Introduction

What an informative week that was and what an eventful week that lies ahead. Eventful because the Federal Reserve has cornered itself into something it always said would never happen: a policy shift dependent entirely on the outcome of one single indicator. Econoday's consensus for September nonfarm payrolls of 475,000 would definitely fit Jerome Powell's criteria for a "decent" report that in turn would trigger a November start to tapering; even perhaps the 300,000 low-end estimate of Econoday's consensus range would be enough to qualify as "decent", at least compared to August's washout gain of 235,000.

The Global Economy

Employment

September is a hard month on its own to forecast, never mind a pandemic. The timing of school years, when the Labor Day holiday falls on the calendar, whether it's a 4- or 5-week reference period, and not least hurricanes that all affect the history of September payrolls. This year is more difficult than ever to predict given the shortage of skilled labor and the displacement of millions of workers. Looking back at data through September 2001, the as-reported result (that is the unrevised, actual print at the time of release) undershot Econoday's median estimate in 15 of the 20 years. Does this point to the risk of another disappointment? Perhaps. A main risk to September's outlook may well come from the sector that's been playing havoc with all the data: autos where production, starved of parts, has been grinding lower. As for Fed policy, the balance in play is between: 1) employment where the need for prompt recovery points to the need for substantial stimulus; and 2) inflation where price pressures (still far beyond the Fed's long-term 2.0 percent target) point to the need for withdrawal.

Knees at the European Central Bank haven't yet wobbled even as inflation has been picking up sharply. Eurozone inflation accelerated again in September: a flash 3.4 percent annual rate was up from August's final 3.0 percent, on the firm side of the market consensus and the highest outturn since September 2008. It also means that inflation is now 1.4 percentage points above the ECB's 2.0 percent target; core rates are right at target and also climbed in the month. Inflation for non-energy industrial goods actually moderated from 2.6 percent to 2.1 percent in September reflecting an unwinding of earlier distortions caused by timing differences in seasonal sales in some member states. Yet the drop here was more than offset by services where the rate jumped from 1.1 percent to 1.7 percent. In addition, there were positive contributions from food, alcohol and tobacco (2.1 percent after 2.0 percent) and also energy (17.4 percent after 15.4 percent). Though inflation continues to be biased up by the cut in German VAT in July 2020, September's data will be seen by the Governing Council's hawks as a warning sign that current pressures may be more than just transitory. December's discussions about what to do with the Pandemic Emergency Purchase Programme (PEPP) and the asset purchase programme (APP) are likely to be heated.

In what accurately signaled on Thursday the HICP inflation results on Friday was Italian consumer prices where a 0.1 percent monthly dip was enough, decline or not, to lift the annual rate from August's 2.0 percent to 2.6 percent in September, its highest mark since October 2012. Differences in the timing of seasonal sales this year versus 2020 had an important impact here. Pressures were largely due to energy alongside food and alcohol and durable goods as well. Core inflation (excluding energy and unprocessed food) nearly doubled from 0.6 percent to 1.1 percent. Annual rates of inflation at the consumer level continue to climb, pressured of course underneath by supply shortages and delays that have lifted producer prices.

Costs in the industrial sector have accelerated sharply, but whether they continue to accelerate is a bit uncertain based on the latest Canadian data. The industrial product price index fell 0.3 percent on the month in August, dragged down once again by lower prices for lumber where supply is now heavy. Yet when excluding lumber and wood products, prices actually rose 0.7 percent on the month. On the year, the overall IPPI was up an extremely elevated 14.3 percent but this was still down from prior months. The lower headline numbers, lumber aside, point to a negative price effect for August manufacturing sales to be released October 14.

Sentiment

Inflation has not yet proven a major negative for consumer sentiment surveys with the week's GfK data offering hope that German households are becoming a little more confident now that the virus is under control. The climate indicator was revised 1 tenth firmer to minus 1.1 in September which was down 7 tenths from August, but for October the indicator is forecast to rise to plus 0.3. Normal levels are around 10 and were last seen just before Covid hit. Economic expectations climbed 7.7 points in September to 48.5, reversing more than half of August's sharp decline and putting this reading 24.4 points above its level a year ago. There was also a near-7 point gain in income expectations which, at 37.4, were up 21.3 points versus September 2020 and at their highest mark since February that year. The propensity to buy was more restrained but, at 13.4, stood 3.1 points firmer than in mid-quarter. However, it was still some way short of the 38.4 posted a year ago and continues to reflect the negative impact of (now limited) Covid restrictions on consumer behavior.

