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In focus today

Focus is on the German inflation data for September. Last week both the French and the Spanish inflation prints came in lower than expected and it will be very interesting to see if this is echoed in the German data.

Focus for the remainder of the week will primarily be on the euro area inflation data for September on Tuesday and the US September Jobs Report on Friday. Ahead of the labour market report, September ISM manufacturing and services indices together with August JOLTs data will also be due for release. The Polish Central Bank announces its base rate on Wednesday. Moreover, in China the National Day holiday starts on Tuesday and lasts for seven days.

Economic and market news

What happened overnight

In China, the private sector Caixin PMI indices declined in September, with the manufacturing gauge falling to 49.3 (August: 50.4), and the services leg edging down to 50.3 (August: 51.6). The official PMIs from NBS were also released, with the manufacturing PMI improving slightly in September to 49.8 (August: 49.1) - the highest print in five months. The non-manufacturing index dropped to 50.0 from 50.3 in August, while the composite measure increased to 50.4 from 50.1. While the readings were generally to the soft side, indicating a challenged economy, we see upside risks to our growth estimate of 4.8% this year and next, given the massive stimulus measures announced last week.

What happened since Friday

In the US, the PCE price index in August stood at 2.2% y/y (0.1% m/m SA), while the core measure was to the soft side at 0.1% m/m SA (cons: 0.2% m/m). The seasonally adjusted monthly core services PCE inflation remained steady and close to June-July pace (0.23% m/m, from 0.24%). On an annual basis, core services inflation picked up slightly to 3.8% (from 3.7%), which is still somewhat above average pre-pandemic pace (circa 2.5%). The downside surprise was mostly driven by the core goods component (-0.17% m/m SA), where deflation has been observed for quite a while now. Overall, a non-dramatic reading, with a muted market reaction as well.

Revised data from the University of Michigan showed consumer sentiment rising to 70.1 in September from 67.9 in August. Inflation expectations were slightly mixed, with the 1-year outlook ticking down to 2.7% in September (August: 2.8%) and the 5-year gauge increasing to 3.1% (August: 3.0%).

In the euro area, both French and Spanish inflation data for September were weaker than expected. French HICP inflation fell to 1.5% y/y from 2.2% y/y in August (cons: 2.0%), driven by lower energy prices due to base effects and monthly declines. Momentum in French services inflation is softening somewhat, though the decline relates to the high prices increases in August due to the Olympics. Spanish HICP inflation declined to 1.7% y/y from 2.4% y/y in August (cons: 1.9%). The soft country readings support the ECB's confidence in inflation returning to target.

In Norway, the seasonally adjusted NAV-unemployment rate rose to 2.1% in September, indicating that the labour market remains relatively tight despite some recent weakness in employment and unfilled vacancies. Retail sales for August grew 0.1% m/m but seem to be trending moderately downward after extreme summer volatility and a pick-up in real wage growth. We still expect private consumption to pick up going forward, but the figures at least show moderate risk of an immediate boom in consumption.

In Japan, Shigeru Ishiba won the LDP leadership election on his fifth attempt and will become Japan's next prime minister. Some of his pledges include of cleaning up the ruling party, revitalising the economy and addressing security threats from powerful neighbours. On Sunday, Ishiba said that "monetary policy must remain accommodative as a trend given current economic conditions", while noting that rate decisions rest with the Bank of Japan (BoJ), with which the government will cooperate. Ishiba has previously criticized the BoJ's aggressive monetary easing.

In Middle East, Israel's killing of Hezbollah leader Nasrallah marks a significant escalation in the ongoing conflict. For now, we think all the signals coming from Iran point towards them still being reluctant to escalate and we think that will be the case.

Equities: Global equities were higher on Friday, buoyed by a rally in Chinese stocks, while the US markets ended lower. Last week, global equities overall saw gains, with the Chinese markets experiencing their best week since 2008; a story in its own right. It was particularly interesting to see materials and consumer discretionary sectors outperforming, while defensives and minimum volatility categories struggled. The massive shift in focus last week from the US, services, AI, lower inflation, and softer monetary policy to a resurgence driven by the traditional Chinese property market growth inverted the familiar equity leadership we have observed for a couple of years.

