Election results from Germany and New Zealand will occupy market headlines at the start of the trading week, assuming there is no fresh escalation of geopolitical tensions by North Korea. US economic indicators will dominate much of the week, but Japanese and Eurozone inflation data and the Reserve Bank of New Zealand’s monetary policy meeting will also be in focus. The Federal Reserve will also be attracting headlines as several policymakers hit the podium.
Few surprises expected from German election
Germany will likely elect Angela Merkel as Chancellor for a fourth term on Sunday as the nation heads to the polls. Some upsets should not be totally discounted however as far-right parties might still make significant gains and Merkel might need to seek new partners to form a government if the SPD party pull out of the current grand coalition with the CDU/CSU.
Investors have so far shown little concern about Sunday’s outcome and will probably focus more on next Friday’s flash inflation readings for the Eurozone. Inflation is forecast to remain at 1.5% year-on-year in September, with core inflation expected to slip to 1.2% from 1.3%. Other Eurozone data next week will include the Ifo business survey out of Germany on Monday and the Eurozone economic sentiment index on Thursday. Both the Ifo business climate index and the economic sentiment gauge are forecast to edge marginally lower in September. A slight drop in business sentiment is unlikely to alter expectations that the Eurozone economy is on track to have another strong quarter in the three months ending September, especially after this week’s stronger-than-expected IHS Markit PMIs. However, a weaker inflation figure could weigh on the euro.
Japan inflation to inch higher amid dovish dissent at BoJ
Data out of Japan next week is unlikely to see much of a reaction in forex markets, but will nevertheless be important as inflation is expected to edge further up to reach a more than two-year high. Starting the week though will be the Nikkei flash manufacturing PMI for September, due on Monday, with the rest following on Friday. Friday’s data will include household spending, retail sales, industrial output and jobs numbers, along with the latest CPI figures. Household spending is expected to decline for the second straight month in August, but retail sales are forecast to show a 2.6% annual gain during the period, up from 1.9% in July. The unemployment rate is expected to hold steady at 2.8% in August, while industrial output is seen rebounding 1.9% month-on-month in August’s preliminary reading. The more closely watched indicator will be inflation. Core CPI, which excludes fresh foods, is forecast to rise from 0.5% to 0.7% y/y, moving further away from zero but still some distance from the Bank of Japan’s 2% target.
Also grabbing attention will be the BoJ’s summary of opinions of the September policy meeting on Friday. The September meeting this week saw one of the two new board members dissenting in favour of looser policy. With the Bank’s remaining two hawkish policymakers now having departed, a dovish tilt shouldn’t be too surprising. However, any sign of other members becoming more concerned about the delay in hitting the inflation target could push the yen lower.
Election risk for New Zealand dollar
After an unexpectedly tight election race, the outcome of New Zealand’s general election on September 23 has become a highly anticipated event. The prospect of a win for the opposition Labour party dragged the New Zealand dollar to multi-week lows at the beginning of September due to the uncertainty posed by Labour’s economic policies. However, a recent recovery by the ruling National party, which are now narrowly ahead in the polls, has helped the kiwi recoup some of its losses. Another risk for the kiwi next week is the policy meeting by the Reserve Bank of New Zealand.
Thursday’s meeting will be the last for the Governor, Graeme Wheeler, whose replacement has not been decided yet due to the timing of the elections. The RBNZ is expected to hold rates unchanged at a record low of 1.75% and will likely maintain its neutral bias, especially after this week’s somewhat disappointing second quarter GDP data. In terms of data, August trade figures will be watched on Monday.
Round four of Brexit talks eyed
British prime minister, Theresa May, is hoping to break the deadlocked Brexit talks with her speech in Florence, Italy today. Expectations will therefore be high that more substantial progress will be made on key issues when the fourth round of negotiations resume on Monday. The pound could lose some momentum if the negotiations fail to produce any concrete results.
In the meantime, investors will be looking for a possible upward revision to the second quarter GDP data, due on Wednesday, while mortgage and consumer lending figures on Friday may also attract some attention given the Bank of England’s concerns about rising household debt and with a looming rate hike in November.
Fed speakers under the spotlight after hawkish FOMC meeting
It will be a busy week for the US economic calendar with a number of key data releases. First up is housing data on Tuesday, consisting of the S&P CoreLogic Case-Shiller 20-city house price index (July) and new homes sales (August). Also on Tuesday is the Conference Board’s consumer confidence index, which is forecast to fall from 123 to 120.6 in September. There will be more housing data on Wednesday with pending home sales, while August’s durable goods orders are also released the same day. Durable goods orders are expected to rebound by 1.5% m/m in August after plummeting by 6.8% in the prior month. On Thursday, the final estimate of second quarter GDP growth is forecast to remain unrevised at 3%. On Friday, the personal consumption expenditure (PCE) data will be watched closely, and the Chicago PMI is also released. Personal income is expected to rise by 0.2% m/min August, half the rate of July, and personal consumption is forecast to increase by just 0.1%, also down on the prior month’s rate. The Fed’s preferred measure of inflation, the core PCE price index will likely remain unchanged at 1.4% y/y in August.
The Fed is so far maintaining its view that this soft patch in inflation is temporary and still foresees one more rate hike by year end despite increased concerns by some FOMC members. The renewed expectations of a third rate rise following this week’s FOMC meeting have lifted the US dollar, though many market participants remain unconvinced by the Fed’s optimistic rate hike path. Fed officials will get the chance to clarify their latest quarterly economic projections in a series of public appearances over the coming week, the most important of which will be Chair Janet Yellen’s address at an economic conference in Cleveland on September 26.