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Next week's economic releases, which includes UK inflation figures, can determine the future path of monetary policy for major economies, while political events, such China's five-yearly Communist Party Congress commencing on Wednesday, perhaps have the capacity to steer developments for the years to come.

Chinese Party Congress, Japanese trade data and elections further ahead and Australian employment to be closely watched

Data on producer as well as on consumer prices for the month of September will be released out of China on Monday. Expectations are for the producer price index (PPI) to grow by 6.3% year-on-year, at the same pace as in the preceding month. According to analysts' estimates, the consumer price index will rise by 1.6% on an annual basis, below August's 1.8%. Among other releases attracting attention in China, are figures on urban investment, industrial output and retail sales (all for the month of September), as well as third quarter GDP figures, to be released on Thursday. Analysts' forecasts are projecting an annual growth rate of 6.8% during the quarter. The respective figure during the second (as well as the first) quarter of the year stood at 6.9%, with the official growth target for 2017 being "around 6.5%". In the background will be China's Communist Party Congress taking place in Beijing and beginning on Wednesday, October 18. This political meeting takes place once every five years and has a mandate of considering and approving new policies, as well as appointing to certain positions those individuals who will lead China over the next five years.

Transitioning from the world's second largest economy to the next in line, September Japanese trade data out on Thursday will definitely be eyed. Exports and imports are expected to rise by double digits though at a smaller pace relative to August (but only slightly so in the case of imports). Of course, speculation regarding the outcome of general elections taking place in the nation on October 22 will be on the rise. Should the Japanese Prime Minister Shinzo Abe come out strong, then it is expected that we'll have a continuation of Abenomics with a reflationary economic agenda remaining on the table. This is also seen as increasing the odds for the Bank of Japan to maintain its ultra-loose monetary policy, something which supports the dollar/yen moving higher over the medium- to longer-term given the divergent monetary policies in the US and Japan.

Relating to the Antipodean currencies, the releases gathering most attention in Australia will be Thursday's employment data (number of positions added to the economy, unemployment rate and participation rate) for the month of September. Last month's upbeat employment report allowed the aussie to move higher relative to the greenback. Out of New Zealand, third quarter inflation figures to be released on Tuesday will be in focus. The bi-weekly milk auction, which tends to affect the kiwi as New Zealand is a major dairy exporter, will also be taking place on the same day.

Eurozone inflation, ZEW survey and producer prices out of Germany - UK data supporting the case for a hike?

Final inflation figures for the month of September to be released on Tuesday will be attracting attention in the eurozone, especially after reports this week that the European Central Bank could decide to proceed with a reduction of its monthly asset purchases (currently amounting to 60 billion euros per month) by around half as it completes its monetary policy meeting on October 26. On a monthly and annual basis, inflation is expected to show growth by 0.4% and 1.5% respectively, with August's equivalent figures being released at 0.3% and 1.5%. The core measures of inflation will also be eyed. Also out on Tuesday, will be the ZEW survey gauging economic sentiment for the month of October in Germany, eurozone's (as well as Europe's) largest economy. September producer price data released on Friday will also be on the look-out in Germany.

Expected to be of most importance out of the UK will be Tuesday's inflation figures for the month of September, August employment statistics out on Wednesday and Thursday's September retail sales. Month-on-month, the consumer price index (CPI) is anticipated to grow by 0.3% (August's figure stood at 0.6%) and year-on-year by 3.0% (August's equivalent came in at 2.9%). The Bank of England's inflation target stands at 2%. It will be interesting to see whether the numbers would support the case for an interest rate hike to be delivered by the BoE, something which would support a stronger British currency. The central bank will be completing its next meeting on monetary policy on November 2.

US industrial production, housing starts and existing home sales - manufacturing & retail sales as well as inflation dominating attention in Canada

Out of the US, industrial production figures to be released on Tuesday, housing starts on Wednesday and existing home sales on Friday, all pertaining to the month of September, would probably be the releases having the capacity to move forex markets the most. It is important to note that the effect of hurricanes could have distorted the aforementioned economic releases. Other themes which have been recurring and driving sentiment either in favor or against the US currency, such as who the next Fed chair would be (with a Yellen reappointment not to be ruled out), the US-North Korea spat and President Trump's plans on tax reform, might reappear as well.

Canada will see the release of manufacturing sales on Wednesday as well as inflation and retail sales data on Friday. In terms of inflation, the CPI measures utilized by the Bank of Canada will be in focus as well. It remains to be seen whether the data will negatively or positively affect the Bank of Canada's appetite for additional interest rate hikes after the ones delivered in July and September which brought the central bank's benchmark rate to 1%. The BoC will be completing its next meeting on October 25.