As discussed last week, when markets become very stretched and oversold, and key fundamentals are changing, reversals can occur dramatically. This was evident last week and has continued this morning as policy measures are overshadowing the weak service and manufacturing Caixin PMI data. Chinese stocks are surging, with increases of 3-5%, continuing their ascent. Conversely, the rest of Asia is mostly lower, with Japanese stocks declining almost 5% following the surprising election of Shigeru Ishiba as new prime minister. US and European futures are very close to unchanged. However, it is clear that Europe is benefiting far more from the uplifted sentiment in China than the US.

FI: EUR rates fell across the curve on Friday morning, as French/Spanish inflation figures came out markedly softer than expected. Part of the initial move faded through the session, but EUR swap rates were nevertheless 5-6bp lower across tenors by the close. Markets now price in 20bp ahead of the October meeting, and we agree that the recent data (inflation/PMIs) have moved the balance of risk in favour of another 25bp. Hence, we have changed our ECB call, now expecting the ECB to cut in October and December, before resuming to quarterly cuts in 2025. Our new profile also includes a rate cut in December 2025, thus bringing the deposit rate to 2% then.

FX: Last week marked the 4th consecutive week of a weaker USD, although the second half of Friday's session saw some support to the USD which closed the day unchanged. The yen had a strong session with USD/JPY declining four figures as Ishiba's unexpected LDP presidency win is seen as hawkish for BoJ prospects. The NOK was as one of last week's underperformers whereas the SEK found support broadly, with EUR/SEK trading below 11.30 and USD/SEK briefly touching new YTD lows below 10.05.

Key Highlights

• EUR/USD started a consolidation phase below the 1.1200 resistance.
• A key bullish trend line is forming with support at 1.1145 on the 4-hour chart.
• Gold rallied to a new high near $2,685 before it faced resistance.
• Bitcoin extended gains and traded above the $65,000 level.

EUR/USD Technical Analysis

The Euro attempted an upside break above the 1.1200 level against the US Dollar. EUR/USD failed to continue higher and started a consolidation phase.

Looking at the 4-hour chart, the pair remained stable above the 1.1120 pivot level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour).

On the downside, immediate support sits near the 1.1140 level. There is also a key bullish trend line forming with support at 1.1145 on the same chart, below which the pair might test 1.1120. The next key support sits near the 1.1100 level and the 100 simple moving average (red, 4-hour).

Any more losses could send the pair toward the 1.1065 support zone. On the upside, the bears are active near the 1.1200 level. A close above the 1.1200 level could set the tone for another increase.

The next major resistance could be 1.1240. A clear move above the 1.1240 level might send EUR/USD toward 1.1320. Any more gains might call for a test of the 1.1350 zone.

Looking at Gold, the bulls remained in action and pushed the price to a new all-time high near $2,685 before bears appeared.

Upcoming Economic Events:

• Dallas Fed Manufacturing Business Index for Sep 2024 – Forecast -4.5, versus -9.7 previous.
• Chicago Purchasing Manager’s Index for Sep 2024 – Forecast 46.5, versus 46.1 previous.

Daily Pivots: (S1) 157.07; (P) 160.28; (R1) 161.99; More....

Intraday bias in EUR/JPY stays on the downside for the moment. Current development suggest that corrective pattern from 154.40 might have completed with three waves to 163.47 already. Deeper decline would be seen o retest 154.40/155.14 support zone. For now, risk will stay mildly on the downside as long as 163.47 resistance holds, in case of recovery.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). The range of consolidation should have been set between 38.2% retracement of 114.42 to 175.41 at 152.11 and 175.41 high. However, decisive break of 152.11 would argue that deeper correction is underway.

