The Week Ahead – Still looking cloudy from the summit

"I gave absolutely no credence, and will not give credence to the election when it comes to Iran. It doesn't even enter my mind. The only thing that does is that Iran will never have a nuclear weapon." Hello, and welcome to the week head on the Mura podcast. My name is Ruben Patakuela's chief Southeast Asia economy is at the Mura in Singapore. And today Friday the 25th of September. That was President Trump speaking of the UN General Assembly regarding the situation in the Middle East. And it seems progress towards a deal with Iran may still be a distant prospect, even though he said Iran will want to make a deal right after the midterm elections in the US. That uncertainty is also reflected in volatile own markets with Brent Crude now approaching $107 per barrel again after dipping briefly below $100 this week. US Treasury yields also spiked with 10 year yield decisively above 5% following hot US PMI data, and the US dollar strength appears to be continuing as a result. It seems like we are closing this week with a swing to a risk of tone after starting it in a risk on mode. All eyes are also in the Trump sheet summit in the US with discussions between the two leaders underway as we speak, but expectations for breakthrough are likely fairly low. In this episode, I'll check in with Ruchir Sak Sharma from our US economic team in New York, Jing Wang from our Chinese economic team in Hong Kong to give their perspectives of the summit. We also preview Tier 1 releases such as the US core PCE and the all-important labor market report, as well as China's PMI data, out just before the start of the Golden Week National holiday. Andrew Tyson, my co-host and Sydney will discuss the RBA decision and why he expects a hike. We close with Andre Shepennyak, our senior European economist, who will talk about the latest in German politics, widening spreads in long and yields between France and Germany, and upcoming CPI data in Europe. A lot to cover, so let's dive in. Okay, let's kick off with the USA, Ruchir, thanks for coming back and then for your time today. Hey, you've been straight to be back. So, yeah, I guess the ongoing summit is the most interesting part this week. So, I mean, all these things are still evolving, and at the time of this recording, the two leaders are having the discussion, but anything that you've heard so far from them that's notable? Yeah, so we've seen pretty positive developments so far. Trade is obviously front and center over here. We saw that just as President Xi arrived, Treasury Secretary Bessent announced that the trade truth that has been extended by another two months, so that now runs through 10th of January. Again, that gives both sides some reading room, and specifically from a macro perspective, with affordability already a major issue in the US, renewed tariff escalations that would have added to price pressures. We think rare earth should be an important part of the conversation as well, since shipments from China. They've been under pressure for some time, a number of manufacturing firms, they've pointed to shortages for critical inputs, which have constrained production. And we think, finally, again, the interesting thing would be AI. So there's been this growing discussions around AI safety, and Godrails and US has already floated greater coordination with China, but at the same time, President Trump has pushed back against this idea to slow AI development. So we'll be focusing on how two sides look at that issue. Okay, yeah, clearly very important, and yeah, we'll see how that goes in the next few days. And then we have some important data coming out next week as well, so let's spend a bit more time on that. So let's start with your expectations for Core PCE. Yeah, so for Core PCE, we expected to rise about 0.28% month on month, or that's 3.3% year over year. So there's some added wrinkle this month, because we also get these big annual revisions, including two components, such as software and portfolio management, which have been actually pushing Fed's preferred metric higher. So we think that those revisions did lower the year end Core PCE by around two to three tenths to roughly 3.2%. Now that's definitely above the Fed's forecast, but clearly somewhat below the number that they've been sold in the September SAP. So broadly, we think that inflation trajectory remains consistent with our expectations of one more hike in December, followed by an extended hold. Okay, got it. So just to be clear, this is already reflecting some of the methodology changes that they were talking about before. Okay, so that would be interesting to watch. What about the jobs report? So on the labor market, we remain pretty optimistic. So we expect private payrolls growth through remained around 120k, government hiring should slow somewhat. So more broadly, we have seen that labor market fundamentals. They've been encouraging surveys have pointed to firms expanding their headcounts, continuing claims have a slower that suggests that layoffs have actually remained pretty subdued and we've also seen that consumers perceived probability of losing their jobs that has gone down. So unemployment rate, I think that's again in the Fed's focus, we expect a small take down over there on an unrounded, unrounded basis. Again, we think that risks are