Week Ahead: 1st October 2018

As we start a new quarter, investors will be watching some key economic data releases in the coming days that could set the tone for FX and stock markets in the coming weeks and months. Below we point out three key events to watch out for this week.

1, Japanese Tankan Index: Q3

Early on Monday morning we will receive the latest Tankan index from Japan. This quarterly health check of the Japanese economy is expected to show a slight uptick in the headline index to 22 from 21, however, the forward-looking outlook index is expected to moderate to 20 from 21. The risk is to the downside, especially after the World Trade Organisation (WTO) said that global trade growth will slow this year and next due to the ramifications of trade wars. The Tankan index is heavily focussed on manufacturing, so it could be hit by trade wars and the threat of an increase on tariffs, especially on Japanese goods headed to the US.

The Market impact from a weaker than expected Japanese Tankan index could include a decline in the Nikkei, however, don’t expect the yen to follow suit. The yen is a haven, so it can react counter-intuitively when we get bad economic news in Japan. Thus, even if the Tankan is weaker than expected, the yen may still rise.

2, European, US, China PMI data – September

From Sunday through to Wednesday we get a deluge of global PMI survey data for September. This data will give us a steer on how the major economies performed at the end of the third quarter and what this may mean for Q3 GDP levels. The market will be looking for further evidence that the major global economies are slowing down. Chinese Data is expected to fall slightly, while UK PMI reports are expected to remain stable for October. The US ISM surveys are worth watching. The unofficial Markit PMI surveys for the US, which were released last week, showed a sharp slowdown for September, which could suggest that the ISM surveys will also moderate due to trade fears and higher rates on inflation caused by trade tariffs. As we have mentioned in previous notes, we think that it will be hard for stocks to continue to rally at already elevated levels if global growth starts to slow. This is especially relevant for US stocks due to their lofty valuations, and if we see weaker than expected ISM surveys this week then we believe that the major US stock indices could come under pressure in the coming days.

3, US Labour market report – September

The Labour market report for September, which is released this Friday, is also an important part of the US economic jigsaw. Currently, the market is expecting the US economy to create 190k jobs, down from 201k in August, the unemployment rate is expected to moderate to 3.8% from 3.9%, and wage data is expected to tick down to a 2.8% annual rate from 2.9% in August. While the headline NFP number and the unemployment rate are important, the labour market is a lagging indicator, thus it may not give us too much information about the health of the US economy right now. However, an NFP reading below 180k would suggest a cooling off in job growth that could weigh on the dollar. More important will be the wage data, as it is a key component of inflation pressure. A reading of 2.9% or above for annual wage growth could trigger a move higher in the dollar, and a potential move lower in stocks, as it would reinforce the need for a hawkish Fed and further rate hikes to stamp out future price pressures.

Market focus: the oil price

The oil price has been extremely volatile in recent weeks and rose a 4-year high last week. News flow is also important for the oil price now. At one-point last week, the oil price surged on the back of comments from the US energy secretary who ruled out the release of emergency US crude reserves to boost supply and ease upward pressure on the oil price.

As we start a new week, the same supply and demand dynamics are likely to play out in the oil market. The threat to global oil supplies from US sanctions on Iranian oil exports, along with Opec refusing to boost production levels, should keep upward pressure on the oil price, with $85 per barrel a key resistance level in Brent crude. Unless we see big economic data misses, particularly in global PMI reports that are scheduled for release this week, then we believe that the path of least resistance is for further upside in the oil price this week.