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Week Ahead – RBA and ECB meetings, final US payrolls before Fed September meeting in focus

The first week of September sees the European Central Bank (ECB) and the Reserve Bank of Australia (RBA) meet for their latest monetary policy meetings. After a busy week of numbers for the US, the main US data that will be high on investors watch is the August payrolls data, which will be the final set before the FOMC meets later in the month.

ECB’s Governing Council is to hold its latest monetary policy meeting on Thursday, which will be followed by a press conference. No change is expected in policy but it will be interesting to see Draghi’s view on the market volatility that’s erupted since the yuan’s devaluation. Recent remarks by ECB board member Peter Praet have pointed to readiness by the ECB to expand its QE program if low oil prices and China’s slowdown drive down inflation too low below the target. Flash Eurozone inflation figures out on Monday might give the ECB cause for concern as CPI is expected to ease to 0.1% in August from 0.2% previously. The Eurozone will also see next week August unemployment figures, final Q2 GDP estimates, July retail sales and final PMI readings for August.

Separately, German factory orders for July could attract some attention on Friday. The slowdown in China has yet to have any major impact on German exporters but if the downturn spreads to Chinese consumers, Germany is likely to be hit harder than other Eurozone members due to its export driven economy. Another major exporter that has reason to be worried about the developments in China is Japan. Industrial production figures out on Monday are expected to show output slowing to 0.1% month-on-month in July from 1.1% previously.

Similarly, Australia’s central bank is likely to have China high on its agenda when it meets on Tuesday as iron ore exports continue to suffer from the collapse in commodity prices. The RBA has cut interest rates twice this year and while it recently toned down its dovish stance on further rate cuts and the need for the aussie to depreciate further, the past month’s events may give it reason to cut again next week. However, the aussie’s continued slide against the US dollar may prevent the RBA from acting just yet. Second quarter GDP, trade balance and building approvals data out next week will all be closely looked at by the RBA.

In the US, the key survey indicators to watch out for August are the Chicago PMI out on Monday, the ISM manufacturing index out on Tuesday, and the services PMI on Thursday. Factory orders data is due on Wednesday, which is estimated to show a 0.7% increase in July. But all eyes will be on the August jobs data out on Friday. Nonfarm payrolls are forecast to rise by 218k in August, versus a 215k increase in July. The unemployment rate is forecast to stay unchanged at 5.3% for the third month in-a-row. Despite the tightening labor market though, average hourly earnings are expected to stay muted, growing by just 0.2% during August to give an annual rise of 2.0%. In its last meeting, the FOMC had indicated that the labor market is very close to maximum employment levels but was less confident about inflation. A higher-than-expected figure for average hourly earnings could convince the Fed that wage growth is accelerating fast enough to support a rate increase. But a lower reading would increase the risk of raising interest rates too soon.

The coming week will be a quiet one for the UK with markets closed on Monday for a Bank Holiday. PMI data will be the only major data out for the UK. Manufacturing PMI out on August is forecast to show a slight improvement to 52.0, while services PMI on Thursday is expected to rise marginally to 57.5.

In other data, Canada is estimated to have fallen into recession with GDP contracting for the second quarter in a row by 0.9% in April-June, when figures out on Tuesday are published. The slump in oil price has taken its toll on Canada’s economy since the start of the year. Over in China, the official manufacturing PMI figures are forecast to show a contraction in activity in August for the first time since February, with the reading falling below 50 to 49.7.  A bigger fall could prompt authorities in China to announce further stimulus measures. The official figures have been largely contradicting the Caixin/Markit PMI numbers, which have been showing a contraction since March. The final Caixin/Markit reading for August is out on the same day on Tuesday, and is expected to be revised slightly up to 47.2 from the initial reading of 47.1.

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