FX - The Week Ahead: The current low US short rates and DXY need a very weak US September jobs report this week to sustain these levels

Softer US August inflation and spending data

• USD: US August core PCE inflation released on Friday prints at 0.13%MoM softer than the 0.2%MoM expected by consensus while on a YoY basis, core PCE rises 2.7% as expected. Super core PCE rises by just 0.16%MoM, slower than the already-benign readings in June and July. As the labor market and wage growth slow further super core inflation readings should remain soft. Headline PCE is also up by a very modest 0.09%MoM and the YoY moderates to 2.2% from 2.5%. In general, core inflation is running around 2% on a 3m/3m annualized basis as measured by both PCE and CPI which gives Fed officials more confidence that inflation will return to 2% on a sustainable basis.
   
• USD: However, shelter prices rise by a strong 0.47%MoM but this is already known from August CPI and Fed officials appear to be willing to look through stronger shelter prices as leading indicators such as new rents remain soft and continue to point to this category of inflation slowing in coming months. Meanwhile, August spending is modestly weaker than expected, up by 0.2%MoM in nominal terms and rising by only 0.1%MoM in real terms with overall spending for the third quarter likely on track to grow by 2%+ in real terms.

Week Ahead:

US – September jobs data in focus this week

• USD: US September nonfarm Payrolls – Citi: 70k, median: 133k, prior: 142k; Private Payrolls – Citi: 70k, median: 120k, prior: 118k; Manufacturing Payrolls – Citi: -20k, median: NA, prior: -24k; Average Hourly Earnings MoM – Citi: 0.2%, median: 0.3%, prior: 0.4%; Average Hourly Earnings YoY – Citi: 3.7%, median: NA, prior: 3.8%; Unemployment Rate – Citi: 4.3%, median: 4.2%, prior: 4.2% – the consistently weakening trend of labor market data over the last year has finally caught up to previously resilient payroll job growth, which has more clearly slowed in recent months. This slowing trend is consistent with typical employment patterns ahead of recessions even without factoring in a roughly ~70k/month overestimate of payroll job growth as implied by preliminary revisions. Citi Research expect the slowing trend to accelerate in September, with just 70k payroll jobs added. As the labor market starts to weaken more dramatically, wage pressures should continue to ease. Average hourly earnings were stronger than expected in August, rising 0.4%MoM, but Citi Research expect a much more modest 0.2% increase in September. Citi Research expect the unemployment rate to rise at least back to 4.3% in September with risks tilted towards a larger increase to 4.4%. This would be consistent with further signs of weakening labor demand in September.
   
• USD: US August JOLTS Job Openings – Citi: 7780k, median: NA, prior: 7673k – Citi Research expect JOLTS job openings to rebound modestly in August to 7780k after a larger than expected decline to 7673k in July. Over time, JOLTS openings have tracked relatively well with daily data on job postings from Indeed.com, which have moved sideways in recent months. As payroll job growth continues to slow with an already very low hiring rate, a likely pick-up in the layoff rate in the JOLTS survey could be a more obvious sign that the labor market is reaching an inflection point.
   
• USD: US September ISM Manufacturing – Citi: 46.9, median: 47.7, prior: 47.2 - manufacturing activity has remained subdued with manufacturing production mainly moving sideways on a 3m moving average despite the month to month volatility. The S&P Manufacturing PMI has remained in contractionary territory in recent months and the regional manufacturing surveys have stayed subdued as well. In the near term, Citi Research continue to expect manufacturing activity to remain subdued with interest rates still at a restrictive level. ISM Manufacturing is expected to decline to 46.9 from 47.2 in September with the main subindices like production, new orders and employment staying in contraction.
   
