Friday September 4, 2015 - 15:49:37 GMT
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WEEK AHEAD: ECONOMIC DATA ANALYSIS FRIDAY 4 SEPTEMBER 2015
CHINA CONCERNS TO DOMINATE
China outlook concerns to be highlighted by August trade report
Absence of key US data to leave markets guessing over September Fed move
MPC to remain cautious amid uncertain external backdrop
China outlook continues to dictate risk sentiment. Global risk sentiment remained subdued over the past week despite the Chinese trading week being shortened by Victory Day celebrations, which limited the scope for a further ‘risk-off’ induced sell-off in Chinese equities. Although the ECB provided itself with more flexibility to deliver additional QE should conditions warrant and amidst a further scaling back in US Fed rate hike expectations, lingering concerns over the health of China’s economy and more widely global growth prospects continued to be reflected in broad-based weakness in global stock markets, in particular across Asia. With these concerns set to dominate over the coming week, fears remain elevated of a renewed slide in Chinese equities when markets reopen on Monday.
Ongoing concerns over Chinese growth are likely to be highlighted by the August trade report. The recent devaluation of the Chinese yuan partly reflected efforts to improve external competitiveness and boost export growth to offset weakness in domestic activity. While the impact of the recent devaluation on Chinese exports is too soon to be reflected in the upcoming trade report, should any discernable improvement be absent in future data, this would further heighten expectations for additional policy easing.
US employment report keeps markets guessing over September move. Despite the lower-than-expected rise in August payrolls (173k vs 217k), upward revisions to the previous two months; firmer earnings growth; and a steeper decline in the unemployment rate to 5.1% capped another firm employment report. More importantly, the report remained consistent with the Fed’s desire to see ’some further improvement in the labour market’ which the Fed specified as a necessary prerequisite for a hike. However, with the outlook for policy still clouded by external developments, it failed to provide a clear steer as to whether US policymakers will raise interest rates this month. With no key US data releases over the coming week and Fed policymakers entering purdah, the flow of additional information ahead of the September FOMC meeting policy debate is likely to be limited, keeping market participants focused on external developments for further insight.
External developments warrant a cautious MPC. While the impact of China and the pickup in market volatility continues to have a key bearing on the monetary policy outlook in the US, recent comments from Bank of England Governor Mark Carney at the Jackson Hole Symposium have sought to seemingly play down the risks that these present to the domestic policy outlook. Nevertheless, with some of the potential headwinds to the outlook presented at the August Inflation Report from a weaker external environment having subsequently crystallised, the likelihood of further support for an immediate rate hike look limited at this juncture. Ongoing risks to the near-term outlook warrant a cautious tone from the MPC and, as such, the coming week’s policy decision is expected to result in an unchanged voting pattern from August. With the minutes likely to reveal Ian McCafferty as the sole dissenter in favour of an immediate policy tightening. In keeping with the softer tone of the UK PMIs, the flow of domestic data over the coming week (industrial production, external trade and construction) are likely to be consistent with some moderation in Q3 activity.
Global growth concerns key to policy decisions in Canada and New Zealand. The need for looser monetary policy against a softer global outlook is likely to be highlighted by policymakers in Canada and New Zealand at their respective policy meetings, with the latter expected to reduce its key policy rate to 2.75% from 3.0%. Elsewhere, euro area data is limited to July industrial production releases in Germany, Spain, France and Italy.
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