Market participants got busy straight from the opening of the week, with China's GDP data coming out worse than expected, forcing a reduction in risk exposure. Later in the week, inflation is likely to return to the spotlight, with the UK and Canada reporting their September numbers.
With the latest supply shortages around the globe, the preliminary PMIs from the Eurozone, the UK, and the US, may also attract special attention.
On Monday, the most important data are out, and those are New Zealand's CPI for Q3 and China's GDP for that quarter.
Getting the ball rolling with New Zealand's CPI, the QoQ rate jumped to +2.2% from +1.3%, pushing the YoY rate up to +4.9% from +3.3%. At its latest meeting, the Reserve Bank of New Zealand (RBNZ) raised interest rates by 25 bps, as expected.
In the accompanying statement, officials appeared optimistic, noting that further removal of monetary policy stimulus is expected over time. Therefore, accelerating inflation may have increased the chances for another rate hike by this Bank very soon, and that's why the Kiwi was found as the second in line gainer among the major currencies this morning.
However, more aggressive tightening by central banks around the globe could weigh on the broader market sentiment, keeping gains of the risk-linked Kiwi limited.
Market Participants Reduce Risk Exposure
Speaking about the broader investor morale, overnight, as indicated by the performance in Asian equities, market participants may have decided to reduce their risk exposure.
The reason may have been the more-than-expected slowdown in China's GDP for Q3. In quarterly terms, the world's second-largest economy slowed to +0.2% from +1.2%, which pushed the YoY rate down to +4.9% from 7.9%.
Fixed asset investment and industrial production for September also slowed. Only retail sales accelerated. China has been facing several problems recently.
From potential property defaults due to Evergrande's (OTC:EGRNY) failure to pay interest to its bondholders to power outages and from stricter government regulation on tech firms to new lockdown measures due to the spreading of the Delta coronavirus variant are factors affecting the country's prospects.
A more-than-expected slowdown in Q3 may have raised concerns over how the economy could fare in the last quarter of the year and the spillover effect on the rest of the world.
Later in the day, we get the US industrial production for September and the Bank of Canada's (BoC) Business Outlook Survey. The US industrial production is expected to have slowed to +0.2% MoM from +0.4%. We will scan the BoC's Business Outlook Survey to see how well Canadian firms performed.
An optimistic report, combined with accelerating inflation on Wednesday, adds more credence to the case of further tapering by the BoC at its upcoming monetary policy meeting, scheduled for Oct. 27.
On Tuesday, during the Asian session, the Reserve Bank of Australia (RBA) releases the minutes from its latest gathering. Later in the day, the US building permits and housing starts for September are coming out.
With regards to the RBA minutes, we don't expect any fireworks. At that meeting, the Bank kept all its policy settings untouched, with officials noting that they will continue to purchase government securities at the current pace until at least mid-February and maintaining the view that interest rates are unlikely to rise before 2024.
They also appeared relatively optimistic, saying that the setback to the economic expansion is expected to be only temporary as vaccination rates increase and restrictions ease, the economy will bounce back.
As for the US data, building permits could decline somewhat, while housing starts are forecast to increase fractionally.
On Wednesday, inflation will retake center stage, with the UK and Canadian CPIs for September entering the spotlight. Eurozone's final CPIs for September are also coming out. Still, as is always the case, they are expected to confirm their preliminary estimates, and thus, we expect them to pass unnoticed.
Regarding the UK data, the headline CPI rate could hold steady at +3.2% YoY, while the core data could tick down to +3.0% YoY from +3.1%. Despite the potential slowdown in underlying inflation, both rates could stay well above the Bank of England (BoE) objective of 2%.
Thus, if the forecasts are met, we doubt they could alter market expectations around the BoE's future policy plans. With BoE Governor Andrew Bailey and MPC member Michael Saunders expressing willingness to push the hike button soon, market participants anticipate a 15 bps hike before year-end.
However, we are a bit more cautious about further advances despite the latest rally in the pound, which was the leading gainer against the other majors on Friday and today in Asia.
This is because we don't see much room for hike expectations to come forward due to concerning headlines surrounding the UK economy. We will get a clearer idea from the preliminary PMIs for October, which is due on Friday.
The technical outlook of the pound has turned positive against most of its peers, but we are reluctant to call for a long-lasting recovery. We prefer to take things step by step. For now, we will continue aiming higher, but with the first sign of weakness, we will re-evaluate the outlook.
As for the Canadian numbers, the headline CPI rate could increase to +4.3% YoY from +4.1%, while no forecast is available for the core rate.
As we already noted, accelerating inflation could add to the case for further tapering by the BoC at next week's gathering and may prove supportive for the Canadian dollar, which has been performing very well recently, thanks to the rally in oil prices.
Let's not forget that Canada is the world's fifth-largest oil-producing nation, while it holds fourth place in exports.
The only release worth mentioning on Thursday is the US existing home sales for September, with expectations pointing to a slight increase.
Finally, on Friday, the spotlight will be on the preliminary PMIs for October from the Eurozone, the UK, and the US.
In the Euro area, manufacturing and services indices are expected to have declined somewhat, taking the composite one down to 55.4 from 56.4. This could confirm that the latest energy shortages have left their mark on the Euro-area economy and may weigh somewhat on the euro.
No forecasts are available for the UK prints, while expectations are for only fractional changes in the US. If they materialize, we don't expect it to impact the greenback significantly, as they may barely alter expectations around the Fed's course of action.
As of now, market participants remain convinced that the Committee will begin its tapering process in November, while, according to the Fed funds futures, they expect a 25 bps hike in November 2022.
Elsewhere
As for the rest of Friday's releases, during the Asian session, Japan's National CPIs for September, while later, during the early EU session, the UK retail sales for the same month are coming out. No forecast is available for the headline print in Japan, while the core could rebound to +0.1% YoY from -0.2%.
This will still be well below the Bank of Japan's (BoJ) target of 2%, and it is unlikely to tempt policymakers to start thinking about withdrawing support anytime soon. The headline and core UK retail sales could rebound in September after sliding in August.