This weekend's International Monetary Fund and World Bank meeting of central bankers and finance ministers would be also generating interest (the IMF this week upgraded its growth outlook for the US, China, Japan and the eurozone relative to its previous forecasts in July), with Federal Reserve Chair Janet Yellen (talking on Sunday) being among the notable speakers. Yellen will also be participating in a lecture titled "Monetary Policy Since the Financial Crisis" on Friday.

Week beginning 16 October 2017

• The dark side of the lift in Consumer Sentiment.
• RBA: RBA minutes, Assistant Governors Ellis & Bullock speak.
• Australia: employment, Westpac-MI Leading Index.
• NZ: CPI.
• China: 19th National Congress, PBoC Governor Zhou speaks, GDP, CPI.
• Euro Area: European Council, ECB President Draghi speaks.
• US: Fed Chair Yellen speaks, housing starts & permits, existing home sales.
• Key economic & financial forecasts.

Information contained in this report was current as at 13 October 2017.

The Dark Side of the Lift in Consumer Sentiment

This week we saw a strong lift in the Consumer Sentiment Index.

The Westpac Melbourne Institute Index of Consumer Sentiment rose 3.6% to 101.4 in October from 97.9 in September.

It is the first time since November last year that optimists have outnumbered pessimists and represents the highest level of the Index since October last year.

Consistent reports of an improving global economy may have been a factor behind this lift in confidence. It is also likely that concerns about rising interest rates associated with over-heated housing markets have eased.

Ongoing improvements in the labour market are also boosting confidence. Confidence showed stronger gains amongst those employed as tradies, 'paraprofessionals' (typically in the health and education sectors), or labourers. The rise in confidence was particularly strong for 'trade' workers, up 22% in the month, suggesting the continued strength in residential building was a positive factor.

This is not a great surprise. The recent report from the ABS shows that of the net 320,000 jobs added over the year to August nearly a third (105,000) were added in the construction sector. We expect this will be about as good as it gets for construction workers. The downturn in residential construction activity is expected to bite through 2018.

Overall, confidence is still not particularly strong, with views on family finances a clear weak spot. Whereas the overall Index is down 1% on a year ago, respondents' assessments of their own finances relative to a year ago have fallen by 6.1%.

This is a particularly significant point. Recall that the Reserve Bank consistently refers to this component of the Index as a reliable indicator of spending patterns.

The logic is persuasive. Consumers are more likely to base their spending decisions on their current income capacity rather than necessarily expectations around the overall economic outlook where they may not necessarily be a beneficiary.

During the week I noticed reports that US consumers are particularly pessimistic about: living from 'paycheck' to 'paycheck'; never being able to get out of debt; and never being able to afford to retire. Fortunately, Australia's pension and superannuation system provides households with much more comfort around the retirement issue but I suspect Australians would be similarly concerned about the first two issues.

That 6.1% fall over the year in "finances relative to a year ago" is quite significant. In previous years (to October) the comparable movements have been: -2.4% (2016); 4.3% (2015); flat (2014); 6.2% (2013); 1.2% (2012); -12.9% (2011); flat (2010); 21% (2009); -24% (2008).

The big fall in 2011 was associated with the 200 basis points of mortgage rate increases from October 2009 while the fall in 2008 was in response to the collapse of Lehman and the onset of the GFC. The fall in 2017 is therefore by far the largest annual fall in this component outside unusual extraordinary events since the GFC. This move is likely to be associated with some of the factors that are most likely behind the reports from the US: weak wages growth and excessive levels of household debt. It is for these reasons that we are cautious about prospects for consumer spending and, although the overall Index lifted strongly, the concerns about the consumer must still remain. It is certainly true that other parts (with the exception of housing) were solid in the survey.

The 'economic conditions, next 12 months' sub-index posted the strongest gain, rising 7.1% to a four year high. Some of this likely stems from consistent coverage of the continuing improvement in the global economy with, in particular, improved confidence in the US growth outlook. Longer term economic prospects showed a more muted rise. The 'economic outlook over the next 5 years' sub-index rose just 1.4%.

Consumers were more positive about making major purchases, the 'time to buy a major household item' sub-index rose 3.5% in October after a 2.1% lift in September. However, the sub-index remains well below its long run average (down 2.9% over the year), suggesting that the sluggish spending evident through most of 2017 is likely to extend into year-end.

Expectations for the labour market continue to improve. The Westpac Melbourne Institute Unemployment Expectations Index fell 3.3% to 129.2 in October, marking the lowest reading since June 2011 (recall that lower reads mean more consumers expect unemployment to fall in the year ahead). The move is broadly based with expectations improving across all the major states. So, as in the US survey, households may be becoming less anxious about actually losing their jobs but concerned about the size of that 'paycheck'.

Consumer views around housing remained downbeat. The 'time to buy a dwelling' index dipped 0.2% to 95.1, well below the long run average of 120. State indexes continue to vary widely, ranging from very weak reads in NSW (77) and Vic (88) to a strongly positive result in WA (135.4).

