The Week Ahead - A Sticky Situation

We'll be meeting a couple more times this year and that will be the crystallizing moment at which we're going to look out the window What do we see? What's happening to output? What's happening to employment? What's happening to inflation and in those intermeeting periods? Especially occasions like this when crystalline and I get to sit down without the Cameras and the microphones and I get to sit down with my G20 colleagues I'm doing at least as much listening as I am talking Hello, and welcome to the week ahead on the Murra podcast. I'm Dominic running head of G10 FX strategy here at Murra and London And today is Friday the 16th of October Well, it's been another interesting week for us in markets Certainly a lot of listening and watching to be done to the various cross currents that we're seeing as hinted at there by it fed Chair Kevin Warsh in the comments he made at the IMF annual meetings early this week US inflation has been stronger than expected and might normally have seen expectations for US rate hikes to push higher But concerns about the AI trade equity markets with some major companies seeing widening credit spreads for example And the Nasdaq trading around 5% off its recent highs at one point is all starting to bite on the rate side We continue to expect an October rate hold by the Fed despite the sticky inflation numbers And we're going to discuss all of that and more with Jeremy Schwartz our senior US economy shortly Europe's been a little bit less in the limelight last week With French bonds breads stabilizing after the early October blowout with a calendar lights up next week with UK inflation and Labor market data and an important French budget vote on the 20th of October We'll took through those which George Buckley our chief economist for the region Finally ahead of China's GDP data will focus on the latest trends there with Harrington Zhang from our economics team in Hong Kong As well as looking ahead to central back decisions in Korea Indonesia and the Philippines But before we get into all of that, I do want to flag the special edition of the podcast that was recorded at the IMF events where Yubin Parachuela's Chats to Thomas Rukmaka and Eric Horsbay from Fitch Global ratings about all things relating to EM sovereign debt markets Certainly worth checking out if you get a few spare minutes Well, we'll start this week as we usually do in the US with Jeremy Schwartz our senior US economist Thank you Jeremy for being with us this week. Yeah. Thanks, Tom. Great to be back So that we were we're holding this on the back of some inflation prints that came out this week We've had CPI and PPI data which should give us a pretty good read of where PCE inflation is which is sort of the feds, you know target measure or core PCE How have you guys looked at this inflation data? It looked like it came in a bit hotter than expected from from my perspective Yeah, it was certainly hawkish data this month You know our core PC tracking estimate before the data was around 20 basis points Currently stands at around 31 or 32 So that's a pretty sizable upward revision And I'd say the composition of the CPI data in particular also Probably raised some red flags for hawkish policy makers So on the one hand part of the beat was driven by rent inflation Which can be sticky, but also noisy month to month and I think that doesn't seem to be too persistent But I think the more concerning detail is on some lingering goods price pressure Where we saw a pretty large increase in core goods and maybe most concernately it seemed to be driven by Some of the more tech-sensitive Items so we've seen a number of fed officials talk about how they're willing to look past tariff Strength and inflation. They're willing to look past price pressure from the around conflict and energy price spike But there's a little bit more concern and consternation around the price pressure from the AI CapEx build out at the global memory chip shortage. Let's come on the back of that So I think seeing things like personal computers Tech goods toys, which maybe has some leverage to tech items as well kind of continuing to rise very strongly Is going to kind of raise some alarms that some of this good pressure isn't just a one-off and some of it might persist into next year You know, that said, you know, we do think that Fed speak was fairly consistent ahead of this data Saying that they were comfortable staying on hold in October This probably isn't so much of a kind of upside surprise that they need to panic and deliver a hike when they weren't planning to Advise not to mention just a couple days before the midterm elections But you know, we do think it's going to keep upward pressure on terminal rates and I think it's going to Kind of potentially lead some hawk officials to descend if they do stay on hold as we're expecting So again, no real relief on the inflation front. I think bad headlines bad details And I think something that should keep upward pressure on terminal rate expectations as we go on to 2027 Okay super really really helpful explanation. I'd be thank you. I mean we do get Wash speaking just overnight as we record this so this will go after washes comments But but certainly, you know, I think it's interesting how we've seen yields react actually to this data You know normally expect the hot data to see US yields rise and actually sort of rolled over a little bit And it seems that some of the challenges that we're seeing in markets are coming from the AI space And we don't want to get too much into the the detail of that. But I do think this theme is pretty important you mentioned How AI was having an impact on inflation and some of the pressures that were coming through there You know, do you think there are some risks now potentially in the other way here whereby if this AI trade if this AI theme in the Etsy space does start to