Week Ahead: data heavy week to test market resilience

By Kathleen Brooks, research director at XTB

Central bank decisions, earnings releases and a plethora of economic data will set the tone for financial markets this week. Below, we analyze the most important releases, and why Chinese shares are vulnerable.

UK: pound in focus as CPI set to fall below BOE’s target rate

This the busiest week of the month for UK data releases, and the impact on the pound will be watched closely. GBP/USD has tanked since the end of September, and has fallen back from $1.34 to $1.3050, where it has found decent support. This week’s UK economic data will test that support level and see how far the selling interest in the pound will go. The pound’s sell off so far in Q4 has been steep, but it is not the worst performer in the G10 FX space. The yen and the Kiwi dollar are both underperforming the pound, as the dollar makes a rapid comeback.

The data releasees in the UK come thick and fast this week. On Tuesday we get labour market data. Employment data is expected to remain strong in the 3 months to August, with the UK economy expected to have created 238k jobs. The unemployment rate is expected to remain steady at 4.1%, however wage data could generate the biggest market reaction. Analysts expect wage growth to moderate in the three months to August. Average weekly earnings are expected to moderate to a 3.7% YoY rate, down from 4% in July. If analysts are correct, then this would be the first sub-4% reading for wage growth since 2020. It may also signal that inflation in the UK is now under control, which would support further interest rate cuts from the Bank of England.

Wednesday’s UK CPI reading will be the most important determinant of the BOE’s next move, in our view. Analysts are expecting inflation growth to moderate to a 1.9% annual rate in September, down from 2.2% in August. If estimates are correct then this is a big milestone for the UK, as it would be the first reading that is below the BOE’s target 2% rate since 2021, and it would also be a sign that the BOE’s fight with inflation is over. If inflation does fall below 2% for September, then this is slightly below the BOE’s own forecasts for inflation that were included in the August Monetary Policy Report. The BOE expects inflation to rise to 2.75% by year end, due to weaker base effects from energy price comparisons to 2023. However, over the longer term, inflation is expected to remain close to the 2% inflation target. The trajectory for headline inflation is benign, however, service price inflation has been a bigger difficulty for the BOE. Analysts are expecting service price inflation to retreat to 5.2% in September, down from 5.6% in August. Even if service prices do moderate, they are likely to remain too high for the BOE to be worried about deflation risks to the UK economy.

How UK CPI could impact the pound

The big question for traders is how the economic data will impact UK asset prices. Interestingly, the response to CPI data has on average over the last 12 months, been more keenly felt in the bond market compared to the FX market. In the 30 minutes after a UK CPI release, UK gilt yields have risen by 1.17% at the upper bound, and they have fallen 1.22% on the lower bound. In contrast, the average response in GBP/USD is negligible, the largest upside move was 0.17%, while the largest downside move was 0.2%. However, for most of 2024 so far, GBP/USD has been in a steady upward trend, which could explain why this pair’s reaction to a key economic data release like UK CPI has been mild. But the uptrend abruptly reversed course in late September, and GBP/USD is lower by 1.6% since the start of this month. Thus, we think that the pound will be sensitive to this week’s release. If the UK follows the US and inflation surprises to the upside, then it could be used as a platform for a GBP recovery.

The week will end with UK retail sales data. The market is expecting retail sales to fall on a monthly basis in September, with retail sales ex auto fuel expected to decline by 0.3%. However, the annual rate is expected to increase to 3.1% from 2.3%. Retail sales have been weak in recent months and badly effected by the weather. Better weather in September could have spurred a recovery in consumption. Added to this, BRC retail sales data showed a pickup in consumption last month, and it reported like for like sales growth of 1.7%. Thus, analysts may be too downbeat on the UK consumer, and a positive upside surprise could be possible.

US: election risks start to mount for bond traders

In the US, the focus is turning more and more towards the election in November. The latest polls put Kamala Harris in the lead, but by a very small margin. Harris is expected to win 48.9% of the vote, vs. Trump’s projected 47.2%, according to RealClearPolitics’ poll average. Thus, the outcome of the US election is still a coin toss. US 10-year yields have continued their trend higher in recent days, and they remain above 4.1%. The 2-year yield has backed away from 4% and is currently at 3.95%. Thus, the 10-year yield could trade with an upward bias in the lead up to the election since both candidates are expected to trigger an increase in the US government deficit.

JP Morgan confirms a soft landing for the US economy

The S&P 500 rose to a fresh record high on Friday, above 5,815, the rally was led by financials after a strong set of earnings results from some of the US’s biggest banks. JP Morgan’s share price jumped by 4.4%, its highest level since August. The bank said that the US economy would achieve its ‘soft economic landing’ and the CFO called the US’s economic situation a ‘goldilocks scenario’. JPM’s earnings data for Q3 suggests that it’s a goldilocks situation for the US’s largest bank. EPS, revenue and net income all beat expectations. Revenue surged by $43.3bn in Q3, and net income expanded by $12.53bn. The impact of these strong results is that forecasts for 2024 profit levels overall are likely to be revised higher in the coming weeks, which is positive for JPM’s share price. JPM guided that net interest income, the amount that the bank earns from its lending activities, is expected to be $87bn for 2025, which could be too high if the Fed cuts rates at a faster clip than expected. NII guidance for Q4 was slightly weaker than analysts expected, however, the bank said that weaker NII would be balanced out by a stronger economic outlook. Investment bank activity was stronger than expected, and charge-offs were lower than expected. Overall, this was a strong report from JPM, and the bar is high for other US banks reporting next week, including Bank of America, Goldman Sachs, Citigroup and Morgan Stanley. Netflix will also report results on Thursday evening, which is considered the start of earnings season for US tech firms. We have already posted our preview for Netflix Q3 results, which is worth a read if you plan on trading around the streaming giant’s results. We expect a strong earnings report, and a couple of announcements that may boost revenue down the line.

