Global Macro Outlook for the week and Asia Open
The Employment Report, PCE, and the ISM manufacturing report are next week’s key data releases. We expect a gain of 200K for total nonfarm payrolls in August, above the year to-date average of 186K. The pace of job creation likely moderated in August after two months of above-trend growth. We expect a 0.2% MoM growth for average hourly earnings, which would push the year-over-year growth to 2.5% from 2.6%. This would be consistent with steady labor income growth, and continued strength in consumer spending. The unemployment rate has gone sideways since declining to 4.9% in January, but we expect this can tick down to 4.8% in the August report. We expect personal spending to grow by 0.3% and we put personal income growth at a strong 0.4% in July, supporting our view that solid consumption should continue to drive growth in the third quarter, supported by decent income growth. On the inflation side, we look for a flat reading in headline PCE due largely to declines in energy prices. This would push the year-over-year number to 0.7% from 0.9% in June. Excluding food and energy, the core PCE deflator likely rose by only 0.1%. Our forecast would push the year-over-year figure to 1.5% from 1.6%. We expect the August ISM Manufacturing Index to decline slightly, falling to 51.3 from 52.6 in July. However, this would mark the sixth consecutive month in expansion territory. Our forecast is in line with the view that growth in the global goods sector has rebounded from earlier in the year, but will likely remain muted in the near term. Other key data next week include consumer confidence, construction spending, vehicle sales, and trade balance.
NJA fixed income sentiment will likely weaken as weaker EM risk sentiment and the move higher in USDAsia triggers some position readjustments. The Fed Chair’s speech and subsequent comments have prompted markets to assign a higher probability to a rate hike in the coming months. Rising Fed rate hike risks will also prompt markets to lower the probability of near-term rate cuts in NJA. These factors should bias most curves to bear steepen. However, we think any sell-off is likely to be capped given a relatively supportive growth-inflation backdrop. This is a relatively busy week in data terms, our economists expect growth data to come in softer than consensus expectations. In the near term, we continue to see risks of underperformance in Singapore and are biased to fade further weakness in Indonesia bonds and reduce our FX hedges. Individually, we note:
-India: We expect markets to continue to consolidate, with risks that a modest scaling back of longs could hurt 10y bonds and 5y OIS segments.
-Indonesia: Bonds are likely to remain weighed down by weaker EM sentiment and the move higher in USDIDR.
-China: Markets will likely consolidate after the last week’s sell-off.
-Korea: We continue to see modest near-term bear steepening risks.
-Thailand: Markets are likely to weaken and curves bear steepen, as rising Fed rate hike risks dampen sentiment.
-Malaysia: Rates could rise as positioning interest weakens with weakening EM risk sentiment.