roll over a bit more aggressively could that actually Cause more of a shift to the downside in how people are thinking about the Fed and how people are thinking about the economy more broadly Yeah, I mean, I think that's that's certainly a risk and You know, we have been making the point that AI is not the only driver of growth in the US So we see broader strength beyond that But it's certainly been an outsized contributor To strong growth and even recently a strong US inflation So I think something caused a fundamental reassessment of AI capex And caused the boom to turn into a bust Could potentially kind of reverse some of the overheating pressures we're seeing And keep the Fed maybe not just on hold by thinking about pivoting back towards cuts You know, that's the market move while still just a couple days older this point Doesn't necessarily look like the catalyst yet That would really drive that reassessment I mean, you are seeing some credit markets stress particularly among some of the kind of very levered Players in the AI space But you know more broadly equities are kind of still doing well And I don't think you're getting the kind of market signal that's necessarily going to I kind of lead to this reversal of animal spirits for the businesses doing the investment I think this is more reassessment of Maybe two to three years out into the AI trade but at the moment when we're thinking about the economic impacts Your people are still buying all the equipment they can get their hands on. They're still building every data center They can get a permit for And we don't think An increase in financing costs particularly if it's concentrated Among a handful of businesses is necessarily going to Be such a strong deterrent So I think the things we're looking out for is you know, if the animal spirits for the businesses themselves really changes because of the market move That could potentially Kind of lead to some reassessment I think more importantly than that and something that could happen a bit more quickly for the Fed Is if you started to get contagion out of the AI space in the credit sector So far that looks to be relatively limited We still see credit conditions as being kind of broadly accommodative and businesses who Want to borrow have access to credits Bank lending growth has picked up this year Along with a strong issuance If that starts to change and if you start to see people selling credit indiscriminately That could certainly market see change and while it's still an early move for just a couple days old now I'd say you certainly aren't at that kind of panthreshold yet pretty and thanks Jeremy I'd love to to watch out for but as you say maybe not quite flashing Not quite flashing ready yet. Maybe some amber warning signals But some a few things to watch for sure really appreciate your time as always and we look forward to speaking to you soon Well, let's focus on the UK and Europe now with George Buckley our Chief Economist for the region George Thanks as always for coming on hi dom thanks for having me on so look we're recording this actually on the first day where we've just had or had this morning UK Growth data and I think the story in the UK has been surprisingly resilient It's something they came back came up actually on a trip. We did recently to the US You know, what's happening with the UK growth outlook? Why I think so solid Well, it has been solid. It's been the strongest in the g7 in the first half of the year It's in absolute terms. It's it's growing pretty well Not only if we had a strong first half of the year, but the The numbers for July and August the first two months as we've seen today of the of the second half are also doing Pretty well. It looks like Q3 could be a solid quarter as well Um, certainly you're seeing some of the surveys improve as well I mean that that that's something that we've seen across Europe too, but um the UK does look reasonably solid. I think one thing I would say is that the first half of the year, it only really includes one quarter so far, which is since the US around war started. So I wonder whether lags might be playing a role here and things might get a bit weaker going forward, but confidence is improved, that might be a burn and bounce. All of this is looking pretty solid. The other point is that from a household perspective, household balance sheets are looking reasonably good and saving rates are higher than where they were before the pandemic. So there is some flexibility for consumers if they are faced with the cost of living crisis to eat into those savings. So I think so far, so good. Okay, interesting. Thanks, George. I mean, I think the other part, obviously, we will talk about from a bank of England perspective, is not necessarily activity, which looks resilient enough that maybe it could withstand some ray hikes. It's whether the inflation outlook suggests that the BOE should be hiking. And then, you know, next week, we've got a couple of pretty important data points on that from get the lab market data, where I think, you know, wages are always important to look at. And obviously, inflation itself, what are your expectations for those two reports next week? So for inflation, CPI, we've got rising from 3.1% to 3.5. That's a 0.4 percentage point increase, which is much bigger than what the Bank of England thought, which was 0.2 between the two months. But I mean, I think you can explain that by the fact that energy prices have gone back up again, and that will push vehicle fuel prices up. We think they'll rise by 4% on the month, plus another 4% in October, those figures, obviously, due another month from now. Big uncertainties about airfares, because they are very volatile at this time of year. Also, rents have been rising a bit more quickly. So lots to look into in that report, but the general outtake is that it's going to be stronger. As for the lab market report, it's