Consumer expectations for house prices also softened in the month. The Westpac-Melbourne Institute Index of House Price Expectations dipped 1% to 140.5. The index still shows positive price expectations nationally although the state breakdown showed a sharp 8% decline in New South Wales (to the lowest level since June last year) partially offset by stronger price expectations in Queensland and Western Australia. Evidence that house price expectations in the over-heated Sydney market are cooling is likely to be encouraging for policymakers.

We contend that the key to the interest rate outlook remains the consumer and the housing market. While we have seen a boost in consumer confidence, most of the strength is centred on the one year economic outlook. Respondents remain concerned about their own finances despite an expectation that the economy overall will improve.

Furthermore, the survey continues to point to an easing in sentiment in the housing markets in the major states. Interest rate increases aimed at cooling over-heated housing markets appear to be becoming unnecessary as macro prudential policy tools and the slowdown in foreign activity are achieving the same purpose.

The Week that Was

This week saw the release of our October Market Outlook. In addition to our latest assessment of conditions in Australia; New Zealand; the global economy and FX markets, key themes investigated this month include: Australian employment trends by industry and state, highlighting the narrow focus of job creation; the housing sector's loss of momentum, focusing on the role played by policy and foreign buyers; and the construction sector, where the balance between mining, non-mining and residential investment activity is shifting. Overseas, ahead of it beginning on 18 October, we look forward to the 19th National Congress in China.

On the data front, sentiment was the focus in Australia this week. We also received an update on housing finance and, from the RBA, the latest Financial Stability Review.

The Westpac-MI Consumer Sentiment survey provided a very interesting update this month. The headline index rose 3.6% to 101.4, the first outcome above the 100 optimist/pessimist divide since November last year. Economic expectations for the coming year jumped 7% and the 5-year view also improved. Unsurprisingly, unemployment expectations fell further, posting their lowest read since June 2011 as consumers became more optimistic over job prospects. However, despite all of the above and an abating of concern over recent interest rate increases, family finance expectations are still circa 5pts below their longrun average level, both relative to a year ago and for the year ahead. This is also true of the 'time to buy a major household item' series, implying that growth in retail spending is likely to remain subdued irrespective of the lift in overall confidence. On housing, house price expectations remain elevated versus history, but 'time to buy a dwelling' is holding some 25pts below average. By state, the 'cost' of affordability is clearly evident, with very weak results reported for NSW and Vic.

Also, housing finance data came in a little above expectations in August. Investor finance continued to hold up despite the impact of macro-prudential measures, likely in part because of refinancing activity. The investor result also likely signals that the recent loss of momentum in capital city markets (particularly Sydney) has come as a result of a pullback by foreign buyers. Lending for purchases of newly built dwellings continue to show strength (23%yr) as more buildings are completed and made available for occupancy. First home buyer approvals have also continued to strengthen, up 40%yr.

On the business sector, the September NAB business survey was positive overall; however, a concern for the outlook is that conditions are uneven across the economy. The sectors that are supporting conditions at above average levels are construction and related industries, including manufacturing. Elsewhere, weakness is clearly evident, particularly in the retail sector which is being affected by: weak wages; household debt; rising energy costs; housing affordability and the peak in housing investment activity. These results fit with our concerns regarding the outlook. We anticipate that consumption growth will struggle to accelerate as housing investment turns down. That will restrict 2018 growth to a below trend outcome. A positive for the interim is that the employment index from the NAB survey suggests the current strong pace of employment growth will be sustained through year end.

From the RBA, as is typically the case, there were no surprises in the October Financial Stability Review. Excessive risk taking globally supported by historically low interest rates was cited as a key global risk, as was debt in China. Meanwhile for Australia, "household balance sheets and the housing market remain a core area of interest". On this front, it was emphasised that policy actions have brought greater resilience to the sector. The overall health of the financial sector and the Australian economy was regarded as strong. Worthy of a read are the special topic boxes on: risks in international housing markets; and Australian households' investment property exposures.

Offshore this week, it was relatively quiet. The FOMC September meeting minutes franked expectations of a December rate hike, but also clearly emphasised that the Committee is uneasy over the inflation outlook. This is a topic we cover in depth in the October Market Outlook. The take home is that, while the structural health of the economy has improved materially, slack remains in the labour market. Further context on this labour market slack was provided this week in Northern Exposure. In short, while hiring and job openings are elevated, so too is churn in and out of the labour market. In combination with historically weak participation of prime-aged workers, this trend implies that many US workers are struggling to find permanent employment and thus the household income they desire. This is likely to keep a lid on wage pressures and see consumer price inflation remain a little below the FOMC's 2.0%yr medium-term target. We remain confident in our view that the FOMC will only hike twice more in this cycle following the December 2017 decision - likely in June and December 2018.