skewed slightly towards the lower end. For AHE, we expect the calendar effect would push it down to 0.2% month on month. Again, so the broader message over here is that labor markets, they still look quite resilient. Despite the Middle East conflict, shock and higher energy prices, firms are continuing to expand and hire. And we've actually seen that AI related investment that's increasingly spilling over to construction and manufacturing employment. So again, that should leave the Fed focused on inflation. They shouldn't be worried about the labor market risks for now. Okay, that's very clear. Yeah, brilliant. Thanks very much. We're here. Thanks again. Okay, swinging over to Hong Kong, I'm joined by Jing Wang from our economics team. Hey, Jing, welcome back to the podcast. Yeah, hi, Yubin, glad to be back. So obviously, all eyes on the ongoing Trump G summit in the US. Do you have any thoughts on what you're looking out for in the summit? Yeah, so definitely this summit is the big focus for markets this week. And you know, this would be President Xi's first visit to the US in three years and also his first stay visit to the US in 11 years. Yeah, so markets are wondering whether the two largest colonies in the world can make more progress to further stabilize their relations. But to us, you know, the purpose of this summit might be just to extend the current truth rather than making any big breakthroughs. There could be some incremental progress on the trade front, for example, we might see some type of reductions for relatively small set of products, which could be around 30 billion US dollars according to the US officials. And, you know, in more details, the US might lower tariff on some non-sensitive products. And in a reciprocal way, China, my lower tariffs on agriculture and energy products. And then it could buy more of those groups for the US to better manage the tensions. Another big focus for the summit is about this, I have so called AI dialogue mechanism to reduce risk from the rapid AI development. But we see limited space for, you know, their collaboration, you know, given the intensify AI competition between two countries. And, you know, in the past, the present said that, you know, Chinese are right behind the US AI. And there would be no day after tomorrow if China wins this race. But anyways, we still see, you know, some sort of a positive tone out from this summit. And it's likely for both sides to extend the current truth, you know, by another two-months, through the tens of January, as the US official already mentioned that. And these two leaders might see each other again for twice, right, for the rest of the year. So if you think about those developments or, you know, factors, I wouldn't say this is going to be, you know, really, you know, that kind of bad outcome. Okay, got it, and yeah, just to bear in mind that But we are recording this on Thursday, after an age of time, so the meeting between the two presidents has yet to take place. But yeah, as Jing said, we don't expect too much apart from what is already mentioned by some officials who have had earlier negotiations. Thanks for that, Jing. Just a second question on the week ahead in terms of the data. I think we have the PMIs will be out just before the start of the National Day Golden Week, which starts from the 1st of October. What do you expect from the PMIs? We've had the US PMIs this week as well, and it came out relatively strong. Can we see a similar outcome for China? Yes, indeed. We foresee actually a higher number as well for China's September PMI for three reasons. Number one, September is generally a strong month for PMI because of the seasonality. Number two, the momentum in the export sector remains quite strong because of the global sugar AI cycle, and number three, policy efforts have recently become more supportive because of the growth slowed down in the past half a year. All together, we expect an official manufacturing PMI to rise to around 50 in September from 49.8 in August, and for the down manufacturing PMI and also the rating dog manufacturing PMI, we also expect them to rise slightly in September as well. But we believe the underlying growth momentum of China's economy remains on the weak side, especially for the domestic demand. This potential improvement in September's PMI could be a short lift, and we may see some pullback in October when the favorable seasonal factor subside. Okay, got it. That's clear. Fantastic. Thanks very much, Jing. Thank you, Yubin. Let's focus on the rest of the region and I'm very happy to be joined by Andrew, who is of course a co-host of this podcast, and we'll be at that other side of the mic to discuss his views on the upcoming RBA decision, and we'll compare some notes as well in terms of the inflation outlook. Hey, Andrew. Thanks for joining. Yeah. My pleasure, Yubin. Great. So let's talk with the RBA on Tuesday. How confident are you about your forecast of a hike? Yeah, it looked pretty confident, so we expect 25 basis point rate hike to 4.6%. That is a strong consensus view. It's not an O-brainer to use Lagarde's words from the other day, but I'd put about a 70-75% probability on it. Just to look in terms of context, the unemployment rate's actually been edging up a fraction here, and house prices are falling, and that's not normally the environment in which you'd