very rare that you get a labemark at report, which is unidirectional. There's so many parts, moving parts in this report that you're bound to find something which plays to your view, if that makes sense. Last month, we had regular pay growth, which was stronger, but you had payrolls, which were weaker. I think we're going to get another fall in payrolls. I hope we're going to see regular pay growth slow a bit. The pay numbers, by the way, are going to become increasingly important. Because when we start to think about next year's numbers, that's when second round effects really could start to show through. So a lot of focus on those in the upcoming months. Okay. So pretty busy week for the UK, but also across the channel, particularly in France, we've got this vote on one element of friendship budget. We've got some PMIs at the end of the week. Does Europe look as resilient or are a bit more concerned about some of these political risks in France, bleeding into more widespread concerns in the region? Yeah, I think that the vote in France is just indicates how it's going to be very difficult to pass a budget, because not only are the lawmakers themselves very split. If you look at, for example, the Parliament itself, the Assembly, it's very split indeed. It's going to be very difficult to pass it at that level. But equally, the voters don't want to see austerity. They don't want to see belt tightening. So this is going to be tricky. And when you've got an election coming up, as we have in the spring of next year, at the end of April, start of May for the presidential election, sometime thereafter for legislative, there's not going to be many politicians in France who are really going to push very hard for aggressive fiscal tightening. But that's what's needed. You've got a deficit, which is running at hopefully 5%. That's where they're aiming at. I very much doubt we'll get it there. And 3% in three years' time, I suspect that's very difficult, indeed, to achieve debt levels of 120% of GDP and an interest bill, which is rising quickly, and also to higher than what the defence bill is. So it's very difficult situation for France. As it is with a number of other countries, but France obviously singled out in terms of seeing the biggest rising yields this year so far from any of the major developed markets. Okay, great. So plenty to watch if you can stand. I will just say for balance, you know, Mary and Le Pen and the Iron Party sort of have suggested they won't stand in the way too much of the budget passing later on, but I guess there could be a lot of shenanigans and market volatility coming from that in the week's head. So something to keep us all on our toes, I'm sure. Thanks very much, George. And we look forward to speaking to you soon. Thanks indeed, Don. Well, we're going to move over to Asia now and in particular, we're going to focus on China with Harrington Zhang, one of our economists, based out of Hong Kong. Harry, thanks very much for joining us this week. Yeah, hi, Don. Thank you for having me today. So look, we've got Chinese GDP data coming up next week. I think it's always pretty important from a quarterly perspective. How are you seeing the growth outlook in China at the moment? Yeah, sure. We will have China's Q3 GDP release and all this uptown back, activity data released on Monday next week. So we see a limited growth rebound in Q3 from Q2 and therefore maintain lower below consensus of GDP growth forecast of 4.3% year over year for Q3, which was slightly below consensus of 4.4%. So we evaluate Q3 GDP growth by analyzing both supply side and demand side indicators for July and August alongside of projections for September. Although demand side indicators are important to much weaker growth, but we expect the official GDP growth figures to be aligned more closely with supply side indicators as China's GDP is calculated primarily from the production side. For other activity data, so we expect industrial production growth to increase selectively to 4.5% in September and from 5.2% in August. Thanks to strong exports and further recovery of production activity in all your related sectors aimed at relatively stable, crudey imports. Then on the consumer side, we expect the retail sales growth to F up to 1.1% year over year in September from 0.4% in August thanks to a slightly lower base from last year and a favorable holiday calendar. Then on the investment side, we expect to fix that as the investment growth to improve slightly to a negative minus 9.2% in September from minus 10.6% in August, taking the cumulative a year-to-date growth to minus 7.5% in September. So despite this modest month, monthly improvement, we have not seen material recovery in fixation investment in September. So the persistence and weakness reflect still subdued physical support. Thanks, Hank, to a very comprehensive look at all the data they're very useful. I mean, one thing you touched upon is the trade numbers there and from the outside of perspective, all I see is sort of trade surplus is going through the roof. We see a lot of discussion in Europe about potential measures to try and limit the amount of Chinese imports. Thinking about this maybe slightly thematically rather than specifically on the numbers, you know, how do you think this story plays out? Is China going to face a lot more challenges on the export side of the moment or is this story just something that can continue to continue to grow? Yeah, sure, it's a good question. It's really to focus off of this week. So as we know that China and the EU how they to second the ministerial meeting, under this newly created trade and the investment, the consultations mechanism, last Friday, issuing joint statements and six point list of the so-called deliverables and understandings. So in that statement moves to notably understanding our hybrid vehicle trade. Within the WTO framework, it was rich. EU