Chart of the week: Job creation & losses year to Aug 2017

In the edition of our October Market Outlook, we provide an update on Australian employment trends by industry and by state. Total annual employment growth has accelerated to a well above trend 2.75%. Interestingly, the hiring surge has been narrowly focused with household services the key driver, followed by construction. The current relatively narrow job upswing contrasts with the broad based strength evident in 2015/16 and is symptomatic of the broader uneven economic expansion.

Through the last year the net balance of sectors expanding vs. those contracting was +1, highlighting just how narrow the current expansion is. Compare that to the 2015/2016 peak in employment growth of 3%yr when the net balance was +4 and it held this level for a year.

New Zealand: Week ahead & Data Wrap

Signs of life

There is growing evidence that the slowdown in the housing market over the last year is weighing on household spending decisions. We wouldn't be surprised to see a brief revival in house prices over the next few months. But the outlook for the next couple of years remains subdued, in the absence of a substantial fall in interest rates.

Retail spending on debit and credit cards rose just 0.1% in September, less than we and the market expected. That continued a string on several months where card spending has been flat or even lower. A fall in petrol prices over this year could explain some of the slowdown in spending, but there's little sign that households are taking advantage of their fuel savings to spend more elsewhere. Spending on clothing and durable goods has flatlined, and the rise in hospitality spending (which includes international tourists) has slowed.

Consumer spending in New Zealand tends to have a strong link with the housing market, reflecting the fact that housing makes up a very high proportion of household wealth. The slowdown in spending in recent months is consistent with the cooling in house prices over the last year. Prices are down slightly from their peaks in Auckland and Christchurch, and are rising at a slower pace than before in other regions.

We believe the rise in mortgage rates over the last year has been a significant factor in the housing slowdown. Over much of 2015 and 2016, fixed-term mortgage rates were steadily declining, which incrementally added more fuel to the housing market. But from late 2016, mortgage rates ceased falling and began to rise - not by huge amounts, but the change of direction was enough to take the heat out of the housing market.

The latest round of restrictions on loan-to-value ratios, which were targeted at property investors, are also likely to have been a factor in the early stage of the slowdown. But the experience both here and overseas suggests that the impact of lending restrictions is short-lived; the current slowdown has lasted for longer than could be explained by LVR restrictions alone. Caution ahead of the 23 September election may also have been a factor, to the extent that investors feared the possible introduction of a capital gains tax for investment properties.

A key question for the economic outlook is whether the slowdown in house prices will persist. We wouldn't be surprised to see a brief rebound in house prices over the next few months. The most recent moves in mortgage rates have been down - again, not by a large amount, but the change of direction is notable. The banking system is now striking a better balance between deposits and loans than it was a year ago, reducing the pressure for banks to lift lending and deposit rates.

The election uncertainty factor remains, as the coalition talks between the main parties drag on. (The latest indication is that a decision could be announced as late as the end of next week.) But the NZ First Party, which is being courted by both the National and Labour Parties, does not favour a capital gains tax, so that policy is unlikely to make it into the mix when the next Government is formed.

There have in fact been some tentative signs of life in house prices already. The REINZ house price index rose 1% in September, the second monthly increase in a row. The stabilisation in prices has been supported by a sharp drop in new listings in recent months - property owners don't sell into a falling market if they don't have to. As a result, the stock of unsold homes has actually started falling again, which has alleviated the downward pressure on prices. However, housing turnover remains very subdued, with the number of sales falling to a six-year low. That doesn't augur well for a sustained lift in prices.

Unless the Reserve Bank reduces the OCR, there is a limit to how far mortgage rates can fall in the short run. Over a longer timeframe we would expect fixed mortgage rates to rise in anticipation of OCR hikes and in response to rising global interest rates. Consequently, beyond a short-term fillip, we expect house prices to remain subdued in coming years. And consequently, we would expect consumer spending growth to be more subdued than it has been in previous years - more in line with the pace of income growth.

A slowdown in spending growth in turn implies that there is even less risk of the economy overheating. Inflation has picked up from its lows over the last two years - we expect next Tuesday's CPI release to show inflation close to the Reserve Banks' 2% target midpoint in the September quarter. But with growth expected to be subdued from here, inflation is unlikely to threaten the top end of the inflation target. And that means the Official Cash Rate can remain low for a long time.

Data Previews

Aus Sep Westpac-MI Leading Index

Oct 18, Last: -0.19%

• The Leading Index has swung sharply in recent months from well above trend to back below trend, the six month annualised growth rate holding at 0.19% below trend in August. The turnaround mainly reflects swings in Australia's commodity prices and to a lesser extent a shift to a rising yield curve implying tightening financial conditions.
• The Sep read will again see a mixed bag of updates: the ASX200 down -0.6% vs -0.1% last month, US industrial production contracting 0.9% vs a 0.4% gain last month, and commodity prices holding flat in AUD terms but consumer sentiment and consumer unemployment expectations showing solid improvements, dwelling approvals up 0.4% vs -1.2% last month, and the yield spread widening slightly.

