Week Ahead: Highlights include USTR China speech, OPEC+, US jobs report

NOTE: Previews are listed in day-order

US TRADE STRATEGY (MON)

 The US Trade Representative will outline the Biden administration's US/China trade strategy when she delivers remarks at the Center for Strategic Studies at 15:00BST/10:00EDT. The USTR has been conducting a review of the 'Phase 1' trade deal, and analysts say that her conclusions will play a key role in the fate of US tariffs on Chinese imports. Biden has so far kept in place the Trump-era tariffs on China, and the Phase 1 deal is due to expire in three-months.

Reuters reports that the administration thinks that China has not met its commitments under the deal and intends to hold it to its international trade commitments. The Trade Representative has previously said that the US faces challenges in its relationship with China and has asked Congress for tools to counteract the world’s second largest economy. Geopolitical consultancy Stratfor says the administration will continue to try to resolve trade disputes with its Western allies as it prepares to take a harder line on trade against China once the phase one trade deal ends at the end of 2021.

"The US and the EU will likely reach a deal by the end of the year to suspend or relax tariffs on European steel and aluminium," but "the US is unlikely to drop the tariffs altogether because, while most US manufacturers would favour doing so, dropping tariffs would alienate the powerful steel lobby and labour unions."

Specifically on China, its analysts think that the US will launch a further investigation against China's use of subsidies to support strategic industries; "such an investigation is unlikely to conclude this quarter. If it did occur, it would signal that Washington is gearing up for an aggressive trade policy next year, and that a significant reduction in tariffs on China is unlikely."

OPEC+ MEETING (MON)

Markets currently expect OPEC+ to stick to its plan of hiking monthly output by 400k BPD, with delegates recently suggesting that this meeting is likely to be a smooth affair. There have been some calls for the group to loosen supply curbs by more than planned, as well as pressure from the US amid the backdrop of rising oil prices, its impact on company margins and consumer demand.

Sources noted that OPEC+ was considering options for releasing more oil to the market at the meeting. That said, analysts caveat that this is just the nature of their meetings whereby “all options are on the table.”

Other source reports recently suggested that despite November Brent prices surging to a three-year high above USD 80/bbl, the ministers are unlikely to deviate from current plans. It is worth bearing in mind that OPEC’s latest MOMR stated that “increased risk of COVID-19 cases primarily fuelled by the Delta variant is clouding oil demand prospects going into the final quarter of the year, resulting in downward adjustments to 4Q21 estimates. As a result, 2H21 oil demand has been adjusted slightly lower, partially delaying the oil demand recovery into 1H22.”

This could further dissuade members from hiking output by more than planned. On that note, there have been reports that some African nations are struggling to pump more oil amid delayed maintenance and low investments, with Angola and Nigeria said to average almost 300k BPD below their quota, so this may gain some attention among some analysts. As ever, surprises from OPEC+ cannot be dismissed, although given the lack of friction among members recently, all signs so far are pointing towards a smooth meeting.

RBA POLICY DECISION (TUE)

Australia’s reserve bank is expected to keep policy settings unchanged, with the Cash Rate Target and 3-Year Yield Target (NYSE:TGT) to be maintained at 0.10%, while the central bank is also likely to refrain from any adjustments to its bond purchases which are currently at a weekly pace of AUD 4bln through to at least mid-February.

The central bank has continuously reaffirmed its guidance that suggests rates will not increase before 2024 at the earliest, and Governor Lowe even noted it was difficult to understand markets’ pricing hikes in 2022 and 2023, adding that rates might increase in other countries but domestic factors in Australia were different.

Meanwhile, expectations for bond purchases to be maintained are supported by timing – it was only just last month that the central bank tapered its weekly purchases and prolonged its buying schedule, which makes any near term adjustment unlikely, although the RBA has said that the board will continue to review bond purchases in light of economic and health situation.

