Sample Category Title

[php_everywhere] [/php_everywhere]

[php_everywhere] [/php_everywhere]

[php_everywhere] [/php_everywhere]

[php_everywhere] [/php_everywhere]

U.S. Review

Hurricanes Harvey and Irma Blow Payrolls Off Course

• Nonfarm payrolls contracted for the first time since 2010 as Hurricanes Harvey and Irma disrupted work and routine hiring. Even though a record number of people were unable to work due to the weather, the unemployment rate fell to 4.2 percent amid a curiously strong rise in the household measure of employment.
• The ISM manufacturing and nonmanufacturing indexes hit multi-year highs in September. While some of the strength can be traced to longer supplier delivery times from storm disruptions, production, new orders and employment improved in both surveys.

Hurricanes Harvey and Irma Blow Payrolls Off Course

Employment contracted for the first time in seven years last month as Hurricanes Harvey and Irma disrupted work and typical hiring. Nonfarm payrolls contracted by 33,000 jobs in September, led by a 111,000 decline in the leisure & hospitality sector. Average hourly earnings rose a stronger-than-expected 0.5 percent, but the average wage last month was flattened by the drop in the low-paying leisure & hospitality industry.

Roughly 1.5 million people reported that they were unable to work during the survey reference period, which was the week that Hurricane Irma hit Florida. Yet paradoxically, the number of people defined as employed last month jumped by 906,000. That was the biggest one-month increase since 2013 and more than four times the average over the past year. Even with an increase in labor force participation, that pushed the unemployment rate down to 4.2 percent.

The household survey can be even more volatile than the payroll survey given its small sample size (about 60,000 households) so monthly readings can exaggerate the trend. Given that September conditions were particularly atypical, we have a hard time taking the drop in the unemployment rate and rise in participation at face value this month.

The manufacturing sector looks to have been relatively unshaken by the recent storms. Factory orders for August rose 1.2 percent in August amid strong demand for durable goods. Nondefense capital goods order ex-aircraft are now up 7.2 percent on a three-month average annualized basis and point to solid equipment spending in the months ahead.

The timelier ISM manufacturing index suggests the positive momentum carried into September. At 60.8, the index rose to its highest level since 2004. Some of the headline's gain was attributable to longer supplier delivery times—usually a sign of growing demand at suppliers, but in the most recent month lengthened by supply chain disruptions. Nevertheless, supplier delivery times have been lengthening since the start of the year and look to have encouraged more hiring. The employment index rose to a six-year high and is consistent with manufacturing payrolls having risen by an average of 9,700 since July.

Production looks set to remain strong with the new orders index coming in above 64. We suspect the auto sector is providing some temporary support as Harvey and Irma have generated the need to replace vehicles. Auto sales jumped to an annualized rate of 18.5 million units from a two-and-a-half year low in August.

While the manufacturing sector has shifted into a higher gear this year, construction activity has slowed. The o.5 percent rise in August construction outlays came on the heels of a 1.2 percent pullback, which was twice as steep as what was initially reported. Elsewhere outside the manufacturing sector, however, activity continues to expand. The ISM non-manufacturing index leapt to a new cycle in September. The pickup was supported by rising current activity, new orders and employment, but also longer supplier delivery times.

U.S. Outlook

CPI • Friday

Markets and FOMC members will closely be watching the September CPI release next Friday. After three months of lowerthan- expected inflation readings, the CPI index came in higher than what markets forecasted in August. The September reading has significant monetary policy implications as the FOMC prepares to continue to raise rates. On a year-over-year basis, core inflation continues to look rather anemic. Ex-food and energy, prices were up 1.7 percent over the past 12 months. Following the August gain, however, the recent trend looks stronger; over the past three months, the core index has risen at a 1.9 percent annualized pace.

August's strong gain should help alleviate concerns among Fed members that the slowdown in inflation that began in the spring is set to continue. A strong September print would further ease inflation worries and make a December rate hike more likely.

Previous: 0.4% Wells Fargo: 0.6% Consensus: 0.6% (Month-over-Month)

Retail Sales • Friday

We expect retail sales to grow 1.7 percent in September following a 0.2 percent contraction August, month over month. August's contraction can largely be traced to Hurricane Harvey's impact, with most store categories showing steep declines. Auto sales experienced the sharpest drop with sales of motor vehicles and parts declining 1.6 percent. The decline in auto sales eclipsed the boost from the 2.5 percent rise at gas stations.

For September, we expect building supply stores to have much stronger sales as Houston and the entire state of Florida rebuild and recover from major back-to-back storms. The data in September's release are likely to contain Harvey-related noise, which will make gauging the actual strength of the consumer more difficult.

Previous: -0.2% Wells Fargo: 1.7% Consensus: 1.4% (Month-over-Month)

Business Inventories • Friday

Business inventories rose for a third consecutive month in July and look poised to add to third quarter GDP. Next Friday, August inventory data is slated to be released.

Although we only have one month of the quarter's data in, we expect inventories will be additive to GDP in Q3. As we have highlighted before, it would not take much of an increase in real inventories to provide a significant boost to GDP following two quarters of scant stock building. We are currently penciling in a $40 billion annualized increase, which would add 0.8 percentage points to topline GDP growth. Given the late stage of the business cycle, it is not altogether shocking that we have witnessed more caution on the part of businesses recently. That caution is manifested in the seven times in the past nine quarters in which inventories have been a drag on growth. Friday's release will be very telling for the direction inventories will push/pull GDP in Q3.

Previous: 0.2% Wells Fargo: 0.6% Consensus: 0.4% (Month-over-Month)

Global Review

Soft Consumer Numbers in Australia

• Australia's Reserve Bank (RBA) kept rates on hold this week. The latest data for retail sales substantiated the RBA's recent warnings about the sustainability of consumer spending amidst elevated consumer debt. Not only did Australian retail sales fall in August, the initial flat reading for July was revised to show a decline.
• The latest survey data offer mixed signals for business activity in the United Kingdom.
• After a strong start to the year, a slowdown in the pace of hiring in Canada is consistent with our outlook for slower Canadian growth in the second half.

RBA's Fears Come True With Consumer Spending Slip

The Reserve Bank of Australia (RBA) has kept its official cash rate at 1.5 percent for a little over a year now. The RBA is faced with balancing rising consumer debt amidst a run-up in home prices. Although there have been some signs of firming in the Aussie economy, a recent miss in consumer spending figures highlights the pressure on many Aussie households at present. We learned this week that Australian retail sales fell 0.6 percent in August which follows a smaller decline in the prior month. Although the RBA meeting occurred before the retail sales print hit the wire, policymakers at the Bank have been highlighting the unsustainability of household debt in recent communications. With inflation still low and wobbly fundamentals in housing, we still see the RBA on hold well into 2018. Going into the week, one could have reasonably expected the RBA to indicate a tightening bias. However after this week's lousy retail sales figures, which included a downward revision to prior data, one board member mentioned to a U.S. media outlet late in the week that another rate cut cannot be ruled out.

