Today, the eco calendar is rather thin with only the first estimate of euro zone HICP inflation and the Chicago PMI in the US. ECB’s Mersch and Coeure are scheduled to speak and in the US, last minutes negotiations will be held to avoid a government shutdown.
In September, euro zone CPI inflation is forecast to continue its downtrend. The first estimate is expected to show a drop in the annual rate from 1.3% Y/Y to 1.2% Y/Y. We believe however that the risks are for a lower outcome. German, Spanish and Belgian data showed a lack of inflationary pressures in September while also negative base effects are weighing on the annual rate of inflation. Putting these two factors together, we see significant risks of a lower outcome, pushing the annual rate of inflation below the levels seen earlier in the year.
Ahead of the ECB meeting, a downward surprise could grab some market attention. The core reading, on the contrary, is expected to stay unchanged at 1.1% Y/Y in September, but also here we seerisks for a downward surprise.
In the US, the Chicago PMI will provide us with the latest evidence ahead of tomorrow’s manufacturing ISM. In August, the Chicago PMI edged slightly up, from 52.3 to 53.0 and a further increase to 54.3 is expected. Earlier regional indicators have been mixed. For the Chicago PMI we see risks for a downward surprise. Probably uncertainty on the fiscal situation might turn business providers a bit more cautious.
On Friday, the Italian debt agency tapped the on the run 5-yr BTP (€3B 2.5% Dec2018) and the on the run 10-yr BTP (€3B 4.5% Mar2024). The total amount sold was the maximum of the intended €5 - 6B range. Bid covers were in line with average demand when such relatively large sums are auctioned. On secondary markets, there was a negative reaction following the auction. The treasury had to pay a significant price to sell the debt and dealers had to choke a large part of the supply.
Regarding trading this week, several factors will play a role. First of all, there is the binary political risk in the Italy (political deadlock; see above) and the US (looming government shutdown). Second, the ECB meeting, exceptionally on Wednesday, will draw attention as well. While we don’t expect a rate cut, we believe Draghi will remain very dovish. A flash report with an extensive preview will be released tomorrow.
Finally, the US eco calendar heats up with ISM releases, ADP employment and US NF payrolls. In case of a government shutdown, weekly claims and payrolls won’t be released this week.