Asian financial markets are displaying significant divergence today. Japan's Nikkei index has plummeted over -4%, reacting sharply to the ruling Liberal Democratic Party's election results from last Friday. Shigeru Ishiba, the newly elected LDP leader and Japan's incoming Prime Minister, attempted to soften his previously hawkish stance on the BoJ monetary policy during a interview on Sunday. Despite these efforts, investors remain concerned about the impact of further monetary tightening on the appreciation of Japanese Yen, and the subsequent effects on the nation's export-driven economy.

In stark contrast, stock markets in Hong Kong and mainland China are continuing their robust rally, bolstered by stimulus measures implemented last week. The market has largely ignored the disappointing PMI data released from China today. However, there is growing pressure for additional fiscal policies to supplement monetary efforts. Proposals include expanding the government's balance sheet to stimulate consumer spending and enhance social welfare programs. China's economy still faces challenges from subdued domestic demand and an increasingly adverse global trade environment.

Turning to the currency markets, Kiwi and Aussie are leading gains as the new week begins. Kiwi is particularly strong, underpinned by exceptionally positive business confidence data. Sterling is also performing well, ranking as the third strongest currency today so far. On the other end of the spectrum, Yen is the weakest performer, although this appears to be just consolidation following last week's gains, with prospects for further strengthening ahead. Swiss Franc and the Dollar are also showing weakness, while Euro and Loonie are trading in the middle.

Looking ahead, EUR/USD will be the main focus this week, with Eurozone inflation data and US non-farm payrolls being critical in shaping the next policy decisions from ECB and Fed.

Technically, EUR/USD is so far struggling to build upside momentum to push through 1.1274 resistance (2023 high). However, strong break of this level will confirm resumption of the whole up trend from 0.9534 (2022 low). That would set the stage for further rally towards 61.8% projection of 0.9534 to 1.1274 from 1.0665 at 1.1740 in Q4 by the end of the year.

In Asia, at the time of writing, Nikkei is down -4.56%. Hong Kong HSI is up 3.01%. China Shanghai SSE is up 5.70%. Singapore Strait Times is up 0.20%. Japan 10-year JGB yield is up 0.0551 at 0.862.

Japan’s industrial output drops -3.3% mom in Aug, set for recovery in coming months

Japan's industrial production took a sharp hit in August, contracting by -3.3% mom, a significant miss compared to market expectations of -0.5% mom decline.

The seasonally adjusted production index for factories and mines stood at 99.7, based on the 2020 benchmark of 100. Among the 15 industrial sectors surveyed, 12 experienced a decrease in output, with motor vehicles leading the decline at -10.6% mom. This drop was largely attributed to operational disruptions at more than a dozen Toyota Motor Corp. plants, caused by Typhoon Shanshan.

Despite this steep decline, Japan's Ministry of Economy, Trade, and Industry maintained its assessment that industrial production remains "indecisive." Manufacturers polled by the ministry are forecasting a rebound, with output expected to grow by 2.0% mom in September and further rise by 6.1% mom in October.

On a brighter note, Japanese retail sales increased by 2.8% year-on-year yoy in August, surpassing median forecast of 2.6% yoy . Compared to the previous month, retail sales posted 0.8% mom increase, following 0.2% mom rise in July, indicating steady consumer demand.

China’s PMI data points to continued manufacturing contraction and weakening services sector

China’s economic data for September painted a mixed picture, with manufacturing remaining in contraction and services sector losing steam.

Official NBS Manufacturing PMI edged up slightly from 49.1 in August to 49.7, above expectations of 49.5 but still below the 50-mark, signaling contraction for the fifth consecutive month. Export orders continued to weaken, with the new manufacturing export order subindex dropping from 48.7 to 47.5.

Meanwhile, NBS Non-Manufacturing PMI fell from 50.3 to 50.0, marking the end of 20 straight months of expansion. Within the non-manufacturing sectors, construction showed a marginal improvement, with its subindex rising to 50.7, but services dipped into contraction territory, falling from 50.2 to 49.9.

NBS PMI Composite rose modestly from 50.1 to 50.4. According to the NBS, extreme weather events like typhoons and the conclusion of the summer travel season significantly impacted transport, culture, and entertainment sectors.