Business Activity in the United Kingdom

Speaking of central banks, the Bank of England is on hold as well and we expect it will refrain from raising rates until after the turn of the year. That accommodative monetary policy stance is helping to underpin economic activity in the United Kingdom, but some measures of business spending have softened. Until some of the uncertainty surrounding the Brexit process is cleared up, businesses may take a "wait-and-see" approach which could hinder investment spending.

Earlier this week, the manufacturing as well as the service sector PMIs for the United Kingdom were released. While both measures have bounced off their post-Brexit lows, there was a sharper recovery on the manufacturing side, perhaps reflecting the boost from the earlier decline in the value of the British pound. As the currency has retraced some of its lost value in recent months, the pace of expansion in the manufacturing sector has moderated. The U.K. manufacturing PMI slipped to 55.9 in September from 56.7 reading in the prior month. The U.K. services PMI rose slightly more than expected to 53.6.

Canadian Employment Friday

Thanksgiving comes early in Canada. The Toronto Stock Exchange and Canadian banks will be closed on Monday of this coming week in observance of the Canadian holiday. But the September employment figures for Canada hit the wire at the same instant that it did in the United States.

Over the past year or so, Canada's labor market has been adding jobs at about as fast a rate as it has at any point in the past decade. While monthly jobs number can be notoriously volatile in Canada, the 6-month moving average plotted in the bottom graph shows sustained job growth north of 25K for the better part of the past year. September jobs numbers were a bit softer at 10K due to a loss of momentum in the third quarter. This is consistent with our expectation for growth in Canada to moderate in the second half.

Global Outlook

U.K. Industrial Production • Tuesday

After a strong finish to 2016, industrial production growth in the United Kingdom has languished for most of 2017. A weak pound has likely been a tailwind for British manufacturers, as have the stronger growth environments in the global economy generally and the Eurozone specifically. However, the uncertainty related to the ongoing Brexit negotiations has likely been an offsetting headwind as some businesses delay making capital investments until there is more clarity. Construction output, which is also reported next Tuesday, has fallen in four straight months, with another decline in August expected by the Bloomberg consensus.

That said, manufacturing output in the U.K. increased in July for the first time in 2017. For August, the Bloomberg consensus expects a 0.3 percent gain in manufacturing output and a 0.2 percent increase for industrial production as a whole, which, if realized, would mark the first back-to-back monthly gains since late 2016.

Previous: 0.4% Consensus: 0.9% (Year-over-Year)

Mexican Industrial Production • Thursday

Industrial production growth in Mexico was weak in July, declining 1.0 percent over the month and 1.6 percent over the year. Construction, mining and utilities output all declined in the month, although manufacturing production managed to eke out a 0.3 percent gain. The all-important automobile sector has helped carry industrial production growth in Mexico; automobile, light trucks and parts production increased 9.8 percent on a year-earlier basis. Production in this sector is decelerating, however, as auto demand has softened in the United States, which generates most of the demand for Mexican autos.

The threat of NAFTA renegotiation continues to loom in the background for the Mexican economy, but thus far economic growth has managed to hold relatively steady despite a sharp depreciation in the peso that only began to reverse itself earlier this year and headwinds related to NAFTA uncertainty.

Previous: -1.6% Consensus: -0.5% (Year-over-Year)

Eurozone Industrial Production • Thursday

Unlike the United Kingdom, industrial production in the Eurozone has been accelerating of late, reaching 3.2 percent year-over-year in July. Encouragingly, although the July monthly gain was just 0.1 percent, output in cyclically-sensitive industries such as capital goods and durable consumer goods rose 0.8 percent and 0.7 percent, respectively. The gains have coincided with a continued improvement in the survey data; the purchasing managers index for Eurozone manufacturers touched 58.1 in September, the highest reading since February 2011.

In the policy statement that followed its September meeting, the Governing Council of the European Central Bank acknowledged that the economic expansion in the euro area "continues to be solid and broad-based across countries and sectors." We look for the Governing Council to announce a further reduction in its monthly asset purchase rate at its October 26 meeting.

Previous: 3.2% Consensus: 2.6% (Year-over-Year)

Point of View

Interest Rate Watch

Squeeze Play

Interactions between monetary policy intentions and the expected pattern of federal deficits represent a squeeze play on financial markets as we look ahead into 2018 and develop our annual outlook for next year.

Inflation and Fed Funds Squeeze

Looking ahead, the spread between the pace of inflation, measured by the PCE, and the Fed funds rate has diminished significantly over the last year as illustrated in the top graph. This narrowed margin indicates that, looking into 2018, the real Federal funds rate will move into positive territory, and we have not experienced positive real short-term rates since the 2005-2007 period. As a result we are cautious on the pace of economic growth if 1) inflation does not accelerate but 2) the FOMC pursues its current dot-plot indicated path for the funds rate.

Fed Balance Sheet and Federal Deficits

As illustrated in the middle graph, by the middle of 2018 and through 2019, the Fed's intention to shrink its balance sheet will imply that some additional U.S. Treasury issuance will hit the market relative to the past. The issue comes with the rising projection of federal deficits/financing from the Congressional Budget Office. The conflict is clear; rising debt supply in the face of declining Fed demand.

Federal Debt—At Normal Interest Rates?

As illustrated in the bottom graph, since 1982, the growth in debt has been a greater issue for the government sector than for the nonfinancial corporate sector. Over that period, government debt has grown from 40 percent to 100 percent of GDP while nonfinancial corporate debt has moved from 30 percent to 45 percent. Meanwhile, the severe correction in the household debt situation since 2008 is fairly clear.

Moreover, federal debt is not meanreverting, that is, they are not returning to a steady percentage of GDP. One possible implication of this debt burden is that any downturn in the economy would likely be accompanied by a rising debt burden.

Credit Market Insights

Homeownership Rates Fall Further

Homeownership rates continued to drop across broad demographic groups from 2013 to 2016, according to the triennial Survey of Consumer Finances. Nationally, the percent of families owning a primary residence fell 1.5 percentage points to 63.7, marking continuous declines since the 2007 survey. However, the most recent quarterly data shows homeownership rates stabilizing, so 2016 may be a bottom.

Of note is the breadth of homeownership declines across demographic groups, whether by age, region, income or family structure. Explanatory factors include tighter lending standards, reduced affordability from rising home prices and a lack of supply of new housing in desirable markets. In addition, rising student loan debt and delayed family formation mean that younger buyers in particular are entering the housing market at historically slower rates. Only 33.1 percent of families under age 35 owned a home in 2016, compared to 41.6 percent in 2004.

Some of the only groups to see increased homeownership rates in recent years are families in rural areas and above age 75. Housing outside metro areas has remained more affordable and older Americans are increasingly choosing to age in place, which can help explain these trends.

Looking forward, wage gains stemming from a tightening labor market and families aging into cohorts more likely to own homes may support homeownership rates, or at least keep them stabilized.