In terms of the data, there haven’t been many key releases since the last meeting, aside from Employment Change which showed a larger than expected contraction at -146.3k vs. Exp. -90.0k (Prev. 2.2k) and although the Unemployment Rate surprisingly declined to 4.5% vs. Exp. 4.9% (Prev. 4.6%), the Australian Bureau of Statistics noted this reflects a large decline in participation during recent lockdowns rather than a strengthening in labour market conditions and unemployed people have dropped out of the labour force given that it is difficult to actively look for work.

Nonetheless, this is not expected to spur the RBA to act especially given the looming resumption of activity in Australia’s most populous state of New South Wales which recently outlined its reopening road map that is expected to start on October 11th.

AUSTRALIAN TRADE BALANCE (TUE) 

The release will take place ahead of the RBA policy decision and thus could be overlooked. Nonetheless, Westpac forecasts a narrower surplus of AUD 10.3bln in August vs AUD 12.1bln in July. The bank cites the pullback in iron ore spot price as the main driver of the reversal, in turn hurting exports and export earnings. Imports meanwhile are expected to tick modestly higher, with the caveat of uncertainty associated with lockdowns.

US ISM SERVICES PMI (TUE)

The street looks for the Services ISM to ease a little to 61.3 in September from the 61.7 in August. As a proxy, Markit’s flash Services PMI for September saw the headline slip to a 14-month low of 54.4 from the 55.1 in August, which the survey compiler framed as a solid but slower rise in business activity across the service sector.

Contributing to the softer rate of activity was a slowing rate of new orders, which some see as an ominous sign for future activity, with that particular sub-index having eased for a fourth straight month amid less robust demand conditions and ongoing Covid worries.

Services sector employment levels were little changed, though Markit noted that wider cost pressures remained historically elevated, as greater supplier prices and increased wage bills following incentives to entice workers pushed costs up. Firms were seeking to pass on these higher costs with a rise seen in output charges.

"The pace of US economic growth cooled further in September, having soared in the second quarter, reflecting a combination of peaking demand, supply chain delays and labour shortages," Markit said, "the slowdown was led by a cooling of demand in the service sector, linked in part to the Delta variant spread."

NOTE: the final September services PMI will be released 15 minutes before the ISM services data on Tuesday.

RBNZ POLICY DECISION (WED)

The RBNZ is expected to lift rates at its upcoming Monetary Policy Review, with all analysts surveyed by Reuters unanimous in expectations for a hike, and with OIS pricing a 100% probability for the OCR to be raised by 25bps to 0.50%.

As a reminder, the RBNZ opted for a hawkish pause at its last meeting, where it defied dwindling expectations for a rate increase, citing the imposition of Level 4 restrictions on activity across New Zealand and health uncertainty.

The Committee did agree, however, that the least regrets policy stance was to further reduce monetary policy stimulus, and members concluded that they could continue removing stimulus following the decision to halt LSAP in July.

Governor Orr doubled down on his hawkish rhetoric shortly after the meeting, where he said Covid cases alone would not stop a rate hike, and that October is ‘live’, when asked about the potential for a hike. Assistant Governor Hawkesby recently noted that the RBNZ considered raising the OCR by 50bps at the last meeting, though decided to hold rates due to a communications challenge, not economic risks.

Therefore, with the lower Covid alert status (Auckland is currently at Level 3, the rest of the country is at Level 2), there does not seem to be much impeding the central bank from resuming its policy normalisation strategy. The latest key economic data also suggests there is some leeway in the economy to tighten policy after Q2 GDP topped estimates.

ECB MINUTES (THU)

As expected, the ECB stood pat on rates, and held the size of its PEPP envelope at EUR 1.85trl. The key adjustment to the policy statement was that purchases under PEPP were to be conducted at a “moderately lower” pace compared to Q2 and Q3.

The ECB further opted to maintain flexibility of its PEPP envelope by noting that the entire size of the facility need not be used in full, and the central bank could even expand it if it was deemed necessary to ensure favourable financing conditions.

At the follow-up press conference, President Lagarde noted that the Euro area economic rebound was in an increasingly advanced stage, and output was set to exceed pre-pandemic levels by the end of the year.

