA EUR 4.0 Bln) far outweigh this week's supply. The IEA's monthly Oil Market report and tonight's API Oil Inventories report provide the focal point for Oil, the latter will almost certainly see a sharp snapback in crude inventories, with the consensus looking for 4.5 Mln bbls, though perhaps as large as 6 Mln bbls, given last week's fall looked to be heavily predicated on a temporary drop in Imports, due to port logistics. The China oil demand and product output data are also a short-term negative, in so far as gasoline and diesel demand/usage appears to be set to drop for the first time since 2009, leaving state oil companies with no choice but to export product that is surplus to demand.
Eminently market sentiment should improve after Brainard stuck with her very dovish credentials in her speech yesterday. That said the emerging impression that the FOMC members, who have held positions in the US Treasury or Government, such as Brainard, Tarullo, even Yellen, appear to be the most dogmatically and resolutely dovish. A September move looks very improbable, however there will be a very robust debate at next week's meeting, with the risk of anything between two and four dissents, which in days of yore would have served as a signal that a rate hike at the next meeting was a relatively high probability. Eminently the fact that the November meeting takes place days before the election effectively precludes that possibility, per se underlining just how impaired the Fed's policy reaction function remains.
The run of China data ahead of the Mid-Autumn festival holidays was clearly better than expected, though it should be remembered that the July Industrial Production was weaker than expected due to the floods, per se the modest August rebound is more of a correction than a signal of improving economy, even if economic output does look to be going through a period of stability, and continues to be boosted by the various government stimulus measures. The FAI and Govt Expenditure data again underline that government investment is offsetting continued weakness in private investment, despite ongoing strength in property investment, though the latter faces some headwinds as the authorities start to clamp down on bond issuance by property companies, and introduce other measures to rein in the current surge.
** U.K. - August CPI, RPI & PPI **
- There is little doubt that the most immediate impact from the Brexit referendum will be seen in UK inflation readings, thanks for the most part to the fall in the GBP, as was evident in July's 6.0% m/m surge in Import Prices. Eminently the BoE's MPC has emphasized that it will 'look through' what it believes will be a transitory rise in inflation, above all given its negative view on the UK growth outlook, which may or may not prove to be justified. Be that as it may, the primary driver of the expected 0.4% m/m rises in CPI and RPI will likely be paced by some unwinding of seasonal discounting in the household goods sector, though there should be some offset from clothing, if the BRC Shop Price report is anything to go by. While petrol pump prices fell on the month, these will more than likely be heftily offset by a seasonal rise in Airfares (Aug 2015 +5.1% m/m), and in yr/yr terms the fall in petrol prices was smaller than in the same month of 2015, which in turn may outweigh any drag from food prices, and see CPI edge up to 0.7% y/y from 0.6%, while the drop in Mortgage Costs should be the key element in an expected slip to 1.8% from 1.9% in RPI. However it will be PPI that is most closely watched for pipeline pressures, both in terms of the cost of imported goods, but also in terms of the level of pass through to output prices. PPI Input is expected to moderate in m/m terms to 0.6% after July's 3.3% surge, but thanks to adverse base effects, this would see the y/y rate jump to 8.2% from July's 4.3%, which would be the highest reading since December 2011. Output Prices will also suffer from base effects in y/y terms, with a projected 0.3% m/m implying a rise in the y/y rate to 1.0% from July's 0.3%.
from Marc Ostwald
