Week Ahead: Highlights include US retail sales; China activity data

NOTE: Previews are listed in day-order

CHINESE RETAIL SALES & INDUSTRIAL PRODUCTION (MON)

The latest activity data from China is scheduled for Monday with Industrial Production for October expected to grow Y/Y by 3.0% vs. Prev. 3.1% increase in September which was the weakest expansion since March last year. The reading in September was beneath analysts’ forecast of 4.5% and conformed to the slowing trend seen every month from the blockbuster increase at the start of the year with the disappointing reading influenced by the power crunch in China, supply bottlenecks, sporadic COVID-19 outbreaks and Beijing’s regulatory crackdown, while these headwinds are anticipated to have persisted in October with the National Day Golden Week holidays also likely to have an effect on output.

Conversely, the holiday celebrations at the start of October could be supportive of Retail Sales which are expected to grow by 3.5% vs prev. 4.4% increase in September which was supported by a boost in consumption and with the rise in CPI data for October by the fastest pace in over a year, potentially an encouraging signal for demand.

RBA MINUTES (TUE)

The RBA will release the minutes from its November 2nd meeting where they kept the Cash Rate Target at 0.10% and bond purchases at AUD 4bln per week through to mid-February, as expected, while it discontinued the target of 10 basis points for the April 2024 Australian Government Bond yield which was not much of a surprise given its decision to refrain from defending the target in the week leading up to the meeting.

The central bank also tweaked its guidance to suggest that conditions for a hike are likely to take some time vs. the previous reference for no hikes until 2024 at the earliest. However, this failed to underpin the currency as the central bank also continued with a dovish tone in which it noted uncertainty on the health front and that the board is prepared to be patient, while it also stated that inflation has picked up but remains low in underlying terms and it only sees a gradual pick up in inflation, as well as only a marginal increase in wage growth.

Shortly after that meeting, RBA Governor Lowe added to the dovish tone in which he stated that it is entirely plausible that the first increase in the Cash Rate will not be before the maturity of the current target bond which is April 2024, but it is also plausible that a hike could be appropriate in 2023 and said there is genuine uncertainty as to the timing of future adjustments in the Cash Rate. Lowe also wanted to make it clear that the decision does not reflect the view that the Cash Rate will be increased before 2024 and that inflation and wages allow the Board to be patient regarding a rate lift-off. Furthermore, he said they are prepared to look through spikes in inflation, while he added that market pricing of early 2022 hikes is well away from where they are now and that pricing for early rate hikes is extremely unlikely.

UK JOBS DATA (TUE)

Expectations are for the Unemployment rate to hold steady at 4.5% in the three-months to September, with the Employment Change metric forecast at 243K vs the previous 235K.

Labour market data has taken an increasingly important role in the UK rate outlook following the November decision by the BoE to stand pat on rates (7-2). Within the statement, the MPC noted that “near-term uncertainties remain, especially around the outlook for the labour market,” adding that “provided the incoming data, particularly on the labour market, are broadly in line with the central projections in the November Monetary Policy Report, it will be necessary over coming months to increase Bank Rate”.

The upcoming report will unveil the unemployment rate and wages metrics for the three-month period to September, whilst the ONS will provide a timelier estimate for the number of employees on payrolls in October. This distinction is important given the conclusion of the furlough scheme at the end of September, which has presented a source of uncertainty for the MPC. Evidence for the post-furlough landscape thus far has been relatively encouraging, with the ONS’ Business Impact of COVID-19 Survey noting that 87% of furloughed employees had returned to work, with just 3% being made redundant. Note, the first jobs report to fully encapsulate the post-September jobs market will be released on December 14th with the MPC due to meet on the 16th.

US RETAIL SALES (TUE)

US retail sales are expected to rise +0.7% M/M in October, which would be the third straight monthly rise; the ex-autos measure is also seen rising by +0.7% M/M. Credit Suisse (SIX:CSGN) suggests that the autos and gas components should contribute strongly to the headline given that unit vehicle sales rose at an annualised rate of 13.1mln in October from the 12.4mln in September. "Sales are still depressed due to a global chip shortage but incrementally this should add to retail sales," CS said.

Meanwhile, gasoline prices were up by 6% in the month, suggesting strong gasoline consumption. For the ex-autos and gas measure, analysts will be watching the restaurant spending category as Delta infections peaked in September, with services activity resuming in October, a point underscored by high-frequency card data in the month. "Employment growth and card spending data were both strong in October as Delta peaked, however, real goods consumption is still well above the pre-COVID trend, and risks are skewed to a slowdown into the end of the year," CS says.

UK CPI (WED)

Headline CPI is expected to jump to 3.9% Y/Y in October from 3.1%, with the core annual measure seen rising to 3.1% Y/Y from 2.9%. The surge in headline inflation is expected to be largely attributed to a rise in energy and fuel prices, with the report encapsulating the UK petrol shortage. Furthermore, as highlighted by RBC, October 1st saw the lifting of the Ofgem price cap take effect, which had the effect of raising the cap on retail gas and electricity prices by 17% and 9%.