Caixin Manufacturing PMI told a similar story, dropping from 50.4 to 49.3, the lowest reading since July 2023, while Caixin Services PMI also underperformed, falling from 51.6 to 50.3, a 12-month low. Caixin's Composite PMI slipped from 51.2 to 50.3, reflecting broad weakness in both manufacturing and services.

Wang Zhe, senior economist at Caixin Insight Group, noted, "market conditions in the manufacturing sector worsened in September, marked by a limited expansion in supply and a significant contraction in demand.” Business confidence also fell to its "lowest level in recent years".

NZ ANZ business confidence soars to 60.9, raising concerns of overreaction to RBNZ rate cuts

New Zealand’s ANZ Business Confidence Index saw a significant rise in September, jumping from 50.6 to 60.9, reflecting growing optimism in the business sector.

Key components of the survey also painted a positive picture. The own activity outlook rose from 37.1 to 45.3, while profit expectations surged from 8.0 to 22.2, suggesting a more upbeat economic environment.

Although cost expectations fell slightly from 68.3 to 66.8, wage expectations edged up from 75.1 to 76.4. Pricing intentions also increased from 41.0 to 42.8, while inflation expectations remained unchanged at 2.92%, marking the second consecutive month below 3%.

ANZ highlighted that this survey underscores " the risk that the economy’s response to lower interest rates could be more vigorous than is generally expected."

Inflation remains a concern. Firms are planning to raise prices by an average of 1.6% over the next three months, a notable increase from the June low of 1.2%. While wage growth has moderated from 4% in April to 3% now, and cost expectations have eased to 2.4%, inflationary pressures still require careful monitoring by RBNZ to ensure price stability.

US NFP and Eurozone CPI to Steer Fed and ECB’s Upcoming Decisions

The upcoming week features a series of critical economic data releases are poised to shape monetary policy decisions by some major central banks.

In the US, the primary question is whether Fed will proceed with a consecutive 50 bps rate cut on November 1. Currently, fed fund futures reflect a 53.3% probability of such a move, indicating that the market is evenly split on the outcome.

Fed have clearly indicated that as disinflation efforts are progressing satisfactorily, there is a growing need to focus more on the labor market, another half of the dual-mandate. Consequently, the forthcoming September non-farm payroll report, due this Friday, will be of paramount importance. Among the labor statistics, headline job growth and the unemployment rate are expected to be the most influential factors in Fed's decision-making process. Wage growth, although still relevant, may receive slightly less emphasis given the current context.

In addition to employment data, ISM will release its manufacturing and services indexes, and they will be closely watched. Any unexpected deterioration in the services sector could dampen the current bullish sentiment in equity markets and rekindle fears of recession.

In the Eurozone, market sentiment has shifted sharply in favor of a 25bps rate cut by the ECB on October 17, with probability estimates soaring from 25% to 75% after dismal PMI readings. ECB officials have noted the lack of fresh economic data, but the anticipated release of both headline and core CPI for September may offer new insights that could sway the decision.

In Japan, the new LDP leader Shigeru Ishiba appeared to temper his support for an imminent BoJ rate hike. Over the weekend, he reiterated that monetary easing should continue, citing ongoing concerns over deflation. This could leave markets looking toward BoJ’s summary of opinions and the Tankan survey for further guidance. BoJ remains divided on the timing of future rate hikes, and this division may persist in the coming weeks.

This position of Ishiba suggests that the markets may need to recalibrate their expectations regarding BoJ policy moves. Focuses would be back on BoJ's forthcoming summary of opinions and the Tankan survey for guidance.

Elsewhere, Swiss CPI could reinforce that SNB is on course for another rate cut in December.