• USD: US September ISM Services – Citi: 51.7, median: 51.5, prior: 51.5 - services diffusion indices have generally remained in expansionary territory although the 3m moving average trend in ISM Services has been downward while for S&P Services PMI it has been staying very stably at supported levels. For the month of September, Citi Research expect ISM Services will increase modestly to 51.7 from 51.5. Markets will also be paying attention to the employment details that have been weaker in the S&P Services PMI.

Euro area and UK – Euro area HICP, ECB speak and Swiss inflation in focus this week

• EUR: Euro area Sep HICP — last important data ahead of the ECB October meeting. After softer-than-expected French/Spanish data this week, Citi Research have revised their EA forecast and now see headline easing to 1.7% YY from 2.2% in August, well below the implied profile in ECB Staff projections. Core CPI should also ease to 2.6%, implying a steep slowdown in MM growth to 0.0% MM (SA). Services inflation should be down to 3.8-3.9% YY (vs. 4.1% in August). Euro area HICP Inflation, September – Citi Forecast 1.7% YY, Consensus 2.0% YY, Prior 2.2% YY; Core Inflation, September – Citi Forecast 2.6% YY, Consensus 2.8% YY, Prior 2.8% YY (Services at 3.8-3.9%).
   
• EUR: ECB speakers: dovish turn? — many Governing Council members are scheduled to speak this week, with the focus on the hawks and whether a dovish pivot is possible ahead of the October meeting and following a host of disinflationary data. President Lagarde speaks in the European Parliament on Monday, with Isabel Schnabel on Wednesday at the ordoliberal Walter-Eucken Institute, where any dovish turn might meet a hostile reception and would thus matter even more.
   
• CHF: Swiss Inflation — Citi Research expect a drop in headline inflation due to lower oil prices, but steady core inflation at 1.1% YY as well as steady services and domestic goods & services inflation, despite Franc appreciation. Switzerland CPI Inflation, September – Citi Forecast 0.9% YY, Consensus 1.1% YY, Prior 1.1% YY; CPI Core, September – Citi Forecast 1.1% YY, Consensus 1.1% YY, Prior 1.1% YY.

Japan – Bank of Japan’s quarterly Tankan report in focus this week

• JPY: Bank of Japan Quarterly Tankan report: Business confidence DI to deteriorate modestly in September BoJ Tankan — Citi Research expect that large manufacturers’ business confidence DI will decrease from +13 in June to +12 in the September Tankan under the weight of sluggish domestic demand in China, the yen’s rebound, and suspended factory operations due to Typhoon No.10. Meanwhile, the headline DI at large non-manufacturers will probably drop from +33 in June to +32 in September, reflecting the adverse impact of the typhoon on service sectors. Rising labor costs are likely a potential drag on business confidence at small firms. Capex plans for FY2024 will likely remain solid. As in the previous survey, the key points in the September Tankan will be inflation-related numbers. Given the rebound in the yen in August, close attention will be to the impact on corporate FX assumptions and profit plans.

Commodity Bloc – Australian retail sales in focus this week

• AUD: Australia August Retail Trade: Citi forecast; 0.4% , Previous; 0.0% - retail sales likely rebounded in August, following a flat reading the month prior, possibly as households receive the boost from Stage 3 tax cuts. Citi Research believe a broad-based pickup is more likely in Q4. Spending on services categories remains elevated, although it has softened in recent months. Overall, consumption growth in Q3 will likely remain positive despite still-soft retail sales readings.

Asia EM – China official manufacturing PMI in focus this week

• CNH: China Manufacturing PMI September – Citi Forecast 49.3, Consensus 49.5, Previous 49.1 – Citi Research expect the manufacturing PMI to marginally improve to 49.3 on seasonality in September. As the off-season of heavy industrials has ended, operation rates of cement mills and output of crude steel have improved since the end of August. Operation rates of asphalt declined though. Export orders could be affected by the new US tariffs, but external demand should remain relatively stable, with South Korea’s exports momentum largely resilient in the first 20 days. Policy efforts to support the economy are clearly escalating – it could take some time for real impact to show.