Some of the week's biggest news came once again from China where PMI data suggest that the country's manufacturing sector has stalled out. The official CFLP manufacturing PMI fell for the sixth consecutive month from 50.1 in August to 49.6 in September, its lowest level since February 2020 during the pandemic's initial hit. The Markit China manufacturing PMI, also released in the week, came in at a deadflat 50.0 which, in a bit of an upbeat note, was an improvement from 49.2 in August. And the CFLP non-manufacturing PMI was also upbeat, rebounding sharply from 47.5 in August to 53.2 in September. Turning back to manufacturing, survey respondents are reporting flat activity for production and orders especially foreign orders with both input costs and pass-through to customers on the rise.

However flat conditions currently are in China, outlook readings in the PMIs are improving, as is Capex among major Japanese manufacturers who plan to increase expenditures by a combined 10.1 percent in fiscal 2021 (ending June). This compares with 9.6 percent in the prior quarter's survey and expectations for 9.1 percent. Sentiment among major manufacturers rose to plus 18 in September versus plus 14 in June, plus 5 in March and minus 10 in December. The sentiment index for small and medium manufacturers rose to minus 3 in the latest survey from minus 7 three months earlier. Though readings improved, many industries are still cautious over the coming three months as supply chain constraints are expected to continue, materials prices remain high and uncertainty remains over how economies can control the spread of the pandemic.

We end the week's data run with a look at Switzerland where indications have been growing mixed. The KOF's leading indicator fell for a fourth straight month in September. At 110.6, the headline index was down nearly 3 points from August and on the soft side of the market consensus. While still well above its 100 long-run average, the decline since May's near-144 peak has been sharp and should be indicative of a marked slowdown in economic growth over coming months. The latest setback was attributable to weaker performances by manufacturing, services and foreign demand. By contrast, finance and insurance provided a slight lift.

Markets:

Reaction to uncertain results in German national elections was muted on Monday, in contrast to reports of widening power outages in China which, along with Evergrande, hung over markets all week. Tuesday saw the Shanghai rising 0.5 percent with sentiment bolstered by a promise from the People’s Bank of China’s to ensure a “healthy property market” and protect consumers from the Evergrande collapse. Reports on Wednesday said some of Evergrande's offshore bondholders have not received scheduled interest payments in what would be the second dollar-debt obligation to be missed. Japan was a big mover in the week, all down. Fumio Kishida's victory in the LDP leadership election was seen by many as a pragmatic choice, disappointing those looking for aggressive reforms.

Central-bank chatter in the week included Bank of England Governor Andrew Bailey who hinted at an actual UK interest rate rise next year, echoed in substance by a run of comments from Fed officials signaling tapering for November. In the other camp, European Central Bank President Christine Lagarde sounded a more dovish note as she stuck to the theme of transitory inflation.

The bottom line

Heat in Italian prices is giving a lift to Econoday's Consensus Divergence Index (ECDI) for the country which leads the pack at plus 30. This is well above the zero-line to indicate that Italian economic data, on net, are handily beating expectations as they have, notably, for two straight months. Eurozone data, also lifted by inflation data, are also beating expectations but at a more moderate score of plus 11. The US index, also lifted by inflation data, is at minus 2, with Switzerland and the UK also near near the zero-line, at plus 10 and minus 7 respectively. France at minus 24 and Germany at minus 26 are falling some way short of expectations which, for forecasters, may be signaling markdowns ahead for fourth-quarter data. One country that forecasters have yet to markdown enough is China which, in seven weeks of underperformance, once again brings up the rear at minus 29, not a promising score for the global economic recovery.

**Contributing to this article were Jeremy Hawkins, Brian Jackson, Mace News, Max Sato, and Theresa Sheehan

Week of October 4 to October 8 (all days local)

The week will be filled with central-bank announcements and capped at week's end by a US employment report that will have immediate implications for Federal Reserve policy. Announcements begin on Tuesday from the Reserve Bank of Australia, end on Thursday with the Reserve Bank of India, and are expected to be punctuated in between on Wednesday by the Reserve Bank of New Zealand which, after dropping QE at its prior meeting, is expected to raise its policy rate. Supply-side data in the week will include industrial production from France on Tuesday then Germany on Thursday, the latter preceded on Wednesday by German manufacturers' orders where a decline, after two strong gains, is expected. Consumer data will include Eurozone retail sales on Wednesday and Japanese household spending on Friday. Two reports where surprises could trip quick reaction in the markets will be ISM services from the US on Tuesday and Caixan's services from China on Friday (the former has been strong, the latter weak). A big downside surprise in Friday's US employment report could upend the outlook: weak results then no tapering, strong or even moderate results then tapering begins. Econoday's consensus is a solidly strong nonfarm gain of 475,000 with the low estimate at a still passable 300,000. Canada will also release September employment data on Friday with strength also expected.

Swiss CPI for September (Mon 06:30 GMT; Mon 08:30 CEST; Mon 02:30 EDT)

Consensus Forecast, Year over Year: 1.1%

Consumer prices are expected to rise 2 tenths to 1.1 percent in September.

