Global FX trends, Asia markets open
Asia FX seems to have dodged the bullet of ECB dovishness last week, opening this week rallying in response to benign US Q3 GDP data and a 0.8% rally in the S&P 500 on Friday. The US data showed a moderation in domestic demand growth despite the high 3% headline growth rate and a benign rise in core CPI inflation from 0.9% in Q2 to 1.3% in Q3, in line with expectations.
The US data combined with press reports that Trump is leaning toward nominating Jerome Powell to replace Fed Chair Yellen to allow two and ten year yields to fall about 3bps and 6bps respectively. Additionally, EURUSD’s ability to stabilize just above 1.16 after briefly trading below this on Friday has reduced this source of upward pressure on USD-Asia.

The week ahead is packed with first tier data and events that we expect to support risk appetite. Trump is expected to announce his nomination for Fed Chair this week and press reports suggest he is leaning toward Powell. Neither Yellen nor Taylor can yet be ruled out, but Trump’s recent comments suggest that he recognizes that the hawkishness of the latter might threaten equity markets and growth. Confirmation that its Powell or Yellen would likely be slightly bullish for risk whereas we think Taylor would force markets to raise pricing for 2018 by perhaps 10 – 15bps, challenging risk appetite and boosting the USD.

The FOMC is expected to keep the Fed Funds target unchanged this month and does not have a scheduled press conference. However, we think the language of the statement will turn slightly more hawkish, signaling a 25bps rate hike in December. The market is about 85% priced for a December hike and has about 56bps priced through December 2018. We think that’s about 24bps too low, but if the adjustment occurs gradually we doubt it will disrupt markets. On the growth front our economists expect the US ISM to surprise to the upside at 59.5 vs. the consensus for 59.4 and expect the China PMI to ease only 1/10th to 52.3, also slightly above the consensus. If correct, this should help to support risk appetite and flows into EM.

However, we think US payrolls data on Friday will be key to risk appetite for the next few weeks and within these focus on average hourly earnings. Our US team expects earnings growth to moderate to just 0.1%mom from September’s hurricane affected 0.5%mom gain. A softening in earnings growth won’t stop the Fed from raising the Fed Funds rate 25bps at its December meeting, but probably would prevent markets from pricing a faster pace of rate hikes in 2018.

In Asia, away from China, the main data comes from Korea where we expect October inflation to be 1.7%yoy, below the consensus for 1.9%, but September industrial production growth to be 5.1%yoy vs the consensus for 4.8%yoy. We think better-thanexpected growth is the main factor turning the Bank of Korea hawkish. This leads us to expect it to raise its policy rate 25bps in November.