Here are some highlights for the week:

• Monday: Japan industrial production, retail sales, housing starts; New Zealand ANZ business confidence; Germany import prices, CPI flash; UK Q2 GDP final, current account, M4 monthly supply, mortgage approvals; Swiss KOF economic barometer; US Chicago PMI.
• Tuesday: New Zealand building permits; Japan unemployment rate, Tankan survey, PMI manufacturing final, BoJ summary of opinions; Australia retail sales, building approvals; Swiss retail sales, PMI manufacturing; Eurozone PMI manufacturing final, CPI flash; UK PMI manufacturing final; Canada PMI manufacturing; US ISM manufacturing, construction spending.
• Wednesday: Japan monetary base, consumer confidence; Eurozone unemployment rate; US ADP employment.
• Thursday: Australia goods trade balance; Swiss CPI; Eurozone PMI services final, PPI; UK PMI services final; US jobless claims, ISM services, factory orders.
• Friday: Swiss unemployment rate; France industrial production; UK PMI construction; US non-farm payrolls; Canada Ivey PMI.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 157.07; (P) 160.28; (R1) 161.99; More....

Intraday bias in EUR/JPY stays on the downside for the moment. Current development suggest that corrective pattern from 154.40 might have completed with three waves to 163.47 already. Deeper decline would be seen o retest 154.40/155.14 support zone. For now, risk will stay mildly on the downside as long as 163.47 resistance holds, in case of recovery.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). The range of consolidation should have been set between 38.2% retracement of 114.42 to 175.41 at 152.11 and 175.41 high. However, decisive break of 152.11 would argue that deeper correction is underway.

China’s economic data for September painted a mixed picture, with manufacturing remaining in contraction and services sector losing steam.

Official NBS Manufacturing PMI edged up slightly from 49.1 in August to 49.7, above expectations of 49.5 but still below the 50-mark, signaling contraction for the fifth consecutive month. Export orders continued to weaken, with the new manufacturing export order subindex dropping from 48.7 to 47.5.

Meanwhile, NBS Non-Manufacturing PMI fell from 50.3 to 50.0, marking the end of 20 straight months of expansion. Within the non-manufacturing sectors, construction showed a marginal improvement, with its subindex rising to 50.7, but services dipped into contraction territory, falling from 50.2 to 49.9.

NBS PMI Composite rose modestly from 50.1 to 50.4. According to the NBS, extreme weather events like typhoons and the conclusion of the summer travel season significantly impacted transport, culture, and entertainment sectors.

Caixin Manufacturing PMI told a similar story, dropping from 50.4 to 49.3, the lowest reading since July 2023, while Caixin Services PMI also underperformed, falling from 51.6 to 50.3, a 12-month low. Caixin's Composite PMI slipped from 51.2 to 50.3, reflecting broad weakness in both manufacturing and services.

Wang Zhe, senior economist at Caixin Insight Group, noted, "market conditions in the manufacturing sector worsened in September, marked by a limited expansion in supply and a significant contraction in demand.” Business confidence also fell to its "lowest level in recent years".

Full Caixin PMI manufacturing and services release.

New Zealand’s ANZ Business Confidence Index saw a significant rise in September, jumping from 50.6 to 60.9, reflecting growing optimism in the business sector.

Key components of the survey also painted a positive picture. The own activity outlook rose from 37.1 to 45.3, while profit expectations surged from 8.0 to 22.2, suggesting a more upbeat economic environment.

Although cost expectations fell slightly from 68.3 to 66.8, wage expectations edged up from 75.1 to 76.4. Pricing intentions also increased from 41.0 to 42.8, while inflation expectations remained unchanged at 2.92%, marking the second consecutive month below 3%.

ANZ highlighted that this survey underscores " the risk that the economy’s response to lower interest rates could be more vigorous than is generally expected."

Inflation remains a concern. Firms are planning to raise prices by an average of 1.6% over the next three months, a notable increase from the June low of 1.2%. While wage growth has moderated from 4% in April to 3% now, and cost expectations have eased to 2.4%, inflationary pressures still require careful monitoring by RBNZ to ensure price stability.

Full NZ ANZ business confidence release here.

Japan's industrial production took a sharp hit in August, contracting by -3.3% mom, a significant miss compared to market expectations of -0.5% mom decline.

The seasonally adjusted production index for factories and mines stood at 99.7, based on the 2020 benchmark of 100. Among the 15 industrial sectors surveyed, 12 experienced a decrease in output, with motor vehicles leading the decline at -10.6% MoM. This drop was largely attributed to operational disruptions at more than a dozen Toyota Motor Corp. plants, caused by Typhoon Shanshan.

