5 Key Things to Watch: Q4, Tankan Survey, RBA, NFP, Carry Trade

We had post-QE taper-to-be-delayed Fed jawboning all week, with Kansas City’s George indicating there’s been enough job creation in the US to warrant a US$ 15 billion taper. Perhaps she’s oblivious to the declining labour participation rate, but there’s some sensibility in reducing the Fed’s balance sheet. USD has been underwater for four consecutive weeks, and JPY turned in its best weekly performance in September. Unsurprisingly, AUD notched its toughest week since early August, and NZD fell sharply to its worst weekly showing since late August. The Metals complex remains in the sick ward, and the Energy complex is trying to get past Syrian blowback. Here’s what we’re watching next week:

1. 1 October

Q4 begins in earnest on Tuesday. It’s time to look busy for our bosses so we can get a tidy bonus for 2013. It’s also time for the US government to turn the page on a new fiscal year. The only problem is the US government does not have a budget in place for fiscal year 2014. The US Senate is considering stopgap measures that would see Uncle Sam open for business until 15 November. Separately, the US government may breach its debt ceiling on 17 October, according to Treasury Secretary Lew. Some skeptics question how the US debt ceiling wasn’t pierced all summer, but we’ll leave that to the forensic accountants with green eyeshade to ponder. Swinging over to Japan – where it’ll be 1 October before most other places – we expect the Abe government will announce its long-awaited decision to up the sales tax to 8%, effective from April. We also expect Abe will take care of his constituents by announcing a ¥5 trillion supplementary budget.

2. Is Tankan tankin’ or spankin’?

Sticking with Japan for a moment, the quarterly BoJ Tankan survey is due on Tuesday. BoJ boss Kuroda is reading from the same choir book as Abe and finance boss Aso, and is doing whatever he can to orchestrate a weaker yen. It is estimated that for every ¥1 depreciation in USD/ JPY, some ¥30 billion in Japanese corporate profits evaporate. JPY was having its worst month since April before this week, and Tokyo knows better than everyone else how big the stops are below ¥97.65 and ¥96.70. Beyond that, it doesn’t want to give yen bulls an opportunity to test ¥95.80. The markets expect the large manufacturers’ index to come in around +7, with the large manufacturers’ outlook forecast to print at +10.

3. RBA: Flight or Cast?

OK. A group of doves is known as a flight and a group of hawks is known as a cast. Traders are speculating policymakers have their field glasses firmly affixed upon the former. RBA’s benchmark rate is a record-low 2.50%. It’s way too early into the new Abbott government to know if its putative pro-business policies are going to ignite some Aussie business activity. The mining boom has probably seen its best days; China will need to address its shadow banking and off-balance sheet funding issues sooner rather than later; and Australian unemployment is expected to dart higher. Were it not for an 8% year-to-date increase in Sydney house prices – and an average 5.1% increase in other major cities – RBA’s decision might be easier. Sydney is currently expected to see house price appreciation of 20% in 2014, rendering it very easy to understand why Stevens and other RBA mandarins are reluctant to push borrowing costs lower. The swaps market is only pricing in about a 12% chance the RBA cuts next week. On top of that, Oz’s fiscal position is worsening, and is not expected to return to surplus before 2017.

4. US non-farm payrolls

It’s that time of the month again. With the Fed opting to not taper this month, the odds of an October have increased, notwithstanding the fact that Bernanke is not currently scheduled to hold a post-FOMC presser in October. That means that September NFPs due next Friday will take on added significance, especially if you subscribe to the Esther George school of thought regarding the sufficiency of US jobs growth to date and the need to taper QE now. The +169,000 print for August NFPs was not well-received, and early whispers are focusing on a gain around +175,000. Let’s see if US labour markets give the Fed enough ammo to taper.

5. The Carry Trade Liveth

There was some indication this week that some long carry trades are getting nervous by weakening economic numbers in New Zealand and Australia, and by the sharp bounce higher by JPY. Despite the “risk off” tone to this week, A$ is still on track to notch its best month since March, and NZ$ is poised to register its strongest monthly gain since May 2009. The market’s ability to keep USD/JPY above some key levels will be important drivers here. On the crosses, a break in AUD/JPY below ¥89.90/ ¥86.25 and a breach in NZD/JPY of ¥75.50/ ¥72.15 will see capital flight from the Antipodes in favour of the northern hemisphere.