ECB presents a disturbingly high risk

Genevieve Signoret

Macro Views

Not only did the FOMC end quantitative easing on Wednesday, it made no effort to cushion the hard fact that it will probably hike rates next year. This is bad news only if this would be a mistake. With incoming data point so far pointing to U.S. growth acceleration and falling labor market slack (unemployment), our view is that a rate hike next year probably would not be a mistake. But the downside risks are high. We expect acceleration to be less abrupt and incoming labor market data to be spottier than the consensus and Fed presidents do, hence we do not foresee a rate hike before July. If we’re right about the data but the Fed acts earlier, the Fed could derail the U.S. economic expansion. With the euro area as a whole teetering on the verge of deflation and four individual members already over the edge, and with China rebalancing and trying to deflate a credit bubble, a Fed error via premature tightening could tip the global economy into recession.

Sadly, an ECB error, while also not envisioned in our central scenario, is far more likely than a Fed error. While we expect the 24-member Governing Board to announce more aggressive stimulus next Thursday, we recognize a disturbingly high risk that it will not.

Next week in detail

Events in red are those most likely to shake markets.

During the week

  • China: Foreign trade (Oct). The Financial Times argues that Chinese foreign trade figures are regularly distorted by illicit bets on the Chinese renminbi.  The September release showed a surprisingly large uptick in exports (15.3% y/y from 7.0% in Aug) and in imports (7.0% y/y from 2.4% in Aug).
  • Korea: Foreign trade (Oct).

Saturday 1

  • China: NBS manufacturing PMI (Oct). China continues to slow down, and the HSBC Flash Manufacturing PMI signals near stagnation (50.4 from 50.2 in Sep). Consensus: 51.2 (from 51.1 in Sep).

Monday 3

  • Global: Markit manufacturing PMIs (Oct). October flash PMI showed an improvement in the global manufacturing sector. On Monday, we’ll have the complete and final data.
  • China: NBS nonmanufacturing PMI (Oct).
  • Korea: Foreign trade (Oct).
  • Turkey: Consumer prices (Oct).
  • USA: Light vehicle sales (Oct), ISM manufacturing PMI (Oct). Last week, October’s Markit flash PMI (56.2, down from 57.5 in Sep) showed U.S. manufacturing having slowed down some but still expanding at a decent pace. Consensus: 56.5 (from 56.6 in Sep).
  • Brazil: Foreign trade (Oct).
  • Mexico: Family remittances (Sep), IMEF manufacturing and nonmanufacturing PMI (Oct).

Tuesday 4

  • Korea: Consumer prices (Oct).
  • USA: Foreign trade (Sep), legislative elections (one third of Senate, entire
    Polls suggest Democrats won’t recover the House and could lose the Senate. However, races in Georgia, Iowa and Kansas could affect this result.
  • Brazil: Industrial production (Sep).

Wednesday 5

  • Global: Markit services PMIs (Oct).
  • USA: ISM nonmanufacturing PMI (Oct). Consensus: 58.5 (from 58.6 in Sep).
  • Mexico: Inegi manufacturing PMI (Oct), Banamex survey (H2 Oct), consumer confidence (Oct).

Thursday 6

  • Japan: Monetary policy meeting minutes (Oct 6-7). Yesterday at its monetary policy meeting the Bank of Japan decided to increase its annual monetary expansion rate to 80 trillion yen from 60­­70 trillion and to expand its asset purchase program by 30 trillion yen. Careful: these minutes pertain to the previous meeting.
  • Euro Area: Monetary policy meeting. Last month, banks borrowed less than expected using the ECB’s targeted longer-term refinancing operations (TLTRO). Meanwhile, the ECB has purchased only about 1.7 Bn in covered bonds—a mere baby step toward its balance sheet expansion target of of 1 Tn. Consensus: rate unchanged at 0.15%See our comments above.
  • UK: Industrial production (Sep), monetary policy meeting. Consensus: rate unchanged at 0.50%, no change in their asset purchase program at £375 Bn.
  • USA: Unemployment claims (Nov 1).
  • Brazil: Monetary policy meeting minutes (Oct 29).
  • Mexico: Banxico survey of professional forecasters (Oct).

Friday 7

  • Germany: Industrial production (Sep), foreign trade (Sep).  Last month’s Germany industrial production result (4.0% year on year) set off alarms. Was it a blip or something worse? Consensus: 1.8% month on month (from in Sep).
  • UK: Foreign trade (Sep).
  • USA:Commercial bank lending (Oct), nonfarm payrolls and unemployment rate (Oct), consumer credit (Sep). Consensus: nonfarm payroll change, +215K (from +248K in Sep); unemployment rate, unchanged at 5.9%.
  • Brazil: Consumer prices (Oct).
  • Mexico: Consumer prices (Oct).
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