Topic of the Week

Tax Details Finally Begin to Emerge

Last week, top Republican officials released their proposal to reform the tax code. Highlights of the plan included a doubling of the standard deduction, a consolidation of current tax rates to three brackets of 12 percent, 25 percent and 35 percent and the removal of "most" deductions except home mortgage interest and charitable contributions. On the business side, the proposal lowers the top corporate rate to 20 percent, introduces full expensing of capital investments for "at least five years" paired with a "partial limitation" of net interest expense for corporations. The proposal also creates a 25 percent rate for pass-through businesses.

Our readers should bear in mind that last week's proposal is just that: a proposal that has no binding impact. This plan is an opening bid that will likely have multiple iterations to come, just as occurred with the Affordable Care Act repeal-and-replace effort.

In our view, the likelihood of this proposal passing in its current form is unlikely. The real challenge boils down to this: the Republican plan is aggressive in its tax cutting efforts, making the plan very costly in the absence of revenue raisers, which have yet to be fully fleshed out and will likely raise some strong policy disagreements. We maintain the view that the only provisions likely to become law are a doubling of the standard deduction, an increase in the child tax credit, a lowering of the corporate rate to 25 percent and a repatriation tax holiday on corporate profits.

As of this writing, the House has passed a budget resolution and the Senate Budget Committee has advanced their version, with a full Senate vote expected in a few weeks. They will next need to come together and hammer out the differences between the two bills to proceed with tax reform through the reconciliation process. Once complete, the respective tax writing committees can get to work on drafting legislation, with the goal of producing a bill roughly one month from now. Stay tuned. For more on our tax outlook, see "Our Fiscal Policy Assumptions: An Update" available on our website.

U.S. Highlights

• Recent U.S. economic data has been distorted by hurricanes with the volatility likely to persist in the coming weeks. This theme came across this week, with auto sales, ISM indices, trade and payrolls all impacted.
• Auto sales surprised to the upside, as affected consumers begun to replace flood-damaged vehicles. Meanwhile, ISM indices surged, supported by slower supplier deliveries, with some reversal likely ahead.
• The jobs report surprised to the downside, with payrolls falling by 33k, but did include positive elements, such as a declining jobless rate and accelerating wage growth. These reinforced the likelihood of a rate hike by year-end.

Canadian Highlights

• Signs that Canada's economy is cooling increased this week with data on international trade that showed Canadian export volumes falling 1.9% in August, the third straight month of decline.
• Still, the Canadian job market keeps on chugging. The economy experienced its 10th straight month of job growth with 10k jobs added in September. Since the start of the year, the unemployment rate has fallen 0.7 percentage points and, at 6.2%, is at or close to its long-run structural rate.
• The question of how quickly the Canadian economy can grow is on the minds of monetary policymakers. In a speech this week, Deputy Governor Leduc put his estimate for potential at 1.5%, the top end of the Bank of Canada's range of 1.0% to 1.6%.

U.S. - Navigating Through Weather-Induced Distortions

Recently published U.S. economic data has been distorted by Hurricanes Harvey and Irma with the volatility likely to persist in the coming weeks. This theme has been highlighted by this week's releases, with auto sales, ISM indices, trade, and this morning's payrolls all impacted by mother nature. Despite the distortions, data this week was constructive, and along with the chance of tax reform has lifted U.S. stock indices to all-time highs.

Much of this week's economic data surprised to the upside. Both ISM indices soared to their highest levels since the mid-2000s. The gains among their subcomponents were broad-based, but the readings were partly supported by slower supplier deliveries (Chart 1) on account of transport infrastructure closures and factory outages. The index typically rises with higher demand, but in this case it increased due to supply constraints, with some reversal likely in the coming months. On the other hand, the surge in auto sales to an impressive 18.5 million annualized units was related to consumers in Texas and Florida replacing flood-damaged vehicles. Alongside the rise in gasoline prices, the increase in auto sales should materialize in a healthy retail sales report next week. Further out, we anticipate replacement demand for vehicles to continue to prop up sales, boding well for durables and overall consumer spending through the end of 2017.

But not all data surprised to the upside. While the nominal trade deficit continued to narrow, export volumes retreated for the second consecutive month. The fact that petroleum exports fell sharply suggests that the Gulf refinery outages played a significant role in reducing export volumes. Having said that, import volumes also retreated as ships were unable to dock and unload at many Texas ports.

The jobs report was another example of data being affected by hurricanes. Payrolls declined by 33k in September, marking the first contraction since 2010. Results from the prior two months were also revised down a total of 38k, but the 6-month trend was still a healthy 153k pace prior to the recent anomaly. Still, the September report offered positive elements as well. The jobless rate fell to a 16-year low of 4.2%, while wage growth accelerated to 2.9% y/y (Chart 2). July and August were also revised higher to 2.6% and 2.7% respectively from 2.5% y/y initially. The accelerating trend in compensation is very encouraging and bodes well for the inflation outlook. Still, September's results should be taken with a grain of salt, with some of the wage pressures related to hurricane distortions.

All told, apart from the decline in nonfarm payrolls, the stream of data this week has been better than expected. Importantly, looking past the transitory factors, the economy appears to be on a solid footing. Growth should come in above 2% annualized in the third quarter and near 3% to cap off the year. Declining unemployment and rising wages further reinforce the likelihood that the Fed will hike once more by year end, particularly if these translate into firmer inflation readings. So far, markets are increasingly comfortable with this narrative, with the probability of such an outcome rising to around 90% this morning.

Canada - Coming Back to Earth

Canada's economy is cooling from its red hot pace of activity in the first half of the year. This was confirmed this week in data on international trade that showed Canadian export volumes falling 1.9% in August, the third straight month of decline (Chart 1). This data is volatile however, and we anticipate a rebound in the months ahead. Still, with imports eking out small gains in each of the past two months, net-exports are likely to subtract from economic growth in the third quarter, which continues to track slightly above 2.0%.

The softening near-term economic outlook struck a blow to the Canadian dollar, which fell more than half a cent against the U.S. dollar (to just under $0.80 U.S.) as of writing. With growth cooling, the Bank of Canada may be less anxious to raise the overnight rate, satisfied for the time being that the removal of emergency level cuts is enough to take some wind out of the economy's sails.

Without a doubt, the question of how quickly the Canadian economy should or can grow is firmly on the minds of Canada's monetary policymakers. This week, a speech by Deputy Governor Sylvain Leduc noted the deceleration in productivity growth in Canada and offered that a decline in the rate of new firm creation (and destruction) bears some of the blame. As he explained, a key source of productivity growth is the replacement of old firms (and ideas) with new ones. A slowdown in the rate of entry limits this key source of productivity growth.

The good news is that firm entry appears to have stabilized (Chart 2), which would be good news for Canada's productivity prospects. Measuring the potential growth rate of the economy in real-time is difficult. The recent underperformance in inflation suggests that perhaps Canada's productive potential isn't as meagre as it has been made out to be. Indeed, Deputy Governor Leduc put his estimate for potential at 1.5% at the top end of the Bank of Canada's range of 1.0% to 1.6%.

