Fundamental Analysis

Week Ahead - Manufacturing PMIs and Inflation Data to Dominate; OPEC Meeting also Eyed

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After a relatively quiet week, the economic calendar is looking busier for the coming seven days. Manufacturing PMIs will be released in most major economies as the month comes to an end, and inflation measures for the Eurozone, Japan and the United States will also highlight the week. Canada will be in focus too as GDP and jobs figures are published, while the outcome of a meeting of major oil producers will be awaited by commodity traders.

Aussie capex eyed ahead of Q3 GDP

The Australian dollar is attempting to recover from 5-month lows with the help of a weaker greenback and not-so-dovish remarks by RBA Governor Philip Lowe. Data on Thursday might offer the aussie a further leg up as third quarter numbers on capital and building expenditure are released. The indicators are a prelude to third quarter GDP figures due the following week. Economic growth in Australia remains one of the best in the G7 but persistently low inflation has pushed back expectations of an RBA rate hike from 2018 to 2019. Strong economic data is therefore unlikely to significantly alter the outlook for the aussie without any signs of a pick-up in underlying inflation. Also due the same day are building approvals and private sector credit figures for October.

Canadian growth to slow in Q3

Indications of softer growth in Canada in the second half of 2017 after a strong first half have led investors to price out the possibility of a third rate hike by the Bank of Canada this year. The receding expectations contributed to the Canadian dollar retracing as much as 50% of its May to September uptrend. Any upside surprise to Friday's jobs report and GDP data could help the loonie break resistance around C$1.2660. Employment is expected to increase by 10k in November, pushing the jobless rate down to 6.2%. The economy is forecast to expand at an annualized rate of 1.6% in the third quarter, a notable easing from the prior quarter's 4.5% rate.

Another potential mover for the loonie next week is a speech by the Bank of Canada Governor Stephen Poloz on Tuesday.

Eurozone inflation to edge up

Eurozone manufacturing activity soared to a 17½-year high in November according to IHS Markit's flash estimate released this week. The final reading is due on Friday and there will be more business surveys in the form of the European Commission's economic sentiment index on Wednesday. The services sector also performed strongly, and the combined data drove the euro to a two-month high of just above $1.19 this week. However, next Thursday's flash inflation readings for November may take some of the steam off the currency as they will likely indicate that the European Central Bank still has some way to go before inflation gets onto a sustained path upwards. Flash inflation is forecast to nudge up by 0.1 percentage points to 1.6% year-on-year, but core inflation, which excludes food and energy prices is expected to hold steady at 1.1%.

Plentiful data out of Japan

It will be a busy week for Japan as a batch of key economic indicators are released. First up are October retail sales on Wednesday, followed by the preliminary industrial output reading for the same period on Thursday. Household spending and inflation data are out on Friday, along with the unemployment rate, all for October. Spending by household is forecast to suffer a month-on-month drop of 1.4% in October, while core CPI is expected to rise from 0.7% to 0.8%. In addition, the final Nikkei manufacturing PMI and third quarter capital expenditure figures will be released. The yen is unlikely to see a big reaction to the data, but with some talk of the Bank of Japan considering raising its yield target on long-term Japanese government bonds, upbeat numbers next week may fuel such speculation.

US PCE inflation in focus after Fed minutes shock

The US economic calendar gets back into full swing next week starting with new home sales on Monday and the CaseShiller 20 city house price index on Tuesday. Also on Tuesday is the Conference Board's consumer confidence index. On Wednesday, the second estimate of GDP growth for the third quarter is expected to show a small upward revision from 3% to 3.2%. The main focus though will be Thursday's personal consumption expenditures (PCE) report.

Personal spending and income are forecast to ease slightly month-on-month in October after a strong September. More important will be the Fed's preferred inflation gauge, the core PCE price index, as a further fall in this measure would give the FOMC doves a stronger case to freeze rates over the coming months. The FOMC minutes of the Oct. 31-Nov. 1 policy meeting published this week showed policymakers were becoming increasingly uncertain about the prospect of inflation rising to 2%. The dovish minutes led to a fresh sell-off in the US dollar, particularly against the yen. Weak readings next week could add further downside pressure on the currency. The core PCE price index is expected to tick up by 0.1 percentage points to 1.4% m/m in October.

There will be more data on Thursday, including the Chicago PMI and pending home sales, and on Friday, all eyes will be on the ISM manufacturing PMI. The ISM manufacturing PMI is forecast to ease slightly from 58.7 to 58.5 in November.

OPEC meets to discuss extension to output deal

In other noteworthy data next week, the UK and China will also see the release of PMI surveys. The UK manufacturing PMI is out on Friday, while in China, the government's non-manufacturing and manufacturing PMIs are due on Thursday ahead of the Caixin manufacturing PMI on Friday.

Finally, OPEC members meet in Vienna on November 30 along with some non-OPEC producers, including Russia, to decide whether to extend the current output cap agreement. There have been strong indications in recent weeks, particularly from Saudi officials, that a 9-month extension after March 2018 is highly probable, although, Russia appears less committed. Failure to reach a deal could drag oil prices below their recent two-year highs, but given that March 2018 is still some time away, expectations of an agreement before then would likely limit any losses.

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