Reserve Bank of Australia Announcement (Tue 03:30 GMT; Tue 14:30 AEST; Mon 23:30 EDT)

Consensus Forecast, Change: 0 basis points

Consensus Forecast, Level: 0.10%

Though not expected to change its policy rate, the Reserve Bank of Australia may well reaffirm its plan for scaling back asset purchases. At its September meeting, the RBA continued to judge that Australia's economic recovery, though stronger than expected, had been disrupted by Covid outbreaks and tight public health restrictions.

French Industrial Production for August (Tue 06:45 GMT; Tue 08:45 CEST; Tue 02:45 EDT)

Consensus Forecast, Month over Month: 0.5%

Industrial production has been sluggish, rising only 0.3 percent on the month in July. Market expectations see a 0.5 percent increase in August.

Eurozone PPI for August (Tue 09:00 GMT; Tue 11:00 CEST; Tue 05:00 EDT))

Consensus Forecast, Month over Month: 1.3%

Consensus Forecast, Year over Year: 13.5%

Producer prices accelerated sharply in July, nearly doubling to a monthly 2.3 percent increase that lifted the annual rate by more than a percentage point to 12.1 percent. Forecasters are calling for at least some cooling in August to a monthly increase of 1.3 percent and an annual rate of 13.5 percent.

US: ISM Services Index for September (Tue 14:00 GMT; Tue 10:00 EDT)

Consensus Forecast: 59.9

Over the 60-line in the last six reports but down more than 2 points in August to 61.7, further cooling is expected for ISM's services index at a consensus 59.9 for September.

Reserve Bank of New Zealand Announcement (Wed 01:00 GMT; Wed 14:00 NZDT; Tue 21:00 EDT)

Consensus Forecast, Change: 25 basis points

Consensus Forecast, Level: 0.50%

The Reserve Bank of New Zealand is expected to raise its policy rate by 25 basis points to 0.50 percent. At its last meeting in August, the RBNZ shelved its asset purchase program leaving the official cash rate as its single policy tool.

German Manufacturers' Orders for August (Wed 06:00 GMT; Wed 08:00 CEST; Wed 02:00 EDT)

Consensus Forecast, Month over Month: -1.5%

Manufacturers' orders have easily beat expectations the last two reports, up a monthly 3.4 percent in July after gaining 4.6 percent in June. The consensus for August is giveback, a 1.5 percent decrease.

Eurozone Retail Sales for August (Wed 09:00 GMT; Wed 11:00 CEST; Wed 05:00 EDT)

Consensus Forecast, Month over Month: 0.9%

After an unexpected 2.3 percent drop in July, retail sales are expected to rebound 0.9 percent in August.

Reserve Bank of India Policy Announcement (Anytime Thursday, Release Time Not Set)

Consensus Change: 0.0 basis points

Consensus Level: 4.00%

With inflation slowing the last two months, the Reserve Bank of India is expected to focus on economic growth and hold its policy rate steady at 4.00 percent.

German Industrial Production for August (Thu 06:00 GMT; Thu 08:00 CEST; Thu 02:00 EDT)

Consensus Forecast, Month over Month: -0.6%

Industrial production did rise a monthly 1.0 percent in July but it continued to lag orders where growth has been stronger. Production in August is seen down 0.6 percent.

Japanese Household Spending for August (Thu 23:30 GMT; Fri 08:30 JST; Thu 19:30 EDT)

Consensus Forecast , Month over Month: -1.9%

Household spending is expected to decrease 1.9 percent on the month in August; retail sales for August, which have already been released, fell a steep 3.2 percent on the month.

China: Caixin Services PMI for September (Fri 01:45 GMT; Fri 09:45 CST; Thu 21:45 EDT)

Consensus Forecast: 49.1

March's Caixan services is expected to firm to 49.1 in September versus August's 46.7 that was more than 5 points below expectations.

US Employment Situation for September (Fri 12:30 GMT; Fri 08:30 EDT)

Consensus Forecast: Change in Nonfarm Payrolls: 475,000

Consensus Range: Change in Nonfarm Payrolls: 300,000 to 650,000

A rise of 475,000 is Econoday's consensus for September nonfarm payrolls following far weaker-than-expected growth of 235,000 in August that, however, followed gains of just over 1 million in July and just under 1 million in June. The low-end of the consensus range for September's report is 300,000.

Canadian Labour Force Survey for September (Fri 12:30 GMT; Fri 08:30 EDT)

Consensus Forecast: Employment Change: 57,500

Employment has been strengthening, headlined by three straight monthly gains including 90,200 in August which was better than expected. September's expectations are a further rise of 57,500.