expect to see a rate hike. So I do think you can build a pretty strong case to hike the latest monthly SEVI data for July was on the high side. The latest set of national accounts showed growth of 2.1 versus the RBA's forecast of 1.9. That also showed zero productivity and high nominal unit labour costs. And then we've got high oil prices again and some signs of second-bound pass through. And Hawkeye Central Bank's elsewhere, we know all the central bankers talk to one another, so I think that will be influencing the government's thinking as well. So yeah, all up, 25 basis point rate hike and a 70-75% probability on that. Yeah, that sounds very interesting. And what are you watching in terms of the forward guidance and any signals in terms of the broader outlook? Yeah, look, I think the overall tone will be kind of sympathetic, but also resolute. The RBA Governor will say she understands that higher rates will hurt people with mortgages coming at a time when they're already facing cost of living pressures, but I think she'll reiterate that high inflation hurts everyone, and the RBA really needs to get on top of continuing high inflation. In terms of guidance, it's fairly limited. The RBA doesn't like to provide a lot of forward guidance. I think they would likely say, oh, the board will likely say we're prepared to raise the rate again if we need to, but that's stopping short of signaling a strong indication that that will actually happen. In terms of the outlook, our base case is one and done, but I'll be watching their communication, and I'll also be watching the CPI data. We get August CPI data the following day, and that's probably even more important than the guides that comes from the RBA next year's day. Yeah, and speaking of that, what do you expect from the CPI numbers and Wednesday? Yeah, look, I do think it's done of the slightly uncomfortable one. I've got headline inflation rising to 4.2 from 3.5. Chunk of that comes from fuel. Australia had a fuel tax subsidy which unwound at the start of August, so fuel prices are going to add about 0.5 percentage points on their own. But elsewhere, I'll be looking for signs of pass through service prices following an increasing minimum wages, and we're also seeing candidate signs of tech inflection in the cost of appliances and mobile phones and laptops. That could be a bit of a global theme, of course, so I'll be watching that as well. Yeah, but just on that, you've, I know you've got some inflation data coming out in your region next week. How does that compare to what you're seeing? Is there any signs of pass through in some of the countries that you cover? Yeah, that's really interesting question, Andrew, and this coming week, we've got inflation numbers for September in Korea and Indonesia, where we've already seen the central banks there hiking interest rates. So these are important releases. In Korea, we expect headline inflation actually to ease a little bit to 2.9 from 3.1 on a year-and-year basis, but that's mainly because of base effects. Actually on a sequential basis, it picked up 0.4 month-and-month from 0.2, and that's really reflecting higher food prices. But in terms of core inflation, we actually expect it to ease, and we'd suggest that the man-side pressures are still relatively weak at this juncture. And then in Indonesia, we expect a little bit of the opposite. We think that CPI inflation will pick up to 3.3 from 3.2, and this is interesting because this is reflecting some of the effects of El Nino, which has been widely talked about among policymakers here, so food prices definitely ticking higher. And then core inflation, we also see it as relatively sticky because of some of these pass through effects, both from fuel prices, but also food inflation. So all up, yeah, it's looking a little bit, the inflation outlook is divergent for these countries, but there are some upward pressures that are building. Okay, we can leave it here. Andrew, thanks very much. Yep, absolutely, Mike, right, yeah. Okay, we're going to wrap up with Europe, and very delighted to be joined by Andre from our team in London, Hey, Andre, but thanks for coming back. Hey, you're very happy to always have a pleasure to be on the podcast. Yeah, likewise, thank you. So I guess a hot topic now is really German politics, so maybe if you could give us your latest update on that, and if there's any potential implications for the economy. Yeah, no, sure. Have a look. So we've had a few recent state elections, and essentially the CDU has to fall, particularly poorly, in those state elections, and actually in one of the state elections, in particular, the Mecklenburg, West Palm Rainier, the CDU failed to achieve the 5% threshold required to enter into the local state legislature. That's almost the first time in history, essentially, it's unprecedented in that sense. It sort of underscores how poorly merits and his ruling coalition government are doing. The key focus from some people's perspectives is, obviously, the far right AFD are doing really well. They're gaining popularity, they're exceeding expectation and taking a lot of seats. I would caveat that they're not yet at the stage of actually gaining an outright majority themselves, and so maybe that's less of a concern at this stage, and it becomes more important for a sort of political situation down the line. At the