Hurricane Florence, Trade Storm, EM Squall: Economics Week Ahead

LAGOS (Capital Markets in Africa) – Hurricane Florence is poised to batter the Carolina coast, potentially dampening September hiring and third-quarter gross domestic product. The prospect of fresh talks between the U.S. and China raises hopes the trade storm will blow less fiercely. We think those hopes will be frustrated. Turkey’s larger-than-expected rate hike neutralized one of the policy missteps that drove the emerging market sell off. That’s good news, but structural weakness persist, and are set to increase into 2019.

Gauging the growth impact of storms ahead of time is difficult to do. That said, given the severity of the Hurricane Florence, and its path through a region that accounts for about 4 percent of U.S. GDP, it’s certainly possible that third-quarter growth could be affected. Chief U.S. Economist Carl Riccadonna estimates that the storm could shave approaching a tenth of a percent off the growth rate. That would still leave the U.S. economy clocking an impressive 2.7 percent expansion, on our forecast.

The global trade storm appears to be blowing a little less fiercely. The prospect of talks between U.S. Treasury Secretary Steven Mnuchin and Chinese counterparts was seen as evidence that there might be more jaw-jaw and less war-war. China’s yuan — a barometer of expectations — strengthened sharply.

The reality, though, is that past Mnuchin-led talks have not been successful at averting escalation. We don’t see why he’d be any more successful this time around, especially with Trump already tweeting defiance. Tariffs on an additional $200 billion in goods still appear more likely than not. We think that could shave 0.5 percentage points off China’s already-slowing GDP growth.

For emerging markets, the latest moves have helped restore a modicum of confidence. Turkey’s decision to hike interest rates to 24 percent from 17.75 percent exceeded market expectations, suggesting the central bank regained a little independence. Argentina had already raised rates to 60 percent. With less intense focus from the markets, Africa economist Mark Bohlund thinks South Africa — one of the main victims of contagion — will keep rates on hold when it meets Thursday.

Even so, the structural sources of weakness for emerging markets remain in place. The Federal Reserve is set to continue to raise rates, with a September hike a foregone conclusion and higher wage growth raising market estimates of the chance of a fourth move in December (we think they’ll stick with three). A trade war that deals a blow to Chinese demand could hurt commodity exporters. Political risks loom, notably October’s election in Brazil.

And the consequences of extreme policy settings will start to show up in weaker growth and high unemployment. In Argentina, monthly economic activity data points to GDP falling 4.2 percent year on year in the second quarter. Hurricane Florence will soon pass. Trade and emerging markets storms are likely here to stay.

U.S.
The regional PMI surveys will provide a first glimpse at manufacturing conditions in September, although the data will miss any impact from Hurricane Florence. For a first glimpse of the storms impact, markets will have to wait for the September ISM survey. — Yelena Shulyatyeva

Canada
Next week will be a busy one for Canadian data. The July manufacturing sales report on Tuesday will provide insight into whether the energy sector can continue to support strong sales growth heading into the Nafta negotiations in August. Friday’s CPI report will be an important look at whether inflationary pressures continue to build in advance of the BoC meeting in October. — Tim Mahedy

Latin America
In Brazil, the central bank is likely to maintain interest rates at 6.50% at Wednesday’s meeting. Weak economic activity and cratering growth expectations in 2018 argue for policy makers to keep interest rates low and in line with expansionary monetary conditions, despite higher inflation expectations. — Felipe Hernandez

Euro Area
The euro-area flash PMI survey will be closely monitored in the week ahead for clues as to how the economy developed toward the end of 3Q. The European Central Bank shaved its forecasts for GDP growth in its latest quarterly projections. Our measure of euro-area supercore CPI may decline when the details of the second inflation report for August are released. — David Powell

U.K.
U.K. consumer prices will probably decelerate in August. We continue to think inflation will slow more quickly in the coming months than the Bank of England expects as the effect of previous weakness in sterling fades. — Dan Hanson

South Africa
The South African Reserve Bank’s monetary policy committee is likely to hold its nerve and keep interest rates on hold. Some of the SARB’s MPC members are likely to argue that a precautionary rate hike would reduce the risk of having to take more drastic action at a later point. — Mark Bohlund

Thailand
The Bank of Thailand is meeting and expected to keep rates unchanged. The main focus though, will be on Japan, with the central bank meeting to set policy and the ruling Liberal Democratic Party holding a leadership election. — Tamara Henderson

Japan
We expect the Bank of Japan to keep its policy settings unchanged on Wednesday, as it weighs the effects of recent adjustments to its framework, and continues to wait for inflation to gain traction. Consumer price data on Friday are likely to underscore the challenge — our estimate is for the core CPI to come in at 0.9 percent year on year in August, less than half the central bank’s 2 percent target.

The LDP election is widely expected to deliver Prime Minister Shinzo Abe another three-year term as party chief, putting him on track to be Japan’s longest-serving leader in the postwar period. The focus of the outcome on Thursday is not on whether he’ll win, but by how much. The risk is that a strong victory emboldens Abe to focus more on his long-cherished goal of Constitutional reform — at the expense of economic reforms. In our view, a slim victory would be the best outcome for Japan’s growth outlook. — Yuki Masujima.

Source: Bloomberg Business News