The notion that Canada is awash in underutilized resources, however, is hard to square with the data on the Canadian labour market. In September, the Canadian economy experienced its 10th straight month of job growth (+10k). Since the start of the year, the unemployment rate has fallen 0.7 percentage points and, at 6.2%, is at or close to its long-run structural rate. Moreover, any worries about the composition of job growth favouring part time work should be assuaged by September's report in which full-time jobs rose 112k and part-time fell 102k. This was enough to push aggregate hours worked up 2.4% year-on-year, well above its estimated trend rate of under 1%.

All this means that even as the Canadian economy comes back down to earth, growth of around 2.0% is likely sufficient to put gradual upward pressure on inflation and keep the Bank of Canada in tightening mode. Still, as long as there is some uncertainty around the potential economic growth rate as well as the impact of hikes already in the pipeline, the central bank can go slow. We still expect one more hike before this year is out, but anticipate a slower pace of hikes next year, with just two more before the end of 2018.

U.S.: Upcoming Key Economic Releases

U.S. Consumer Price Index - September

Release Date: October 13, 2017
Previous Result: 0.4% m/m, core 0.2% m/m
TD Forecast: 0.6% m/m, core 0.2% m/m
Consensus: 0.6% m/m, core 0.2% m/m

We expect headline CPI inflation to pick up to 2.3% y/y in September, with prices up 0.6% m/m. Energy prices will exert an even larger contribution this month led by an 11% bounce in gasoline prices. Food prices could also see stronger gains from crops affected by Hurricane Irma. But outside of food and energy, we expect price impacts to be minimal as was the case in past hurricane episodes. Nonetheless, we expect a solid 0.2% print in the core CPI, keeping the core inflation rate stable at 1.7% y/y with upside risk for a firmer 1.8% pace. The September data will be widely scrutinized by Fed officials, particularly by those who are still on the fence over a December rate hike based on the past disappointment in inflation this year. A second consecutive 0.2% rise in core inflation will help build the conviction that price pressures are finally picking up as transitory factors dissipate.

U.S. Retail Sales - September

Release Date: October 13, 2017
Previous Result: -0.2%, ex-auto 0.2%
TD Forecast: 1.7%, ex-auto 1.1%
Consensus: 1.4%, ex-auto 0.9%

We expect a strong 1.7% increase in September retail sales, reflecting a hurricane-induced surge in demand concentrated in motor vehicles. New vehicle sales massively beat expectations in September, hitting a 12-year high of 18.5m units, or a 15% m/m increase, as consumers affected by the twin hurricanes looked to replace their damaged vehicles. Industry estimates suggest that sales have further room to run; over 500k vehicles were damaged by the storms, propping up demand at least through November. Meanwhile, the sharp jump registered in gasoline prices following Hurricane Harvey should lend a boost to gasoline station receipts. Other categories such as building materials could see a boost as well, such that we see scope for a 0.5% rise or higher in the core control group (excluding auto, gasoline station, food services and building material sales). The report would leave Q3 real PCE tracking near a 2% pace.

Canada: Upcoming Key Economic Releases

Canadian Housing Starts - September
Release Date: October 5, 2017
Previous Result: -$3.04bn
TD Forecast: -$2.7bn
Consensus: N/A

We look for housing starts to moderate to 212k units in September vs 223k in August. That would leave Q3 as a whole up 6% over Q2. We look for the September dip to be led by multi-family units, with scope for higher single-family starts to partially offset. An overall drop in September is also likely to be driven by starts in Ontario, which came back strongly in the prior two months.

Hurricanes Hit Number of Jobs but Not Wages

The USD dollar is higher across the board against major pairs. The American currency posted weekly gains against major pairs, but had a mixed performance Friday in the aftermath of the release of the U.S. non farm payrolls (NFP) report. The expected impact of hurricanes in September manifested itself in the first negative NFP reading since 2010. The US economy lost 33,000 jobs in September, but wages surprised with a 0.5 percent gain. The focus of investors has shifted from the headline number of jobs to inflation indicators, such as wages. The strong gain was quickly priced in with the CME FedWatch tool showing a higher than 90 percent probability of a rate hike in December.

The next hurdle for a December rate lift by the U.S. Federal Reserve will come with the release of retail sales and consumer price index (CPI) data on Friday, October 13 at 8:30 am EDT. Retail sales were weaker than expected in September with a contraction in the headline number. Inflation on the other hand met the forecast and given the focus will be on the CPI for clues that validate or weaken a case for a Fed December hike.

The pound has fallen to a one month low as Prime Minister Theresa May, has lost the confidence of a large group of Conservative MPs with a potential ouster in the cards. Disappointing data and political uncertainty are anticipated to continue next week for sterling despite hawkish comments from Bank of England (BoE) policy makers. The euro remains under pressure from the after shocks of the Catalonia independence referendum and awaiting further developments.

The EUR/USD lost 0.75 percent in the last five days. The single pair is trading at 1.1693 in a week that saw the resurgence of the USD with strong economic releases, Fed members supporting a rate hike and the rise in wages putting some inflationary pressure. European data was mixed by contrast with the biggest topics once again turning to political uncertainty. The Catalonia independence referendum and the response by the Spanish government have brought the fragility of the EU into focus once again. Brexit talk and the political infighting within the Conservative party in the UK also weighted on the euro versus the greenback.

US indicators will dominate the calendar in the week from October 9 to 13. FOMC member speeches, the release of the minutes from the September FOMC meeting, US producer price index, inflation and retail sales with only the speech by European Central Bank (ECB) President Mario Draghi on Wednesday a highlight for the EUR.

The GBP/USD lost 2.67 percent this week. Cable is trading at 1.3038 with markets losing confidence in Prime Minister May and her party might be pushing to oust her. Disappointing data this week in construction and manufacturing PMIs offset comments from Bank of England (BoE) policymakers about a possible rate hike later this year. Ian McCafferty and chief economist Andy Haldane issued comments this week that supported the view of Governor Mark Carney about the economy being strong enough to remove stimulus. That is precisely the point that was put in question by the weak data and presents an issue for the BoE. After so much rhetoric to hike rates will the current trend of soft data forced them to rethink their intended rate path, or do they follow through in fear of losing credibility?

Manufacturing production data will be released on Tuesday, October 10 at 4:30 am EDT on a week with little UK indicators to guide traders. The US economic calendar is not as busy but will feature the release of the September Federal Open Market Committee (FOMC) meeting minutes on Wednesday, October 11 at 2:00 pm EDT and comments from FOMC members throughout the week. The highlight of the week for the GBP/USD will be the release of inflation and retail sales data. In the past it has proven to be a tough obstacle for a NFP driven dollar rally to survive.

