Saturday, October 30, 2010

Weekly focus: Market movers ahead


  • In the US, the coming week is heavy in economic data and events. Most important will be the FOMC meeting on 2-3 November. We expect the Fed to engage in a new round of quantitative easing. The statement is likely to leave the ultimate amount of treasury purchases open-ended and conditional on economic and inflationary developments . 
Further, the ISM index will be released on Monday and the Employment report Friday. So far, regional PMI surveys have in general improved this month, but remain on average at a low level. We expect a further, but modest, decline in the ISM manufacturing index in October to 54.0 from 54.4. 
However, we expect the new order/inventory differential to improve from the miserable September level. The employment report is likely to show a continued modest increase in non-farm payrolls of 60,000 and 80,000 in private payrolls. The distortion from Census hiring should diminish substantially, but government job growth is nevertheless expected to continue in negative territory for some months as local governments struggle to meet their budgets. 
Finally, Tuesday November 2 is the day of the US mid-term election. See the focus article in this publication for more information.
  • Most important event in Asia next week is the Bank of Japan’s monetary meeting on November 4-5. This monetary meeting has been pulled one week forward. The official reason is that BoJ will discuss purchases of exchange traded funds and real estate trusts as part of BoJ’s newly created JPY5trn fund to buy government bonds and private sector assets like corporate bonds and commercial papers. 
The main purpose without doubt is that BoJ wants to be able to respond to any action from the Fed and particularly the impact on the yen will be important for BoJ’s action. In our view BoJ will eventually expand its quantitative easing. We think that BOJ’s newly created JPY5trn fund will be expanded, but we think it will only happen in connection with this week’s monetary meeting if the quantitative easing announced by the Fed is substantially more aggressive than currently expected by the market.  
China will next week release both of its manufacturing PMIs for October. We expect a slight deterioration in the official NBS manufacturing PMI, but this is solely due to seasonal distortions. We expect the HSBC manufacturing PMI to improve slightly in October suggesting that growth will again start to improve in Q4.
  • In the Euro area all attention will be on the ECB Governing Council meeting. This week’s data on monetary developments and bank lending together with the increased demand for liquidity in the 3-month LTRO paint a picture of a healing banking sector, but also show that the financial sector is not back to normal yet. Against this background the ECB will keep the door open and will not commit itself to when to stop with full allotment at its refinancing operations. 
Trichet is likely to say something relatively downbeat on exchange rates and also make a point on the reform of the stability and growth pact, which the ECB finds too soft. Needless to say interest rates will be kept unchanged. Apart from the ECB meeting not much is scheduled. PMIs are likely to show that the Spanish economy is weakening while the message on Italy should be somewhat more upbeat. We estimate that euro area retail sales increased 0.3% in September following a soft August.
  • The big question in UK markets is whether the Bank of England will follow the Fed and apply additional monetary stimulus. Even though advance Q3 GDP surprised on the upside, we still see pretty good chance that the BoE will increase the asset purchase target by GBP50bn as the economic outlook remains bleak, driven down by the government’s austerity measures. BoE entering a second round of quantitative easing will most likely send UK yields lower and the pound weaker. We expect the PMIs to fall slightly over the week, though still indicating expansion.
  • We expect Swiss markets to trade mainly on global events in the coming week, in spite of the release of October CPI and PMI data, as well as speeches by SNB’s Jordan and Danthine,. Not least would we expect EUR/CHF to trade higher should the FOMC meeting trigger renewed dollar weakness. That said, it will be interesting to follow the SNB speeches for any comments on monetary policy, as there has been somewhat of an information vacuum lately
Full report: Weekly focus: Market movers ahead

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