There is no doubt that the ongoing US-China trade situation will remain the main focal point next week as investors are becoming worried that China may retaliate after US President Donald Trump signed into law a bill backing Hong Kong’s anti-government demonstrators. If China does retaliate then this could be bad news for risk-sensitive assets such as stocks, oil and commodity dollars next week.
Meanwhile the economic calendar is thankfully going to get busier after what has been a very quiet period over the past couple of weeks.
The week will start off with key PMI data from manufacturing and services sectors of major economies. The focus will also be on important Australian data and a couple of central bank rate decisions. Crude oil will take centre stage from mid-week, due to US oil inventories data and more to the point, OPEC’s meeting on Thursday. The week will end with the publication of monthly employment data from both North American nations.
So, there will be plenty of potentially market-moving events to focus on next week, which should mean elevated pockets of volatility here and there – which is great news for FX traders.
Manufacturing and services PMIs
- China: the official Chinese manufacturing and non-manufacturing PMIs will be released on Saturday. Manufacturing PMI is expected to print 49.5 vs. 49.3 last, while non-manufacturing PMI is expected at 53.1 compared with 52.8 expected. Caixin Manufacturing PMI for China will be published on Monday, while the Caixin Services PMI is due out on Wednesday. Interestingly, the Caixin PMI has improved in recent months while the official PMI has remained below the expansion threshold of 50.0. With the US-China trade situation still ongoing, we don’t expect a big improvement until at least when the phase one of the deal is signed.
- US: the closely-followed ISM manufacturing PMI will be published on Monday, while the ISM non-manufacturing PMI is released on Wednesday. Manufacturing activity has taken an alarmingly sharp turn at the world’s largest economy, raising fears over growth. The PMI peaked above 61.3 in October of last year. Since then activity has been decelerating, reaching low 50s in the summer, before dipping into contraction i.e. below 50 in September, where it has remained since. The last time the PMI remained below 50 for three consecutive months was in early 2016, which preceded a strong recovery that lasted a couple of years. The dollar bulls will be hoping to see a similar recovery in manufacturing activity this time around. Meanwhile, the non-manufacturing PMI has remained resilient, although it too has been decelerating in recent months.
- UK: the Markit Final Services PMI is due for release on Wednesday morning. The services PMI used to be a major data release for the pound, but with Brexit and election campaigns taking centre stage, UK data has taken a back seat. That being said, last week saw the pound fall sharply in response to the initial – the so-called “Flash” – release of the manufacturing and services PMIs as they both fell below 50. If the PMI gets revised upwards then we may possibly see a bounce for the pound, while a downward revision could have the opposite impact.
- US: The monthly non-farm payrolls report (Friday) will be the most important employment data in so far as the markets are concerned. Headline jobs growth has been declining over the past few months, although still showing decent gains of around 150K. However, if employment growth falters further – or worse goes into reverse – then the dollar could fall sharply in response, as the Fed could think about another rate cut in early 2020. The week’s other US employment indicators will include the employment components of the ISM manufacturing (Monday) and non-manufacturing PMIs (Wednesday), and ADP private sector payrolls report (also on Wednesday).
- Canada: As well as the US jobs report, we will have the Canadian jobs data (Friday) to look forward to on the same day. Canadian employment unexpectedly fell last month after two consecutive months of solid gains. A rebound in employment is what the CAD bulls will be hoping to see, while another negative reading could see the North American dollar tank as the likelihood of a Bank of Canada rate cut increases.
Central bank rate decisions
- RBA (Tues) is widely expected to keep its policy unchanged for the third consecutive month at 0.75%, following three rate cuts that starting in June. The probability of a 25 basis-point rate cut has been declining in recent weeks. According to the ASX’s RBA Rate Indicator, the implied odds of a cut are just 11%, down sharply from around 55% in October. Aussie traders will be focusing on the language of the rate statement for clues on future rate changes in Australia. As well as the RBA, this week will see the release of Aussie building approvals (Tues), quarterly GDP (Wed) and retail sales (Thurs).
- BOC (Wed) is also expected to hold its policy unchanged at 1.75%, currently the highest among the developed economies. Recently, though, the BOC has dropped its hawkish bias and if we see more dovish commentary at this meeting then the CAD could resume its slide as investors price in a potential rate cut at some point down the line. This would become more likely should Friday’s Canadian employment report also disappoints. Conversely, if the BOC is not as dovish as the markets expected, then the Loonie could outperform given the higher level of interest rates in Canada.
OPEC and crude oil
- OPEC (Thurs) will be meeting on Thursday to discuss extending the production quota. Analysts expect the organisation to announce an extension of the current output of 1.2 million barrels per day, due to concerns over excessive supply – not least in the US. Here, oil production has hit a new record high of 12.46 million bpd in September, up from 12.397m bpd in August, according to the US Department of Energy. The US therefore remains the largest oil producer.
- Meanwhile oil prices will likely respond to any noticeable changes in US Oil Inventories (Wed), which have been rising again of late – suggesting rising supply or weakening demand in the market.
- WTI: On Friday, oil prices fell almost 5% as fears grew that Russia will block an OPEC+ quota extension. WTI was still holding above the November low of $54.75 when this report was written, but if that level gives way then more losses could be on the way in early next week ahead of OPEC’s meeting later on in the week.