As we start a new week, it’s hard to fault the US stock market. The ‘soft landing’ theory is playing out in the stock market, a fifth of companies have made a new 4-week high, and 75% of companies are now trading above their 200-day moving averages. The latter point is worth noting. When components of an index trade above their 200-day moving average, it can signal two things. Firstly, the index could be overvalued and at risk of a sell off if economic data disappoints, or if corporate earnings reports don’t meet expectations. However, it can also suggest strong upward momentum, which may continue to lift the main US stock market to more record highs. The dollar is also the strongest performer in the G10 FX space so far this month, and the dollar index rose for the second consecutive week. On a broad basis, the DXY is up 2.38% in the last 2 weeks, which is the largest 2-week gain since 2022.

The ECB set to move to the dovish side

Elsewhere, there is a 95% chance of a rate cut from the ECB this week. There is also a cut fully priced in for December, although the ECB has been at pains to say that it will make decisions on a meeting-by-meeting basis. However, could the ECB shift to a more dovish stance at this week’s meeting? Eurozone inflation is now below the ECB’s target rate at 1.8%. CPI in Germany is even weaker at 1.6%, which is also a reflection of a weak economy. German exports and imports are falling, and German factory orders tumbled by more than 5% in August. Will this be enough to turn Germany’s notoriously hawkish ECB officials towards a more dovish stance? If yes, then this could point to an acceleration in monetary easing by the bank, which may weigh on the euro. The expectation of a rate cut from the ECB has made the Fitch downgrade to the outlook for French debt easier to swallow. It was revised to negative from stable on Friday, and comes after the new French government unveiled their latest budget.

The interest rate futures market is still expecting 6 rate cuts from the ECB by September next year. We don’t think that the ECB will point to more than 6 rate cuts in this cutting cycle, however, we do think that they could front-load cuts, and the possibility of a 50bp rate cut in December could be put on the table. The euro could be at risk of another sell off. EUR/USD has fallen by 1.2% since the start of the month, but a dovish ECB could push this pair back towards $1.08, the low from August. EUR/GBP could also be at risk. This pair has failed to break above resistance at 0.84 and may return to recent lows around 0.8320 as we lead up to the ECB meeting on Thursday.

LVMH’s China effect may take time to materialize  

Earnings results are also in focus in Europe this week. LVMH is scheduled to report Q3 results on 15th October. It will face easier annual comparisons compared to Q2. However, there is a lot of divergence in the fortunes of luxury companies, as the market remains tough. The recent China stimulus package has helped the LVMH share price to rally nearly 8% in the past month. Hermes is also higher by 11%. However, it is too early for the China stimulus package to have an impact on LVMH earnings, and a potential bounce back in Chinese luxury spending is a story for Q4. LVMH’s share price has given back nearly 50% of the gains it made after the China stimulus measures, and the share price is still close to 2-year lows. Thus, this earnings report will be vital to determine what the share price does next. The forward guidance is particularly important.

ASML earnings could spark a recovery in the share price

ASML, the semiconductor equipment maker, will also report results this week. Its share price is down 20% since reaching an all-time high in June. The market is expecting revenues of EUR 7.19bn, net income is expected to be EUR 1.91bn, while EPS is expected to come in at EUR 4.88. Analysts are expecting strong sales in Q3, which could help the company to achieve its sales target of EUR 27.6bn for 2024 as a whole. The Q3 order bookings will be in focus to try and gauge revenue growth coming down the line. A strong set of earnings could help the ASML share price to stage a recovery.

China officials dash fiscal stimulus package hopes

Elsewhere, the Chinese shares may have opened the week up more than 1%, however the CSI 300 stock market is still the weakest performer out of the main global indices so far in Q4. The start of the week was a volatile session, after inflation data for September was weaker than expected. The CPI rate is a mere 0.4% YoY, while PPI was -2.8% last month. This is hardly an inflation rate that cohabits with strong economic growth. The inflation data supports stronger stimulus measures from Beijing to boost domestic demand. The Ministry of Finance press conference on Saturday was considered lacking in detail. The MOF said that it was possible that the government would raise the deficit above 3% of GDP for next year, they also hinted at more support for the property sector. However, this may not be enough to save the CSI 300 from another sell off later this week, as the statement was considered to lack firepower. We will be watching to see if the MOF statement leads to a bigger unwind of the large rally in September. Combined with inflation fears, investors may take a cautious stance towards owning Chinese shares in the coming weeks, which could be good news for the Nikkei and Japanese stocks more broadly. The disappointing MOF statement at the weekend was felt most strongly in the oil market, and Brent crude tumbled more than 1% on Monday. It may take solid details about future Chinese stimulus measures to help the oil price stage a recovery rally. 

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