From a policy perspective, the MPC expects inflation to “rise to just under 4% in October, accounted for predominantly by the impact on utility bills of past strength in wholesale gas prices.” Further ahead, CPI inflation is expected to peak at around 5% in April 2022.

The upcoming release will be compared to the benchmark outlined by the MPC, however, with further gains to the index expected throughout the winter and early 2022, the report will unlikely provide much sway on the transitory vs non-transitory debate. Furthermore, with inflation already elevated and the MPC stressing the importance of developments in the labour market, the jobs report the day before might provide greater impetus for refining December rate hike expectations.

CANADIAN CPI (WED)

Canadian bank RBC looks for the headline inflation rate to rise to 4.5% Y/Y from the 4.4% in September, and says the readings will be supported by increases for items like food, energy, home-owning and auto components. "Annual CPI growth is still being biased higher by weak year-ago comparable prices when the economic impact of the pandemic was more severe," RBC writes, "but price growth has also been broadening versus pre-pandemic levels as well, and that is expected to continue in October."

CBRT POLICY ANNOUNCEMENT (THU)

Ahead of next week's CBRT rate decision, the central bank's November survey saw end-year CPI at 19.31% (prev. 17.63%); in 12-months, repo rate seen at 13.8% (prev. 14.34%), and CPI seen at 15.6% (prev. 13.9%); the CBRT continued to frame inflation as transitory at its previous meeting, and rejected the notion of potential second round effects.

Meanwhile, end-2021 GDP growth is seen at 9.2% (prev. 8.9%), while the USD/TRY rate is seen ending 2021 at 9.9785 (prev. 9.2195), having this week fallen to a fresh record low, and many analysts suggesting a test of the psychological 10.00 level awaits. In its previous policy statement, the CBRT said that "till the end of the year, supply-side transitory factors leave limited room for the downward adjustment to the policy rate," which might imply a rate cut of a smaller magnitude might be on the cards next week. Accordingly, having cut rates by 200bps at its last meeting to 16.00%, analysts at SocGen suggest that there is scope for a 100bps rate cut next week.

SARB POLICY ANNOUNCEMENT (THU)

The South African Reserve Bank is expected to lift rates by 25bps to 3.75% to put a lid on inflationary pressures; analysts are arguing that inflation metrics could top 5.0% in September, with some fearing a rise to 5.5%, with upside pressure possible into next year. At its previous meeting, the central bank's model projections have flagged the possibility of 150bps worth of rate hikes through the end of next year, though the MPC said stable and subdued inflation expectations would help keep policy accommodative. Reuters strategists said that inaction by the SARB would likely hurt the ZAR currency, and if it weakened significantly, it could further underpin price pressures and fan risks of imported inflation.

JAPANESE CPI (THU)

Japanese National CPI data for October is scheduled for release next week and is expected to remain subdued following the 0.2% headline reading and 0.1% rise in CPI Ex. Fresh Food for September which was the first increase in Core inflation since March 2020. This was driven by rampant energy prices which rose by the fastest pace in three years and if excluded from the data, would have kept inflation in negative territory as evidenced by the wider than expected contraction of -0.5% vs -0.2% for National CPI Ex. Fresh Food & Energy which is seen as a gauge of the underlying trend of inflation.

The pressure on prices continued to stem from a COVID-19 impacted economy as Tokyo and 18 other prefectures were still under a state of emergency in September, while the previous Suga governments’ agenda of lowering mobile phone service fees also had a dampening effect on inflation. Nonetheless, the state of emergency was no longer in effect in October although restrictions were still in place for restaurants and bars which were eventually relaxed towards the end of the month as COVID-19 infections declined, while expectations are for the economy to gradually improve as the impact from the virus wanes although reaching the inflation goal is likely to take a long time with the BoJ’s Outlook Report estimates only forecasting CPI to reach the midpoint of the 2.0% target by fiscal 2023.

UK RETAIL SALES (FRI)

Expectations are for retail sales to rise +0.3% M/M vs -0.2% in September, whilst the core print is also seen rising by +0.3% M/M vs the previous -0.6%.

Oxford Economics, which looks for a 0.3% contraction, notes that “the squeeze on consumers’ spending power and damage to sentiment from rising inflation risks having an adverse effect on retail sales volumes.” Additionally, the consultancy highlights that whilst fuel sales rose 2.9% M/M in September, and would have been unusually high in October, sales would have dropped off rapidly as the month progressed.

In terms of recent indicators, the BRC Retail Sales report noted that “retail is getting back on track ahead of Christmas as sales grew at a faster rate than the month prior, and well above its pre-pandemic levels”; elsewhere, the latest Barclaycard spending report cautioned that “in signs that shoppers may be cutting back on retail spending, some categories recorded smaller growth than last month, including clothing – which saw an 8.9% increase compared to 10.1% in September.”