Aus Sep Labour Force, employment '000

Oct 19, Last: 54.2k WBC f/c: 25k

Mkt f/c: 15k, Range: -10k to 32k

• Total employment rose 54.2k in August compared the market's for +20k. Full-time employment bounced 54.2k following a -19.9k correction in Jul. In the year fulltime employment has gained 251.2k/3.0%yr. Part-time employment rose 14.1k following a 49.1k bounce in Jul. In the year to Aug, part-time employment lifted 74.5k/2.0%yr.
• By state, NSW, Vic and Qld were driving the strength with total employment gaining 12.9k, 18.6k and 16.7k respectively.
• The leading indicator including our preferred Jobs Index all point to ongoing robust demand for labour. We are also looking for annual growth in employment to overshoot the Index through late 2017 and into early 2018 as it rebounds from an undershoot during late 2016 early 2017.
• Our forecast 25k rise in employment will lift the annual rate to 3.1%yr from 2.7%yr.

Aus Sep Labour Force, unemployment %

Oct 19, Last: 5.6% WBC f/c: 5.6%

Mkt f/c: 5.6%, Range: 5.4% to 5.7%

• Despite the strong gain in employment, the Aug release printed a flat unemployment rate of 5.6% (5.60% at two decimal places) due to a 0.2ppt gain in the participation rate driving a solid rise the labour force.
• In Aug, the gain in participation came from a lift in both male and female participation but the gains from females have been somewhat greater and females do appear to be on a more solid uptrend. Males, by contrast, look more like they have found some stability in participation. By state, the strongest gains in female participation were in Qld but they are also improving in NSW while Vic continues to hold a very high level of female participation.
• In Sep, we are looking for a flat participation rate of 65.3% which will generate a 30.5k gain in the labour force which, with rounding, will leave the unemployment rate at 5.6%.

NZ Q3 CPI

Oct 17, Last: 0.0%, Westpac f/c: 0.5%, Mkt f/c: 0.5%

• We expect a 0.5% rise in the Consumer Price Index for the September quarter, lifting the annual inflation rate to 1.9%.
• Food prices rose for the quarter, while fuel prices fell. The strong New Zealand dollar was a disinflationary force over the first half of this year, but we expect its influence to have waned in the September quarter.
• We expect inflation to exceed the Reserve Bank's forecast for the quarter. However, with economic growth and house prices falling short of the RBNZ's forecasts, we think that interest rates will need to remain low for even longer than the market expects.

China Q3 GDP

Oct 19, last 6.9%, WBC 6.8%

• In the June quarter, Chinese GDP recorded a third consecutive upside surprise, with annual growth of 6.9%. Versus authorities' 2017 target of "around 6.5%yr", the six months to June was certainly a strong start.
• Come the September quarter, this momentum has endured. The PMIs continue to report robust momentum across both the manufacturing and services sector, with broad-based support from domestic and external demand.
• Looking forward, the key downside risk to growth is that subdued employment growth caps momentum in household spending. In the near term, it is unlikely to be significant. However, should household incomes not grow in a robust fashion, it could become a bigger cause for concern. In 2018, investment is also likely to be providing less support.

The rate plunged after the United States data were sent to the public and has erased the earlier gains. USD/CHF is trading in the red and is pressuring a dynamic support after the false breakout above a dynamic resistance. Remains to see what will happen till the end of the day because the rate may squeeze a little after the impressive drop.

Unfortunately, the greenback has taken a hit from the United States data, which has disappointed in the afternoon, failing to come in line with expectations.

The US Retail Sales have increased only by 1.6% in September versus a 0.1% drop in August, less versus the 1.7% estimate, while the Core Retail Sales surged by 1.0%, more versus the 0.9% estimate and versus the 0.5% growth in the former reading period. Moreover, the CPI increased only by 0.5%, less compared to the 0.6% estimate, the Core CPI disappointed as well because has increased only by 0.1%, less versus the 0.2% estimate.

You can see that the rate failed to stay above the UML and now is pressuring the WL2 of the former ascending pitchfork. I've said in the previous reports that the rate could come down to retest the second warning line (WL2) after the false breakout above the median line (ml) of the ascending pitchfork and above the 0.9787 static resistance.

Only a valid breakdown below the WL2 will confirm a further drop in the upcoming period, while a rejection will signal a potential bullish momentum.

The EUR/JPY dropped and resumed the yesterday's minor drop. You can see that is the rate is pressuring the downside line of the Rising Wedge and looks determined to breakdown from this chart pattern. I've said that a valid breakdown from this pattern will signal another leg lower in the upcoming period, the first downside target will be at the upper median line (UML) of the major ascending pitchfork.