Market events to watch this week:

Tuesday, October 10

• 4:30am GBP Manufacturing Production m/m

Wednesday, October 11

• 2:00pm USD FOMC Meeting Minutes

Thursday, October 12

• 8:30am USD PPI m/m
• 8:30am USD Unemployment Claims
• 10:15am EUR ECB President Draghi Speaks
• 11:00am USD Crude Oil Inventories

Friday, October 13

• 8:30am USD CPI m/m
• 8:30am USD Core CPI m/m
• 8:30am USD Core Retail Sales m/m
• 8:30am USD Retail Sales m/m

*All times EDT

In a relatively light calendar week, US economic indicators will be at the forefront, along with data out of China, the Eurozone and the United Kingdom. Inflation and retail sales numbers will be the highlights coming out of the United States, while industrial output and trade data will be the focus in non-US markets. The Federal Reserve will also be making headlines as it publishes its September meeting minutes and more Fed officials make public appearances.

China releases trade data

China's economy continues to defy projections of a slowdown in 2017 with the World Bank this week lifting its forecasts for GDP growth for the year from 6.5% to 6.7%. Rising global demand for Chinese exports has been one of the reasons why growth has been outperforming. After a dismal 2016, export growth has averaged 7.7% year-on-year so far this year. This trend looks set to continue in September with exports forecast to rise by an annual rate of 8.8% when the monthly trade figures are published on Friday. Imports are expected to grow by 13.5%. Also due out of China next week is the Caixin services PMI on Monday.

Eurozone industrial output to be eyed

It's going to be a fairly quiet week for Eurozone data with the only notable releases consisting of the Eurozone sentix index (Monday), and industrial output numbers (Thursday). Euro area industrial production is forecast to rise by 0.5% month-on-month in August, with corresponding figures for Germany and France due on Monday and Tuesday respectively. A bigger market mover might be ECB President Mario Draghi's attendance at a panel discussion at the Peterson Institute in Washington on Thursday. With the October 26 policy meeting approaching, investors will be eager to get a better insight as to what decision to expect from the European Central Bank with regards to asset purchases and forward guidance.

UK data will struggle to eclipse Brexit and political concerns

The pound looks set to have its worst weekly performance in a year this week. It's on track for losses of around 2.5% as worries that Theresa May's days as prime minister are numbered add to the uncertain outlook for the UK amid lack of progress in the Brexit negotiations. A possible vote of no confidence by Conservative MPs forcing May to stand down cannot be ruled out in the coming days or weeks.

Data out next week however, may provide some support for the battered pound. Trade, industrial output and manufacturing figures for August are all published on Tuesday. Industrial production is forecast to rise by 0.2% m/m in August, down from 0.2% in July, though the annual rate is expected to accelerate from 0.4% to 0.8%. The manufacturing sub-sector is also forecast for positive growth, expected at 0.3% m/m and 1.9% y/y. UK manufacturers have lagged behind their Eurozone counterparts this year even though the global economic recovery has picked up a gear and sterling remains weak, highlighting the challenge Britain faces in rebalancing its economy.

Hurricanes likely to distort retail sales figures

US data should add some excitement for traders in the coming week as key inflation and retail sales numbers are released. However, the week will likely start on a quiet note as US markets will be partially closed for Columbus Day on Monday. The first major data announcement is due on Wednesday, comprising of the JOLTS job openings for August, and the Fed minutes of the September policy meeting are also published on the same day. With the odds of a December rate hike now having risen to above 90% (according to fed fund futures) following a series of robust indicators and hawkish language by Fed policymakers, the FOMC minutes are unlikely to see much of a reaction in forex markets. However, analysts will still want to scrutinize the minutes for any signs of division over the inflation outlook given that some committee members have been more concerned than others about the absence of inflationary pressures.

On Thursday, producer prices for September will precede the CPI and retail sales reports for the same month on Friday. Both headline and core inflation are forecast to tick higher in September, with annual CPI rising to 2.3% from 1.9%, and core CPI to 1.8% from 1.7%. Consumer prices based on the CPI measure have been growing more strongly than the Fed's targeted inflation gauge, the core PCE price index, which declined to a two-year low of 1.3% in August. Retail sales meanwhile are forecast to receive a major boost from auto sales, which surged in September as Americans replaced their vehicles damaged in the hurricanes. Total retail sales are expected to jump by 1.7% m/m in September after falling by 0.2% in the prior month. Finally on Friday is the University of Michigan's preliminary reading of the consumer sentiment index for October.

Also to watch out of the US next week are Fed speakers, which will include Minneapolis Fed President Neel Kashkari, Dallas Fed President Robert Kaplan, Fed Governors Lael Brainard and Jerome Powell, and Chicago Fed President Charles Evans.

According to the widely-expected nonfarm payrolls report, 1.5mn people stayed out of work due to dangerous weather conditions in September, dampening the number of jobs added to the economy. This, however, was not the biggest surprise, as investors had been warned about the negative consequences arising from the devastating hurricanes. What was instead a more unexpected fact, was the upside change in wage growth which consequently pushed the dollar to fresh highs and boosted confidence in the US economy. In the meantime, the Gulf of Mexico is threatened again by another tropical storm, with oil prices giving up their yesterday's gains.

Hurricanes Harvey and Irma indeed dragged US nonfarm payrolls down, though, the impact was more negative than expected as the number of workers employed during the previous month declined by 33,000 instead of increasing by 90,000 as analysts estimated. In comparison, August's mark of 169,000 was upwardly revised from 156,000. In the private sector, 40,000 people were out of work.

On the other hand, weather distortions did not influence the unemployment rate as the rate considered people missing their jobs as employed. The figure fell surprisingly to a sixteen year low of 4.2%, while forecasts were for the figure to remain steady at the previous mark of 4.4%.

Good news also came from average earnings, with workers enjoying an increase of 0.5% m/m in their average hourly payments in September, following a rise of 0.2% in August. On a yearly basis, wages jumped by 0.2 percentage points to grow by 2.9%, approaching the 3.0% needed for inflation to reach the Fed's 2.0% target according to analysts.

The participation rate rose from 62.9% to 63.1%, the highest level seen since September 2013.

In the wake of the labour data, the dollar index surged to a 2 ½ -month high of 94.50 before it slipped back to 94.15, being 0.24% up on the day. Dollar/yen also touched a 2 ½ month high at 113.40, making a daily gain of 0.47%. Dollar/swissie was up 0.40% at a 3 ½-month high of 0.9816.

In Canada, September's labor report revealed that the economy added lower jobs than expected as the increase in full-time positions slightly offset the significant reduction in part-time jobs. Particularly, part-time positions experienced the largest drop ever seen, dropping by 102,000 after rising by 100,400 in August. In contrast, 112,000 people became full-time employers – the highest time since 2006 – following the departure of 88,100 persons in the previous month and adding 10,000 people to the labour force. The Canadian unemployment rate stood flat at a 9-year low of 6.2%.

Dollar/loonie struggled to gain ground, retreating to 1.2556 after it peaked at a 5-week high of 1.2597.

Euro/dollar was trading weak during the session, pulling to a 9-week low of 1.1668 in the wake of the US nonfarm payrolls. Still, it managed to edge up to 1.1692 afterwards.