Subsequently, the accompanying economic projections saw the central bank’s 2021 growth forecast upgraded to 5.0% from 4.6%, with the base-effect spill over resulting in a minor tweak lower to the 2022 growth view, to 4.6% from 4.7%, while 2023 growth view was left unchanged at 2.1%. T

he ECB still characterises inflationary pressures as transitory, however, its 2021 inflation projection was lifted to 2.2% from 1.9%, 2022 CPI forecast was raised to 1.7% from 1.5%; note, 2023 was revised up a touch to 1.5% from 1.4%, and thus it still sees inflation below target at the end of its forecast horizon.

Note, the conversation around inflation might be regarded as slightly stale given the continued supply-side pressures observed since the meeting.

Lagarde went on to state that the decision to slow purchases, and the wording in the statement, was unanimously agreed.

For those looking for clues on “life after PEPP”, the President remarked that discussion will take place at the December meeting. Any hints over what to expect from the December meeting and how the GC is split on the matter will be of great interest to the market. Albeit, given the time lag between the meeting and publication, there is always an air of staleness when it comes to digesting the relevance of the account.

RBI RATE DECISION (FRI)

The RBI is expected to hold its repo rate steady at 4.00%, although analysts are noting upside risks, given the current inflation situation. Mitigating the calls for an inflation-induced hike, however, is the Covid situation in India, alongside a negative output gap and continued slack in demand.

The recent meeting minutes suggested that, in a scenario where inflation is north of 6%, the RBI will likely move on rates; for reference, August headline inflation printed 5.3%.

“Even though growth is the priority now, the central bank also wants to maintain its credibility in flexible inflation targeting by ensuring long-term expectations are well anchored,” Credit Suisse (SIX:CSGN) stated. The Swiss bank expects the RBI to persevere with the current repo rate until March 2022.

US LABOUR MARKET REPORT (FRI)

The consensus looks for 500k nonfarm payrolls to be added to the US economy in September, which would be a cooler rate of growth than the three- and six-month average rate, though in line with the 12-month average (3-month average is 750k/month, the six-month average is 653k/month, and the 12-month average is 503k/month – that technically at least suggests an improving rate of payrolls growth in recent months).

The September data release may turn out to be a more benign affair than the releases we have seen in recent months; the Fed is almost certain to announce a tapering of its asset purchases at its November meeting, barring any significant collapse in incoming data between now and then, and at his post-meeting press conference in September, Chair Powell said he’d only need to see a ‘decent’ jobs report before committing to a taper.

This suggests that the bar to begin the taper is low, and since Fed officials have attempted to disconnect the taper process from eventual rate hikes, and accounting for the length of time between now and market estimates of the first interest rate hike – money markets currently price some probability of lift-off in late 2022 – the September jobs data may prove less useful in providing any policy reads.

As has been the case in recent months, the more informative metrics may be the underemployment rate and employment-population ratio, which will help us to understand the extent to which slack remains in the economy; additionally, the wages figures will help us understand how cost push inflation is driving employee demands for higher compensation (the idea is that any significant upside in wages over the coming months would challenge the Fed’s ‘transitory inflation’ narrative, and perhaps lead market participants to begin pricing sooner rate hikes).

CANADIAN LABOR MARKET REPORT (FRI)

Canadian bank RBC is looking for 50k job additions in September, after 90.2k added in August (and a cumulative 415k job additions over the last three-months).

"We think gains will continue in the hardest-hit industries, notably food/accommodation where the deficit to Feb-2020 is still around 150k despite rising 210K in the last three months," and adds that "improvement in long-term unemployment and the hardest-hit demographic groups is also likely welcomed by the BoC, which has focused more on the labour market during the pandemic than previous cycles."

RBC also looks for the jobless rate to fall to 6.8% in September from 7.1% prior; it notes that the September figures may see some impact from people coming-off unemployment support programmes.

As an aside, it is worth noting that BoC Governor Macklem will deliver remarks on Thursday, his last scheduled appearance before the end-October MPR meeting.