EUR/CHF decreased after a little today, but looks undecided at this moment. The bulls seem exhausted and could lose significant territory in the upcoming days. I've said in the previous report that a rejection from the WL5 and from the upper median line (uml) will send the rate tumbling. A minor drop is expected if will really fail to close on the mentioned resistance levels.

Volatility rose today after the release of the consumer price index in the US, according to which inflation increased by 0.5% in September, which is 0.1% more than in August, but 0.1% less compared to the forecast. Core CPI increased by only 0.1% against the expected 0.2%. Slower than expected inflation growth reduces the possibility of the interest rate increase anticipated in December. Retail sales data in the US also disappointed investors. The indicator increased by 1.6% in September versus the 1.7% predicted, but this figure was much higher than the decline in August of 0.1%. Hurricanes Irma and Harvey are the likely causes to the disappointing data reports from the US.

The price of the American crude oil benchmark is correcting downwards after a confident increase. Yesterday the WTI bulls were cheered by news on the reduction of inventories in the US by 2.7 million barrels against 1.9 million barrels expected. The growth potential however is limited due to the increase of oil production in OPEC countries. Volatility is likely to remain high today because of the data release by Baker Hughes on active drilling rigs count in America. Rising activity in shale oil production remains the key factor in putting pressure on oil prices.

The aussie is rising against the US dollar on the background of the greenback's depreciation. This managed to offset any negative impact from China's disappointing trade surplus which fell to 28.5 billion dollars in September against the 42.0 billion dollars in August. Remember that China is the major trading partner of Australia so key indicators in China often affect the AUD.

EUR/USD

The EUR/USD price is growing rapidly after it was unable to fix below the 1.1825 mark. The next target in case of maintaining the current positive momentum will be 1.1925. Breaking through this level will open the way to 1.2000. In order to change the current ascending trend, quotes need to break through the support at 1.1800. Crossing the zero point by the MACD signal line may be judged as a stimulus for continued growth.

USD/WTI

The WTI quotes have rolled back after they were unable to overcome resistance at 51.65. The next target in case of decline will be the psychologically important 50.00 mark. On the other hand, gaining a foothold above 51.65 may become a trigger for the bulls to push the price higher up to 52.80. Volatility is likely to be elevated today.

AUD/USD

The AUD/USD demonstrated a confident rising movement and broke through the resistance at 0.7870. This is the basis for maintaining the current positive momentum and immediate goals will be located at 0.8000 and above it. The RSI on the 15-minute chart is in the overbought territory, indicating a possible pullback to 0.7870.

Market Movers ahead

• In the US, industrial production for September is due out. The first two months of Q3 have been on the weak side.
• Bank of England Governor Mark Carney, Deputy Governor Sir David Ramsden and MPC member Silvana Tenreyro are due to testify before the UK's Treasury Committee on Tuesday. We will look for any hints on whether they have changed their minds on a November hike.
• It will be an interesting week in China, as the 19th Congress of the Communist Party begins on Wednesday. On the data front, we look for a small decline in GDP growth.
• In Denmark and Sweden, employment data releases for September are due out.

Global macro and market themes

• Global central bankers have been busy on the news wires. However, new research indicates that the accuracy of forecasting of financial and macroeconomic variables has not improved.
• The market will focus on what 'QE path' the ECB will choose on 26 October when the bulk of its decisions regarding the future of the QE programme are due to be disclosed.
• It seems that two 'paths' are on the table: either an extension for six months of EUR40bn a month in purchases or purchases for nine or 12 months of just EUR20-30bn a month.
• We believe for now in the first 'path' but acknowledge that the purchase constraints that make it increasingly difficult for the ECB to buy according to the 'Capital Key' makes a 'longer' but smaller monthly amount 'path' more likely.

Full Report in PDF

While market watchers expected today's US inflation report to give a clearer picture of the inflation path amid concerns whether subdued inflation is temporary or persistent, uncertainties over the direction of inflation increased after US consumer prices disappointed analysts, reducing the odds for a third rate hike before the end of the year.

The widely-expected data on US consumer prices fell short of expectations in September, with the headline CPI index growing at 0.5% m/m, while analysts anticipated the figure to rise by 0.2 percentage points to 0.6%. This was the highest growth posted since February and emerged mainly due to rising gasoline prices. On a yearly basis, the index increased by 2.2% below the 2.3% expected but above the 1.9% seen in August. Excluding volatile items, consumer prices rose by 0.1% instead of remaining steady at 0.2% as was projected. This maintained the yearly measure at 1.7% versus the forecast of 1.8%.

In a separate report, US retail sales experienced the highest growth since November 2011, expanding by 1.6% m/m but missing slightly the forecast of 1.7%. In the previous month, retail spending contracted by 0.1% which was upwardly revised from -0.2%. The core equivalent gauge, which leaves automobiles aside, surprised to the upside, increasing by 0.5 percentage points to 1.0% m/m while projections were for a slower growth at 0.3%.