moment, the key concern is all of this concern regarding the CDU does raise the risk of actually merts being challenged or having to step down, and a new chance for Germany being appointed. We don't think any of the sort of political disruption will result in snap general election. This is because both the CDU, CSU, and the SPD are polling so poorly at a national level, they wouldn't want to risk new elections. On the one hand, from a sort of growth perspective, Merts has certainly struggled to get his reform agenda across the line. We do think that if you see further political disruptions in terms of the state elections next year, the CDU does very poorly again, that could be the result in Merts stepping down being replaced. That maybe actually provides some sort of boon for Germany in the sense of provides some positive momentum in terms of a renewed lease of life, and getting across those reforms in terms of recall, Germany has a fiscal bazooka, essentially, they've been trying to [BLANK_AUDIO] and unleash, but merge the struggled, relate to get that across the line, and so maybe a new leader could help with that. - Okay, got it. So actually, if, apart from that uncertainty, could be positive from a growth perspective later on. On, there's various interesting development that you pointed out, there's been some increase or widening in the long-end bond spreads, particularly between France and Germany. How significant is that? - I look, it's quite significant. We're talking now about the French Kenya OAT versus the Kenya Bund spread rising to currently about 112 base points at the time of recording. To contrast Italy's closest 95, Spain's at 48. Now, if we sort of take the sort of widening of EGB spreads versus Bund since the start of the year, basically Spain's been range bound, whereas both France and Italy have widened. A big part of that is due to the fact is, you've had a sense of the use around wall, resulting in higher energy prices and market pricing in higher central bank rates. As market price to higher central bank rates, because R minus G is positive for both Italy and France, it means that they're long and yield. Detestability concerns become more prominent, and so they tend your yields and the spreads versus Bund widen, whereas that's not the case to Spain, obviously. But now you have also running into Q4, essentially the budget discussion in France, and there's no incentive to pass a budget for next year, because essentially you have the presidential elections in April, and then new parliamentary elections in June. And obviously from a market's concern perspective, is the fact that Melanchion is doing better and better, such that the far less candidate is doing better and better in the pin bowling. And essentially, he's been calling for cancelling of the French debt, which obviously from an investment perspective, you think we did a donation risk and the risk of France exiting the euro, and hence why spreads have widened so much. I also had a downgrade in France by scope. We're actually forecasting in the likelihood further downgrades this year, change of outlooks for negative, and actually downgrading of a notch probably next year for some of the other credit agencies. So all of all, all this means we probably should see out versus boot spreads, continue widening into your end, and certainly the first half of next year, as all of that uncertainty around politics and fiscal really comes to the fore. - Okay, wow, that's yeah, super interesting. And I guess a quick one, I'm afraid for you in terms of the data in the week ahead, I guess there's some inflation numbers coming out. What are your expectations there? - I'm looking at the inflation data that we're getting is for the month of September, and we know that oil prices rose quite meaningfully over the September. We actually had oil above $100 a barrel for about two weeks. And so essentially what we see in Europe at least is the very strong, contemporaneous correlation between the price of Brent crude oil and refined petroleum products, so vehicle fuel. So I think petrol, think diesel, and so we should see again, a jump in those inflation figures owing to that. And this is the main inflation print the ECB is gonna have ahead of the October meeting. Now, we're not expecting a four handle, we're still expecting a three handle. That said, if you get some major surprise, like let's say a four percent or above, and that's obviously gonna be at least a 0.3 percentage point of surprise versus where consensus is currently thinking the inflation print could turn out. That could certainly result in markets raising up, raising the risk of pricing further the risk of no October rate hike. It's not a base case for us to work. We think the next rate hike comes in December, but clearly if you get such an upside surprise and such a sort of strong four handle, that could make people question, should the ECB be going back to back? - Okay, got it. It could be very consequential for monetary policy responses by the ECB. Okay, great. Let's see it here, Andrew. Thanks very much. - Thanks. - Pleasure's always. (upbeat music) - Well, that's it for now, and thank you again for listening to our podcast edited and produced by John Dalton. Please like and subscribe to the Morris podcast from your usual provider. 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