Meanwhile, the Catalonia's head of foreign affairs, Raul Romeva, speaking on BBC on Friday, said that the region's parliament would decide on breaking away from Spain on Monday despite the Spanish Constitutional Court banning the parliamentary session from going ahead. This could potentially lead to more scenes of violence in the region. The Spanish Prime Minister, Mariano Rajoy, will meet with ministers later today as tensions remain high, with two large banks already planning to reallocate their operations elsewhere in Spain to avoid any negative economic effects due to ongoing tensions.

A better than expected September Halifax house price index reading out of the UK did little to boost sterling as May's leadership was in doubt after a disappointing speech at the Conservatives' annual conference, with former Conservative chairman calling her to step down. However, May's statement of providing "a calm leadership" provided some short-lived gains to the currency before it dived to a one-month low of $1.3024 – the pair was last at $1.3041.

In commodities, oil prices reversed yesterday's gains as energy producers shut down their operations in the Gulf of Mexico ahead of the tropical storm Nate which heads towards the region after causing fatalities to a number of Central American countries. WTI crude lost 2.89% of its value during the day, last trading at a three-week low of $49.42 per barrel, while Brent retreated by 2.26% to $55.73.

Gold approached a two-month low of $1,260.43 per ounce before it bounced back to $1,265.35.

Week beginning 9 October 2017

• Business investment lifts, but recovery uneven and upside constrained.
• Australia: Westpac-MI Consumer Sentiment, NAB business survey, housing finance.
• RBA: Financial Stability Review, Deputy Governor speaking.
• NZ: card spending, house prices and sales.
• China: aggregate financing, Caixin services PMI.
• Euro Area: industrial production.
• US: FOMC meeting minutes, retail sales, CPI.
• Key economic & financial forecasts.

Information contained in this report was current as at 6 October 2017.

Business Investment Lifts, But Recovery Uneven and Upside Constrained

Reserve Bank of Australia Governor Philip Lowe struck a positive tone on business investment in the Statement accompanying the RBA's policy decision on October 3. He stated that: "Over recent months there have been more consistent signs that non-mining business investment is picking up. A consolidation of this trend would be a welcome development." Here we consider the case for increased optimism on business investment and assess the outlook.

Business investment by the non-mining sectors strengthened over the past year. Annual growth lifted to 4.6% in mid-2017, we estimate, a pace approaching the historic average of 4.9%. That is a marked improvement on a 1.0% outcome in mid-2016 and is the best result since 2011 to 2012, when growth averaged 7.5%. That said, the current pace falls well short of the sustained strength evident during the six years 2002 to 2007, when nonmining investment grew by a brisk 12% a year on average.

In assessing trends in business investment we will largely focus on spending by asset class. This spans equipment spending (which accounts for 40% of the total); non-residential building (a 25% weight); intellectual property products, including computer software (a 20% weight); infrastructure (a little in excess of 10%) and livestock.

Growth in business investment to date has been uneven. Nonbuilding activity was flat over the past year, while equipment spending grew at a sub-par pace, up 2.0%, relative to a longrun average of 6%. Strength has been concentrated in the smaller asset class of infrastructure activity, accounting for almost 2ppts of the 4.6% rise in total investment. Computer software spending is advancing at a solid clip, albeit below its long run average, accounting for 1.4ppts of the rise in investment. Livestock, which typically has a neutral impact, added 0.6ppts, as some herd rebuilding occurs.

The uneven nature of the uptrend in business investment may prove to be a temporary feature, ahead of an emerging more broadly based upswing. Alternatively, it may be symptomatic of more general uneven economic conditions, a view that we favour, as explored below.

Infrastructure activity has been the stand-out performer recently. Private non-mining infrastructure work rebounded by 19% in the year to June 2017, partially reversing a sharp fall over the two years to mid-2015, which was followed by a flat period to mid-2016. The lift in activity is fully centred on two segments, namely: telecommunications, with some long overdue upgrading of the network; and electricity generation, with the nation facing potential power shortages. Outside of these two areas, activity is broadly flat, including segments such as roads; water & sewerage; and recreation. Near-term, prospects are for some further upside, but for growth to moderate, with the level of work done currently in line with the value of commencements.

Spending on intellectual property products (IPP), which includes R&D as well as computer software, is expanding at a solid clip. The segment notched up 7% growth over the past year, although that is still short of the long-run average of 9.5%. Businesses are focused on enhancing their technology, with a view to innovation and increased productivity. This is a mediumterm theme and the pace of growth in total IPP spending has been steady since 2014, with no sign of acceleration.

Non-residential building is at a turning point, with the prospect of a near-term lift in activity, a point that we have highlighted previously. Private approvals for the 12 months to August are 18% above that for the previous year, although we would discount this somewhat due to some slippage in pass through to commencements. Consistent with the approvals data, the latest update from the ABS capex survey included an upgrading of 2017/18 investment plans of the service sector.

The capex survey, which provides only a partial coverage of total business investment, points to a increase in service sector capex spending in the order of 10%, centred entirely on building & structures, with equipment flat.

In the building sector, more projects have received the go ahead in retail, social building (including education, health and accommodation), and particularly offices, with approvals up 75% for this segment, to be back at historic highs. This is to meet the needs of a growing population, as well as to service rapid growth in both international tourism and foreign student numbers. Having said that, in the post GFC period, there is no sense that the sector is set for a sustained strong upswing, with the absence of a speculative dynamic. Rather, the latest round of projects will satiate current demand, following which activity will likely either consolidate or dip temporarily.

Equipment spending, 40% of non-mining business investment, has been underwhelming. Growth was a sluggish 2% over the past year, coming on the heels of a 1% rise the year prior. There are some bright spots. The manufacturing sector reports that agriculture and some parts of mining have lifted equipment spending of late, on the back of stronger income growth associated with higher commodity prices. However, a key driver of equipment spending is the need for businesses to expand capacity to meet rising demand from the household sector. It is this driver that is underperforming. The RBA Governor made reference to this point in his Statement of October 3, "Against this, slow growth in real wages and high levels of household debt are likely to constrain growth in household spending".

Competing views on the outlook for the household sector are critical to prospects for a broadening and acceleration in the uptrend in non-mining business investment. On this matter, the Westpac Economics' view differs from that of the official family.

We expect consumer spending growth to be stuck at a lacklustre 2.5% annual pace, associated with persistent weakness in wages growth. In addition, we expect home building activity to weaken materially in 2018, led by a correction in the high-rise segment. By way of contrast, the forecasts in the May Federal Budget are more optimistic for 2018/19, expecting: consumer spending growth to lift to 3.0%, associated with a 3.0% increase in wages and a solid 1.5% rise in employment; and home building activity to decline relatively gradually, -4% vs Westpac at -7%. If household demand growth plays out as we expect in 2018 then the risk is that equipment spending remains relatively lacklustre.

In summary, business investment by the non-mining sectors has emerged from the softness apparent for much of the post GFC period. There is a need to add to the capital stock to meet the needs of a relatively fast growing population. Moreover, the negative spill-overs from the mining investment downturn have faded and world growth has improved. On balance, we see non-mining business investment growth continuing at around the current 4½% pace, supported near-term by the emerging lift in non-residential building activity.

