After a hectic week, the Golden Week holiday in China should bring some calm to markets. The key question for next week is whether the Indian central bank will hike policy rates by more than 25bp?
Asian market liquidity is expected to be thin, as Chinese markets are closed for a holiday during 1-7 October, and Hong Kong, Korea, and India are also out on public holiday on other days of the week. Nevertheless, it's quite a busy economic calendar dominated by manufacturing, trade, and inflation releases and the central bank meeting in India.
The weekend release of China’s purchasing managers index, followed by PMI releases for other Asian economies on Monday will set the tone for the markets. The key focal point in PMIs will be the new export order components and we'll be keeping an eye out for what that says about the trade war impact. However, this is still a soft indicator.
In the week ahead, we expect central banks in Romania and Poland to reiterate that their tightening paths are on hold for the remainder of 2018
With inflation expected to fall towards the target band in the next couple of quarters and a general dovish bias within the National Bank of Romania (NBR), we expect the central bank to stay on hold for the remainder of this year, likely citing the need to assess the impact of both the previous policy tightening as well as incoming data, after recent GDP growth figures surprised to the downside.
At the same time, we are seeing the market consensus, which was tilted towards more aggressive tightening, converging to our long standing call for a lower terminal rate between 3.25-3.50%. It seems the NBR also expects CPI and interest rates to converge, meeting somewhere within this range. Still, our latest reading of NBR rhetoric suggests overconfidence in achieving its inflation goals, which might turn into over-complacence. We expect the key policy rate to converge towards market rates, implying three more hikes from the NBR in 2019, of 25 basis points each. It's unlikely that the NBR will commit to regular open market operations to accommodate the interbank liquidity conditions, keeping more flexibility on liquidity management if needed to fend-off currency depreciation pressures.
Manufacturing and services data dominate next week, giving us an insight into how businesses are coping with trade concerns and weakening economic momentum in Europe
We get a raft of key September data next week, but there is a lot of uncertainty over the numbers given the potential for distortions related to hurricane Florence. Economic activity will undoubtedly have been impacted in the US East Coast region given evacuations and subsequent disruption, but the extent of the impact is also dependent on when the data was collected, adding to the level of uncertainty.
As such, we feel it makes sense to prepare for soft figures, but to “look through” them, given the underlying strength of the US economy. Indeed, any weakness is likely to be followed by a sharp rebound – similar to what we saw in jobs data, retail sales and industrial activity following Hurricanes Irma and Harvey last year.
The key data will be the jobs data, and the ISM reports. Wages will be in focus with another strong month-on-month rise likely. We probably won’t get a break above 3% year-on-year growth this month, but we certainly expect it next month. Meanwhile, the ISM reports should continue to indicate that business activity remains very robust. We will also hear from several Federal Reserve officials. They may provide more colour on why the Fed is looking for four more rate rises over the next twelve months and evaluating the risks to their predictions.
Discover what ING analysts are looking for next week in our global economic calendars