Trade Commission said that this could more than half of China's hybrid vehicle exports to the EU over a period of four years relative to the scenario of no policy change. Septual rich also reported understandings on lowering China's tariffs for selected EU goods and the relaxation of China's export risk rich on rare minerals and as well as permanent the magnates. So basically we will be the outcome as more than recently positive. So mainly reducing the near term risk of escalating trade tensions. But of the structure, the problem is that the structural drivers of the bilateral trade in balances and tensions remain largely addressed. So subject to EU leaders assessment, assessment of the European Council meeting this week, which is ongoing now. And progress on implementation wakes back to a relatively a period of so-called relatively stability. Through a generalist ministerial video conference, I had over the third and I had over the third that this is called trade and a trade and investment consultation meeting in March next year. So this would basically give two sides some time to operationalize the understandings. Although further sector have to say that, further sector-specific restrictions remain possible during this period. So the trade data release this week filled out China's EU bond export growth rebounded very strongly to around 25% the year-to-year from just under 7% in August also already with a high base and lifting them to around 42% about September 2024 levels. So that's before the US-China trade war. Before any potential, let's say, trade diversions towards the EU. So the certain trade surplus, with the EU also hit a record high in monthly terms of $35 billion USD. So in our view, probably also likely helps in displaying why Beijing has some laws considered a certain ground to Brussels in their latest rounds of trading negotiations. So if we talk about the hybrid vehicle case, it's really the focus points of contention during the latest rounds of negotiation. So we think Beijing is quite rational and cognizant in terms of near term, because for everything we have seen over the past few weeks, show that the EU is likely to put some very high level tariffs if there's hybrid vehicle issues. Not solved and in this later around talks. So I think Beijing made a very, let's say, strategic compromise. But with all the median terms, we really start to this, this what we call reprieve, it's truly durable as we have seen from the latest trade numbers. The imbalance continues to weather. Yes, so we think these really are short-term stability, but all the media to make some more for more uncertain. I mean, make sense is more more sort of structural issues that play in it, certainly something that I think European policy makers have to really try and get to grips with some in some sense, certainly we're seeing some signs of that from, you know, particularly from the German side of things at the moment with plenty of discussions going on in the region. So we'll see how that plays out, but certainly something that's pretty important in the background, even if it's not front and center on the data releases this week. Harry, thanks as always for coming on. We'll speak to you soon. Thank you, though. I'm moving away from China and looking a bit more broadly across the rest of Asia. We do have three central bank decisions to focus on next week. We've got Indonesia, Philippines, and the B.O.K. in Korea. If we run through those in Indonesia weeks, but the B.I. to actually raise policy rates by 25 basis points to 6%, there's been a little bit more pressure on financial markets in Indonesia recently. The currency certainly facing a few challenges and risks around the MSCI, shifting the status of Indonesia's equity market, for example. So we do think some of the sort of financial stability concerns may cause the B.I. sorry to hike by 25 basis points when it meets on the 21st of October. In Philippines, we also expect a policy rate hike, another 25 basis points there to 5.25%. That's the fourth hike in a row that we expect. And we think that's really coming down to very sticky inflation, which has jumped quite significantly well above the BSP's forecast and target range. So the risks also there with food prices, et cetera, could also continue to squeeze inflation higher. So we think the B.I. needs to stay quite vigilant on that front. And finally, on Korea, we expect actually a pause from the B.O.K. this month at 3%. They've obviously hiked in the past, but we think it's now time for the B.O.K. to just take a bit of a pause and assess how that timing is starting to impact the economy, which remains pretty resilient. It must be said, especially through export-led growth. Well, that's broadly from Asia. We also get some inflation data out of New Zealand. It must be said for Q3 and inflation data out of Japan as well, which will be keeping a very close eye on. Well, that's it for this week. Thank you, as always, for joining us on the Weekhead Podcast, which was edited and produced by John Dalton. You can like and subscribe to the podcast using all of the usual channels, Spotify, SoundCloud, Apple, or wherever it is you get to your pods. We'd love to get your feedback, so please do leave a comment, let us know what you like and what you'd like to hear more of. And please also feel free to share the podcast far and wide with anyone you think might be interested. You can also hear more if you click on to numericonex.com. Thanks once again and good luck for the Weekhead. In a complex and unpredictable world, where a sunset in one market means a sunrise in another, one investment bank always looks beyond the horizon. To help our clients release the potential of tomorrow, today. Nomoro, connecting markets, east and west. Disclaimer, this content has been prepared by numerous solely for information purposes. 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