What happened last week
Monday: Sept. Manufacturing PMIs: Australia 53.5 vs 53.9 expected, Japan 50.8 vs 51e, India 55.1 vs 55.8e, Switzerland 57.5 vs 54.5e, Italy 48.3 vs 47.5e, France 47.7 vs 47.8e, 47.8 vs 48.3e, Eurozone 48.4 vs 48.5e, UK 48.4 vs 48.5e, US 52 vs 51.9e, Canada 49.8, Brazil 51.1, Singapore 49.9, South Korea 47.3. US Sept. ISM Manufacturing PMI 50.9 vs 52e: employment sub-index 48.7 vs 53e, 51.7 vs 51.9e. The Reserve Bank of Australia “only” hikes by 25bps (vs 50bps expected) to 2.60%, adding to its statement that “One source of uncertainty is the outlook for the global economy, which has deteriorated recently.”
Tuesday: US Aug. factory orders 0% MoM vs 0.2%e. US Aug. JOLT job openings 10.053m vs 10.775m expected and down ~1.8m since their peak in March 2022. South Korea September PMI 5.6% YoY vs 5.7%e. Australia Sept. Services PMI 50.6. Japan Sept. Services PMI 52. RBNZ hikes 50bps to 3.5% as expected.
Wednesday: North Korea fires a ballistic missile over Japan. The Financial Stability Board, a global rule-setting institution for finance, is working on proposals to regulate the cryptocurrency market with the same rules as for traditional finance. OPEC+ decides to reduce production by 2 million barrels per day from November. German August trade balance 1.2bn vs 4.0bn expected, continues to come up at historical lows. Sept. Services PMI: Spain 48.5 vs 49.8e, Italy 48.8 vs 49.1e, France 52.9 vs 53e, Germany 45 vs 45.4e, UK 50 vs 49.2e. US 30 yr mortgage rate at 6.75%. US mortgage application -14.2% WoW. US Sept. ADP nonfarm employment change 208k vs 200k expected. US Aug. trade balance -67.4bn vs -67.7bn expected. Canada Aug. trade balance 1.52bn vs 3.45bn expected. US Sept. Services PMI 49.3 vs 49.2e. US Sept. ISM Non-Manufacturing PMI 56.7 vs 56.0e. Australia Aug. trade balance 8.324bn vs 10.1bn expected. Hong Kong Manufacturing PMI 48.
Thursday: India Sept. Services PMI 54.3 vs 57e. UK Sept. Construction PMI 52.3 vs 48e. Eurozone Aug. retail sales -2.0% vs -1.7% expected. US initial jobless claims 219k vs 203k expected.
Friday: Ukraine nuclear plant loses external power as Russian shelling continues. UK Halifax House Price Index 9.9% YoY, lowest rate since January 2022. US Sept. Nonfarm Payrolls 263k vs 250k expected; Participation rate down to 62.3% from 62.4%, Unemployment rate down to 3.5% from 3.7%; Average hourly earnings 5.0% vs 5.1%e. Canada Sept. employment change 21.1k vs 20.0k expected. China Sept. Caixin Services PMI 49.3 vs 54.5e. Chinese Golden week shows a sharp slowdown in mobility and consumption: From October 1-7, 255.5 million people traveled, a fall of 36.4% from last year’s holiday and down 58.1% from the same period in 2019. Travel revenues fell 26.2% to 287bn yuan, a 56 per cent fall compared to 2019. Cinema revenues were down 66% to 1.5bn yuan compared to last year.
Sunday: North Korea fires two ballistic missiles toward its eastern waters following the drills of a US aircraft carrier.
What to pay attention to this week: US CPI and China National Party Congress
The 20th National Communist Party Congress is expected to take place on Oct. 16 in Beijing. This is the most important political event in China and will nominate the top political leaders and define the next economic objectives. We watch for the decision around zero-covid policies (the rumor is for a pause), and additional monetary and fiscal support as the economy slows, as well as any stronger stance regarding Taiwan. Important week for the UK with labor market data on Tuesday and GDP on Wednesday. In the US, the FOMC minutes will be published on Wednesday and Sept. retail sales disclosed on Friday. Most important is the publication of US September CPI this Thursday (consensus is 8.1% YoY for headline and 6.5% for core).
Nansen’s take
Outside of the US, there are signs that quantitative tightening is disrupting financial stability. The obvious example is the one of the Bank of England, which has had to conduct emergency purchases of gilts because of the surge in yields inflicting losses in the domestic pension system. This exceptional gilt purchase program will be followed by a longer-lasting intervention scheme as well as the creation of a new short-term lending facility aimed at pension funds. This represents a de facto pause or at least a slowdown of quantitative tightening, with, as described in our prior publications, a weaker trade-weighted GBP left as a “relief” valve. In Australia, the financial vulnerabilities sit with the domestic housing market: housing prices represent close to ~6 times household disposable income and housing debt ~2 times the income. Surging mortgage rates and the consequent pain inflicted on households’ balance sheets probably contributed to the decision of the RBA to slow its hiking pace last week. Housing price growth has slumped in Australia close to 0% (see charts below). In China, where inflation has been more tame than in Europe and the US, the PBoC has already resumed rate cuts to cushion the negative effects of a deflating domestic property bubble and of zero-covid policies. Following next week’s Party congress, we are watching for: increasing power of President Xi’s in his new mandate (via more allies named at key responsibilities), and, possibly, less willingness to impose zero covid policies as a consequence. We are also watching for more fiscal / monetary announcements to prop up faltering domestic growth (see double-digit fall in Golden week revenues, and contracting Caixin Services PMI in our weekly recap above). Considering all these negative global growth drivers, the logical market response would be for global rates to go lower. However, the first obstacle to rates correcting has to do with exogenous supply shocks on energy prices, especially in Europe because of the Ukraine conflict, but also globally (see latest OPEC+ decision to cut oil output). This stagflation environment is likely to persist as the Ukraine conflict carries on: Russian troops remain in difficulty, which increases the risk of global escalation. The strategy from Europe and the US is unclear aside from imposing new economic “sanctions” (the cap on Russian oil imports will likely lead Europe to lose direct access to Russian oil imports). Meanwhile, domestic surveys in Germany show increased reluctance to continue supporting Ukraine militarily, as the population fears an escalation. The second obstacle to lower global rates is the growth differential between regions, with the US still in better shape than Europe and Asia and still focused on containing domestic inflation. Looking especially at the latest US labor market data, we observe the following:
- Job openings have fallen from their March 2022 high, but remain at multi-year high levels especially in relation to total levels of unemployment (see chart below)
- The decrease in job openings remains concentrated in a few sectors so far, notably health care, which is not surprising given that health care levels of employment are back to February 2020 levels, and retail trade
- The quit rate remains stable
Overall, the labor market is cooling at too glacial a pace to worry the Fed and core inflation is expected to remain sticky until ~April 2023. We will be looking for leading indicators of a US growth slow down or a US credit shock: namely high yield credit spreads at crisis levels, US dollar losing ground, and US yield curve re-steepening. Our estimate for these indicators to move remains around ~H1 2023.