Despite this steep decline, Japan's Ministry of Economy, Trade, and Industry maintained its assessment that industrial production remains "indecisive." Manufacturers polled by the ministry are forecasting a rebound, with output expected to grow by 2.0% mom in September and further rise by 6.1% mom in October.

On a brighter note, Japanese retail sales increased by 2.8% year-on-year yoy in August, surpassing median forecast of 2.6% yoy . Compared to the previous month, retail sales posted 0.8% mom increase, following 0.2% mom rise in July, indicating steady consumer demand.

Business sentiment has continued to charge higher as interest rate pressures ease, but activity remains soft for now.

Key results (September 2024)

• Business confidence: 60.9 (Prev: 50.6)
• Expectations for own trading activity: 45.3 (Prev: 37.1)
• Activity vs same month one year ago: -18.5 (Prev: -23.1)
• Inflation expectations: 2.92% (Prev: 2.92%)
• Pricing intentions: 42.8 (Prev: 41.0)

September saw another sharp rise in headline business confidence. It’s now back at levels we last saw in 2014.

Businesses are also feeling more optimistic about their own prospects, with a net 45% expecting trading conditions will improve over the coming year. That’s also the highest it’s been since 2014.

The lift in business confidence follows the start of the RBNZ’s easing cycle in August, with interest rates expected to trend down over the coming year.

But while businesses are feeling more optimistic about the outlook, for now they continue to face weak trading conditions. There were more businesses who reported that sales fell over the past year than reported increases, and many have shed staff.

After trending down over the past year, gauges of inflation pressures have stabilised. While not low, they’re looking more consistent with the RBNZ’s goals than they have for a long time, with inflation expected to be at 2.9% this time next year (the same as in the previous survey).

Overall, today’s results probably broadly match the RBNZ’s expectations, and likely won’t have changed their thinking ahead of next week’s policy announcement: Activity remains soft; inflation pressures have stabilised and are well down on the elevated levels we saw in recent years; and signs of a firming in growth over 2025 are starting to emerge. Against that backdrop, we’re forecasting a 25bp cut in the OCR at next week’s RBNZ policy review. The last piece of key data before the RBNZ meets will be tomorrow’s Quarterly Survey of Business Opinion, which we expect will show similar trends to today’s ANZBO survey.

• CADCHF reversed from resistance level 0.6320
• Likely to fall to support level 0.6180

CADCHF currency pair recently reversed down from the resistance level 0.6320 (former strong support which stopped the weekly downtrend at the end of 2023).

The downward reversal from the resistance level 0.6320 continues the active weekly downward impulse wave (3) .

Given the clear weekly downtrend and the strongly bearish Canadian dollar sentiment, CADCHF currency pair can be expected to fall further to the next support level 0.6180.

Gold has hit all-time highs on each of the last six trading days. Thursday’s touch of $2685 followed the strongest selling momentum since 18th September, when initial profit-taking expanded following the release of strong GDP growth estimates.

Short-term intraday profit-taking is both fuel for further gains and a sign of uncertainty at this stage of the market. Technically, gold has already crossed above the 161.8% level of the two-year rally since August 2018 – a typical rally extension pattern along Fibonacci levels. When the price has moved so far into the area of historical highs, it becomes more difficult to find new upside targets.

More attention is now being paid to looking for signs of overbought conditions. On the weekly timeframe, the RSI index is approaching the overbought level of 80. This is only the sixth time since 2008 that the index has entered this territory, with corrections of 6-20% following. The last percentage was 6% at the end of last year, but the others were much higher. In 2011, this overbought area locked in a price peak for the next nine years.

Gold’s strong rally over the past three weeks is the most dangerous part of the trend for short-term sell-side traders who get involved in selling without reliable signals. On a weekly timeframe, such a signal would be a negative weekly close. We will get this signal next Friday at the earliest. The publication of monthly data on the US labour market will reinforce its importance for the markets.