The dollar fell sharply to 92.78 against its major counterparts, falling back to two-week low levels reached yesterday. Dollar/yen declined by 0.43% to a two-week low of 111.67.

Speaking in Luxemburg, the President of the European Commission, Jean-Claude Junker said that new problems around Brexit emerge "day after day", prolonging the process by more than initially thought. Moreover, he claimed that he cannot find for the time being a compromise as far as the UK's financial obligations are concerned and therefore he cannot suggest for the negotiations to move to the next stage at the EU summit on October 26. Late on Thursday, a report by the German newspaper Handelsblatt stating that the EU Brexit negotiator Michel Barnier wants to offer a 2-year transition period to the UK to stay in the EU under some conditions gave a boost to the pound. However, following Junker's comments, the pound retreated to an intra-day low of $1.3246 before it bounced back to 1.3318 in the wake of the US data.

The euro stood tall against the weakening dollar at 1.1873, recouping earlier losses. The ECB's plans to start tapering its bond-buying program next year, according to sources with a knowledge, did little for the common currency. In particular, the ECB policymakers are said to announce in a couple of weeks that they will halve their current monthly asset purchases of 60 billion euros in January and will keep the program active at least for nine months. The question, however, remains on whether the ECB policymakers will close the program next September or will continue with it perhaps for some time. In response to the above, the German 10-year bond yields dropped to 0.40%, the lowest level reached in two-weeks. Besides that, the German Economy Ministry said on Friday that the German economy will continue growing in the second semester but at a slower pace compared to the first semester.

The aussie and the kiwi were the biggest winners against the greenback during the European session. The former was in track to post a green candle for the fourth consecutive day, surging by almost 1% to a two-week high of $0.7896, while the latter hit a nine-day high of $0.7195, being up by 0.86% on the day despite political uncertainties in New Zealand.

In commodities, oil prices retreated before the session-end but managed to remain up by 1.35% as data out of China's General Administration of Customs showed on Friday that Chinese crude oil imports jumped by 9% m/m in September, while oil products imported declined by 15.8% m/m. WTI crude retreated to $51.27 per barrel and Brent slipped to $57.01.

Gold advanced by 0.40% to $1,3000 per ounce on the back of a weaker dollar.

• European equities are slightly lower and US ones open slightly higher, as EUR/USD moves higher.
• A spike in energy prices in the aftermath of Hurricane Harvey boosted the US cost of living by the most since January (0.5% M/M & 2.2% Y/Y vs 0.6% M/M 2.3% Y/Y consensus), while inflation excluding food and fuel stabilized at 1.7% Y/Y (vs 1.8% Y/Y forecast).
• US retail sales jumped last month by the most in more than two years (1.6% M/M) as motor vehicles lost to hurricanes were quickly replaced and higher prices lifted receipts at gasoline stations. Core retail sales rose by 0.5% M/M. Both were close to expectations, but August figures were upwardly revised.
• EU Commission chairman Juncker has warned Brexit will take longer than the UK government thinks, calling on Westminster to pay if it wants to accelerate talks to its future relationship. He said there was no agreement over the UK's exit bill which would stop negotiations from moving on to trade talks before next week's EU Summit.
• The Bank of England should hold off raising interest rates as Britain's economy shows little sign of encouraging growth, the British Chambers of Commerce argued.
• Bank of America has reported a 13% rise in quarterly profits, as growth in consumer banking and wealth management offset a sharp decline in bond trading revenues. Wells Fargo is still counting the cost of the sham account scandal more than a year since it erupted as it reported a decline in revenues and profits.
• Hungary's base interest rate will stay unchanged at 0.9% until at least 2020, central bank deputy governor Nagy said, adding that downward risks to inflation had increased. The National Bank of Hungary, the most dovish in central Europe, cut its overnight deposit rate in September and announced more steps to ease monetary conditions.

Rates

Core bonds profit from slightly disappointing US CPI

Global core bonds gained ground today, boosted by ECB rumours, slightly disappointing US eco data and political risk ahead of the weekend. At the time of writing, US yields decline by 1.2 bps (2-yr) to 2.7 bps (10-yr). German yields shift 1.2 bps (2-yr) to 3 bps (10-yr) lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Portugal underperforming (+3 bps).