However, we also expect the investment recovery to be uneven, reflective of the uneven nature of the broader economic expansion, with the household sector the key source of weakness. Equipment spending, which represents 40% of total investment by the non-mining sectors, will remain relatively subdued in this environment. If so, it is unlikely that the non-mining business investment cycle surprises materially to the upside, diminishing the prospect of the economy accelerating to a sustained above trend growth path. Our point forecast for December 2018, is total non-mining business investment growth of 5.0%yr, with equipment broadly flat.

The Week that Was

This week, we have been firmly focused on Australia and the outlook for the RBA.

The statement released by the RBA following its October meeting carried a number of subtle but interesting changes. Foremost was the shift in language around non-mining investment - see the essay above for further detail. Attention shifted from the outlook (which was characterised as having "improved recently" in September) to current experience, given "consistent signs that non-mining business investment is picking up". Further, the "large pipeline of infrastructure investment" that we have often discussed was also noted. This is best interpreted as the RBA gaining confidence in their expectation of improving business investment into 2018. Still, a constrained household sector continues to bother the RBA, the statement noting that "slow growth in real wages and high levels of household debt are likely to constrain growth in household spending". Though the Australian dollar has fallen from around USD0.80 to USD0.78 since the September meeting, the commentary on the currency ("weighing on the outlook for output and employment") was left unchanged. On the outlook for activity therefore, there is still a high degree of uncertainty, all the more so given this week's data outcomes.

The other key point to note regarding monetary policy is the RBA's clear concern over household debt, particularly that it continues to grow at a multiple of income growth. This has been a key theme in recent speeches by RBA staff, and in the October statement, it received greater prominence, coming ahead of the current conditions discussion in the housing paragraph. As we emphasise, it remains our view that the RBA and APRA will continue to target the household debt issue with macroprudential policies rather than rates. Nonetheless, this remains an important theme to track.

On to this week's Australian data. All three key releases spoke to our concerns regarding the outlook, most notably retail sales.

For the month of August, retail sales fell 0.6% against the market's expectation of a 0.3% rise. See the chart of the week box for further detail. This outcome pairs very well with the 'family finance' and 'time to buy detail' from our Westpac-MI Consumer Sentiment survey (an update will be received next week), with each of these measures consistently printing at below average levels through 2017. Combined with our expectation that wage gains will remain subdued versus history, this is a key reason as to why we believe that the RBA's expectations regarding the consumer will be disappointed in 2018.

Also informing on a component of household demand, the dwelling approvals release for August was broadly in line with expectations, but more importantly continued to suggest that residential investment will be a negative for growth in 2018 (versus the RBA's expectation that it will be broadly neutral). High-rise approvals, having fallen 50% over the past year, are expected to fall further. Low-rise approvals (townhouses up to 4 stories) have pushed higher in recent months, but in August single-home approvals lost some of their recent momentum. Auction markets and house price measures are softening (to varying degrees) across the major cities, hence single-home and low-rise approvals should flatten out in coming months. Given the substantial tightening in restrictions around foreign buyers and developers, the risks to the outlook for residential construction are likely skewed to the downside.

Finally on trade, here we received another surprise in August, this time to the upside as exports increased while imports stalled. On exports, iron ore was the big positive, up on higher prices, against which there were declines in coal, gold and base metals. The bigger point though is that for the September quarter as a whole, the trade data is not as constructive for growth as we had hoped. Hence the positive contribution we have pencilled in from net exports for GDP may not come to pass. Currently the data imply a nil contribution from net exports in Q3.

On the international scene, at the beginning of the week, we received a positive update on China, with both official PMIs rising to multi-year highs. Despite strength in production and new orders, employment remains a concern. Elsewhere in Asia, Japan remained a stand out, while India and Indonesia continued to experience more moderate expansions amid considerable uncertainty. Broadly, these updates continue to suggest that the global uptrend in trade is likely to persist, albeit with growth slowing over the coming year.

Also, for those with an interest in Europe, a quiet week has seen us take stock of the state of the Continent's consumer and the likely outlook for household demand.

Chart of the week: retail sales

For the month of August, retail sales fell 0.6% against the market's expectation of a 0.3% rise. Further, July's flat result was revised lower to a 0.2% fall. The combined July/August result is the weakest two month period since October 2010 (which came near the end of the RBA's 2009-10 tightening cycle) and leaves annual growth at 2.1%yr, its weakest result since June 2013. The detail of the report highlighted that the weakness in sales was broad based across subsectors and states.

While monthly retail sales are a nominal measure, and thus can be weighed down by price discounting, we doubt that underlying retail volume growth will be robust. This in turn points to significant downside risks to the Q3 consumption estimates in the national accounts and wider GDP growth.

New Zealand: Week ahead & Data Wrap

More of the same

The latest Quarterly Survey of Business Opinion indicates that election uncertainty may have weighed on sentiment about the broader environment, but firms remain content about their own prospects. The survey suggests that the New Zealand economy is on track to continue to grow at a modest pace, but that the June quarter is likely to have marked the peak for growth this year.

General business sentiment fell from a net 17% positive to a net 7% in the September survey. The survey was conducted over the September month, so as we've seen with other measures such as our consumer and regional confidence surveys, uncertainty about the outcome of the 23 September general election may have weighed on respondents' minds.

In contrast, firms showed fewer concerns about their own performance. A net 13% of firms reported improved conditions over the last quarter, compared to a net 17% in June. Meanwhile, expectations for the quarter ahead picked up a little compared to the last survey, and have been fairly consistent over the past year.

The detailed survey questions painted a similarly positive picture. Reported hiring over the last quarter rose to an equal-record high, and intentions for the next quarter were also high. Investment intentions were steady for plant and equipment, and up sharply for buildings. Profits were reported as broadly flat over the last quarter, but were expected to pick up.

There was some variation in fortunes across sectors. Retailers and manufacturers were generally more positive over the quarter, while the building and services sectors saw a drop in confidence. Notably, 41% of firms in the building sector reported that labour is their biggest constraint on growth, compared to 32% who cited lack of demand.

In recent times we've discussed the slowdown in construction activity, including the extent to which it has been the result of tighter financing conditions affecting demand, supply-side constraints such as skill shortages, and/or other factors. The results of this survey suggest that - in the commercial property space at least - demand remains strong, and capacity constraints seem to be the greater factor.

The QSBO also provides an array of information about capacity constraints and price pressures. The indicators from the September quarter survey were mixed. On the stronger side, the difficulty of finding workers rose to its highest level since 2007. Capacity utilisation fell slightly for a second quarter, but it remains at one of the highest levels on record.

However, these apparent capacity pressures haven't translated to a similar lift in the rate of inflation. More firms are reporting cost increases, but this share has remained relatively low in the years since the Global Financial Crisis. Despite the capacity constraints that were evident elsewhere in this survey, fewer builders reported a rise in costs and prices this quarter.

