The direction of the European Central Bank’s monetary policy and the state of the U.S. labor market will be the main themes of the week ahead as traders determine the odds of a taper announcement at the Fed’s October 29-30 meeting.
In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.
1. JPY- Japan Tankan Index, a Bank of Japan quarterly survey of large and small businesses considered as the main indicator of economic conditions in Japan, Mon., Sept. 30, 7:50 pm, ET.
Since last December, the Tankan survey has been one of the reports representing gradual improvement in economic conditions by moving from negative into positive territory. The index is forecast to continue this trend with a larger expansion and a reading of 7 in Q2 2013 compared with 4 in the previous quarter. The report could keep the JPY well bid on reduced chances for additional easing by the Bank of Japan.
2. AUD- Reserve Bank of Australia Interest Rate Announcement, Tues., Oct. 1, 12:30 am, ET.
Even though there is still room for rate cuts, if needed in the future, the Reserve Bank of Australia already reduced the benchmark rate by 25 bps in August and will not be in a rush to cut rates again in October and possibly for the rest of the year. The Aussie dollar has fallen significantly in recent months and could stay under pressure on risk aversion or if the central bank decides to keep the door open to further monetary policy easing.
3. EUR- Euro-zone Unemployment Rate, the main measure of labor market conditions, Tues., Oct. 1, 5:00 am, ET.
No end in sight is expected for the euro-zone economy’s record-high unemployment with forecasts pointing to a reading of 12.1% in September, same as the previous month. The report could serve as a reminder that although the recessionary period has come to an end, unemployment is still a big hurdle for the 17-nation economy.
4. USD- U.S. ISM Manufacturing Index, a leading indicator of economic conditions measuring activity in the manufacturing sector, Tues., Oct. 1, 10:00 am, ET.
Manufacturing activity in the U.S. has regained traction after the index unexpectedly dropped in contraction territory with a reading of 49.0 in May, but we could see a small monthly pullback to 55.3 in September from 55.7 in August.
5. EUR- European Central Bank Interest Rate Announcement, Wed., Oct. 2, 7:45 am, ET. Although activity in the euro-area has been picking up, ending the prolonged recession and the chronic contraction in euro-zone’s manufacturing and services sectors, the 17-nation economy is still struggling with record high unemployment. The European Central Bank will not tighten monetary policy anytime soon in this environment and will probably echo the message that policy will remain accommodative “for the foreseeable future”. The USD should be able to regain its strength against the EUR if the labor market data improves and the Fed gets ready to take the first step towards monetary policy tightening while the European Central Bank remains stuck in an easing mode.
6. USD- U.S. ADP Employment Report, a measure of job creation in the private sector of the U.S. economy, Wed., Oct. 2, 8:15 am, ET.The anticipated small increase to 177K in September from 176K in August might fall short of instilling confidence in the ability of the private sector to create enough jobs to persuade the Fed that it’s time to start tapering of monthly asset purchases in October.
7. USD- U.S. Jobless Claims, an important gauge of labor market conditions measuring first-time claims for unemployment benefits, Thurs., Oct. 3, 8:30 am, ET.
Jobless claims are forecast to stay close to their four-year lows with a reading of 315K from 305K in the week before. The trend of declining claims for unemployment benefits is a good leading indicator of future improvement in the U.S. labor market and if this is coupled with stronger jobs creation in the months ahead, the USD should benefit.
8. USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions measuring activity in the services sector, Thurs., Oct. 3, 10:00 am, ET.
The ISM services index is forecast to retreat from the August high of 58.6 with a reading of 57.2 in September.
9. JPY- Bank of Japan Interest Rate Announcement, Fri., Oct. 4, around 12:00 am, ET.
With the prospect of a corporate tax cut to offset the hike in the consumption tax currently off the table, come April 2014, the Bank of Japan might be asked to pick up the slack with additional easing. But for the time being, economic conditions have improved and inflationary pressures have risen, creating an environment in which the Bank of Japan wouldn’t need to get more aggressive. The central bank will be likely to reaffirm its commitment to open-ended QE until the 2% inflation target is in sight. As the monetary policies of the Fed and the Bank of Japan diverge in the months ahead, the U.S. dollar should be able to resume its bullish trend against the yen.
10. USD- U.S. Non-Farm Payrolls and Employment Situation, the main indicator of U.S. economic health measuring job creation and unemployment, Fri., Oct. 4, 8:30 am, ET.
Another disappointing nonfarm payrolls report will pretty much eliminate the odds of a Fed taper in 2013 and would contribute to what could become a miserable for the USD month of October. Weaker-than-expected readings and downward revisions for previous months have become a trend in the jobs data throughout the summer. Although we wouldn’t “bet the farm on it”, we could see a bit stronger job creation in September with the economy forecast to add up to 180K jobs compared with 169K in the previous month, while the unemployment rate stays at 7.3%. Should the NFP report surprise to the upside, the USD will regain its footing on expectations that there is still a chance that tapering of monthly asset purchases may be announced by the Fed at the October 29-30 meeting.