Bunds opened the session on a positive note, but soon reached a temporary high, before turning sideways till the US economic releases. We suspect some technical inter-market positioning was behind the move as also in other markets some moves occurred simultaneous. However, news agencies referred it to an article based on ECB sources. The ECB would consider cutting the monthly bond buying by half (to €30 bn) and keep the programme active for at least nine months. It isn't obvious to us why that should push the Bund higher. The €30 bn looks lower than markets expectations (negative), while the 9 month is probably a bit longer than expected (positive). Of course, if (forward guidance on) rates are the key driver, then the 9 months extension may have more weight than the €30 bn pace and push back rate expectations. The rise of the bund and the decline of the euro make sense along the lines of that reasoning. At the same time, ECB Hansson, admittedly a super-hawk, suggested according to a news agency that the ECB could tweak it guidance on rates and even raise them before the bond-buying stops. The main move of today's session occurred during US dealings, after slightly disappointing CPI data. While headline inflation rose by 0.5% M/M and 2.2% Y/Y, it was slightly below expectations. Core CPI stabilized at 1.7% Y/Y while consensus expected a small acceleration. Retail sales were strong, but close too forecasts. Core bonds surged higher, in line with this week's performance (downside exhausted after last week's payrolls). Geopolitical risk drew some safe haven flows as well (eg. US Iran nuclear deal).

Currencies

Dollar faces uphill battle on soft US CPI data

Early this morning, FX markets faced a technical repositioning with EUR/USD, USD/JPY and EUR/USD pushed lower. However, calm returned soon as investors awaited the US CPI and retail sales data. Retails sales were strong, but inflation was slightly softer than expected. The latter proved to be the more important factor for (FX) markets, putting the dollar under pressure. EUR/USD rebounded off the low 1.18 area and trades currently around 1.1870. USD/JPY dropped below 112 (currently 111.75).

Overnight, Asian equities mostly extended the established uptrend. Chinese trade data were OK, suggesting good activity and supporting positive sentiment in the region. There was again a 'disconnect' between rising Japanese equities and USD/JPY. The latter struggled not to fall below 112 even as the Nikkei surpassed 21K. The dollar also lost a few ticks against euro. EUR/USD traded in the 1.1845 area.

There was some nervous repositioning in several major cross rates at the start of European trading. We didn't see a clear explanation. Core yields, especially German ones, declined. USD/JPY dropped below 112. The decline spilled over into EUR/JPY and even put downward pressure on EUR/USD. The pair dropped to the 1.1815 area. However, this 'stop-loss' repositioning soon petered out as there was no further guidance from interest rate markets or equities.

US investors eagerly awaited key US CPI and retail sales data. (Core) retail sales were marginally stronger than expected. The CPI was slightly softer than consensus with the headline CPI rising from 1.9% Y/Y to 2.2% Y/Y (2.3% Y/Y expected) and core inflation stable at 1.7% Y/Y (1.8 Y/Y expected). The dollar hesitated upon the publication of the data, but the small miss in inflation finally prevailed. US yields declined and so did the dollar. EUR/USD rebounded off the low 1.18 area, reached just before the US data release. The pair trades currently in the 1.1870 area. So a return below the 1.1800/23 support area is unlikely, which is disappointing for USD bulls. USD/JPY is also drifting below the 112 big figure. Lower interest rates outweigh positive equities. USD/JPY trades in the 111.75 area. A further decline below the 111.50 area would deteriorate the short-term picture in this cross rate.

Hope on 'EU concession' supports sterling

Yesterday's roller-coaster ride of sterling finally turned out in favour of the UK currency. Sterling initially sold off as EU Barnier said that the negotiations on a divorce bill ended in a stalemate. However, sterling reversed initially losses on rumours/comments that the EU would consider to start preparations for a transition period.

(FX) markets saw the glass half full rather than half empty this morning on headlines that the EU would consider a transition period, something the UK is aiming for. EUR/GBP dropped below the 0.89 barrier. Enthusiasm eased later in the session on comments from Germany and EU's Juncker who highlighted that the Brexit process remains extremely difficult. EUR/GBP rebounded (temporary?) back above 0.89. In the end, sterling maintained yesterday's rebound. Will sterling enter calmer waters, awaiting new signs from next week's EU summit? EUR/GBP trades in the 0.8910 area. Cable extended gains north of 1.33, partially due to USD weakness after the 'soft' US inflation.

USD/CHF - 0.9734

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9739

Kijun-Sen level                    : 0.9739

Ichimoku cloud top                 : 0.9745

Ichimoku cloud bottom              : 0.9735

Original strategy :

Sold at 0.9755, Target: 0.9655, Stop: 0.9775

Position : - Short at 0.9755

Target :  - 0.9655

Stop : - 0.9775

New strategy  :

Hold short entered at 0.9755, Target: 0.9655, Stop: 0.9775

Position : - Short at 0.9755

Target :  - 0.9655

Stop : - 0.9775

As the greenback met renewed selling interest at 0.9772 and has slipped today, retaining our bearish view that the decline from 0.9837 top has resumed and downside bias remains for this move to extend weakness to 0.9669-70 (61.8% Fibonacci retracement of 0.9565-0.9837 and previous support) but previous support at 0.9642 should remain intact due to oversold condition, bring rebound later.

In view of this, we are holding on to our short position entered at 0.9755. Above said resistance at 0.9772 would defer but only break of resistance at 0.9808 would signal low is formed and indicate the pullback from 0.9837 has ended, bring retest of this level later.