Similarly, the share of firms reporting that they had raised their prices or intended to do so was unchanged in the September quarter. At their current levels, these measures are consistent with inflation near the Reserve Bank's target midpoint of 2%, but they don't suggest a risk of inflation breaking to the upside in the near term.

Consumer prices for the September quarter will be published later this month. We're putting the final touches on our forecast, which currently stands at a 0.5% increase for the quarter. This would see the annual inflation rate lift from 1.7% to 1.9%. Our forecast is quite a bit higher than the Reserve Bank's pick of 0.2% for the quarter (1.6% annual). However, most of the difference is in the tradables component - including volatile factors such as food and fuel prices, which the Reserve Bank has more scope to look through.

In general, the high-level indicators of economic activity, such as the QSBO and our quarterly confidence surveys, have been only a touch softer for the September quarter compared to June. That's consistent with our view that the economy will continue to grow at a modest pace over the rest of this year, but that the 0.8% rise in June quarter GDP is likely to mark the high point for growth this year. The June quarter benefited from a range of temporary factors that won't be repeated in the September quarter figures: a boost to tourism spending from two major sporting events, and a rebound from earlier disruptions in dairy production and rail transport.

In fact, dairy output is shaping up to be a drag on near-term GDP growth again. Wet weather has hampered pasture growth in the early part of this season, and milk collections to date are down on the previous season (which were already subdued, given the pressures generated by low milk prices at the time). Fonterra's forecast of a 3% rise in milk collections for the season now looks like more of a stretch than it did at the start of the season.

All else equal, lower than expected volumes from New Zealand are often offset by higher world prices for dairy products - an idea that seemed to pervade the market ahead of this week's GlobalDairyTrade auction. The surprise 2.4% fall in auction prices served as a reminder that supply is only one half of the story, and that the strength of world demand shouldn't be taken for granted.

We have maintained our forecast of the farmgate milk price for this season at $6.50/kg, compared to Fonterra's forecast of $6.75/ kg (with other forecasters sitting somewhere around that level). That said, the level of production and hence prices remains very sensitive to the weather over the next few months, as dairying enters its peak period.

For the week ahead, the economic highlights will include updates on the housing market and consumer spending during September - and most importantly, a potential resolution about the shape of the next Government. On Saturday the special vote count will be completed, and the final seat allocations announced. After that, the negotiations among the major political parties will be full speed ahead - NZ First leader Winston Peters has given a selfimposed deadline of 12 October for making a decision about who to align with.

Data Previews

Aus Oct Westpac-MI Consumer Sentiment

Oct 11 Last: 97.9

• The Westpac-Melbourne Institute Consumer Sentiment Index rose 2.5% to 97.9 in September from 95.5 in August. Despite the lift, pessimists continue to outnumber optimists with pressures on family finances, concerns around interest rates, deteriorating housing affordability, rising energy prices and weak wages growth offsetting any boost from improved jobs growth.
• This month's survey is in the field over the week ended Oct 8. Factors that may influence confidence include: the RBA's decision to again leave rates on hold at its Oct meeting; more signs of cooling across Australia's major housing markets; and a disappointing retail update showing a surprise fall in sales. Both the AUD and ASX are down over the last month. Against this, jobs data has continued to perform strongly.

Aus Aug housing finance (no.)

Oct 12, Last: 2.9%, WBC f/c: flat

Mkt f/c: 0.5%, Range: -1.6% to 1.5%

• The number of housing finance approvals to owner occupiers posted another surprisingly strong gain in July up 2.9% and 4.5% ex refinancing. Note that the macro prudential tightening measures introduced in late March and associated increases in rates for investor and 'interest only' loans in March and June have likely given indirect support to owner occupier loan activity. Indeed, the value of investor loans fell 3.9% in July.
• The full impact of these shifts is still coming through. Industry data suggests owner occupier loans were again firm in August but with some signs that the recent lift is levelling out. We expect owner occupier approvals to be flat in the month. The focus will again be on investor loans and to a lesser extent construction-related finance which has shown a notable lift in recent months.

NZ Sep retail card spending

Oct 10, Last: -0.2%, Westpac f/c: 0.5%, Mkt: 0.5%

• Retail spending was softer than expected in August, with spending levels down 0.2%. That followed a fall of 0.6% in July.
• Spending levels have been broadly flat for several months now. In part, this is because of the softness in prices, particularly for imported consumer goods. However, it's likely that the softening in the housing market is also dampening household spending, particularly for items such as household furnishings.
• Increases in fuel prices should push retail spending higher in September. However, with lingering softness in the housing market, and an easing in tourist arrivals following their surge earlier in the year, the underlying pace of spending looks set to remain modest.

NZ Sep house prices and sales

Oct 9-13 (tbc), Sales last: +0.6%, Prices last: 0.5%yr

• New Zealand's housing market has slowed substantially over the last year. House sales are down by a quarter, and sale prices have flattened out. Prices have fallen slightly in Auckland and Christchurch, while the rate of increase in the rest of the country has slowed.
• There was a tentative stabilisation in August, with sales and prices ticking up slightly. A sharp slowdown in the rate of new listings - property owners don't sell into a weak market if they don't have to - has helped to rebalance the market.
• Nevertheless, we think this improvement could be shortlived, as higher mortgage rates and lending restrictions remain the dominant factors. And to the extent that election uncertainty has been a factor recently, it will surely have weighed on the market again in September.

US Sep CPI

Oct 13, last: 0.4%, WBC: 0.5%

• Inflation has been an ongoing disappointment in the US in 2017, with core and headline CPI inflation having fallen back below the 2.0%yr medium-term target as the PCE measure remained there.
• However in August, headline prices rose 0.4% as gasoline prices jumped over 6% and rents also experienced a strong month. Annual headline inflation lifted from 1.7%yr to 1.9%yr.
• Come September, hurricane season will see gasoline run higher again and headline prices increase 0.5% overall. Annual inflation is therefore set to bounce back above 2.0%.
• These inflationary influences will prove transitory, so it is best to focus on core inflaton. This measure is expected to print a more modest 0.2%, 1.7%yr. Further out, expect to see headline and core inflation settle a little below the 2.0%yr medium-term target of the FOMC.

US Sep retail sales

Oct 13, last: -0.2%, WBC: 1.2%

• Aug was a soft month for US retail, in part because the arrival of hurricanes Irma and Harvey weighed heavily on car sales in affected regions. Nationwide sales were down 1.6% as a result. That said, given both headline and core retail sales fell 0.2% in the month, households also clearly stocked up ahead of the storm, offsetting some of the weakness.
• Come Sep, not only will there be a sharp reversal in car sales (Reuters has reported sales of new cars in the Houston area were up 109% in the three weeks after the storm versus the three weeks prior), but significant household spending will also need to take place to replenish household stocks and make necessary initial repairs to buildings. As a consequence, retail sales will jump in Sep.
• It is worth highlighting however the 0.2% fall in core sales in Aug and the downward revisions to Jul. These results imply that, sans weather, the US consumer remains reluctant to spend. This is a key reason why GDP growth is likely anchored to 2.0% despite job growth and sentiment.