The Global Week Ahead: Global Fiscal Largesse is Only Just Beginning

Next Week's Risk Dashboard

• China expected to announce fiscal stimulus measures…
• …that will front-run inflation, GDP and other releases
• US earnings season kicks into higher gear
• Canadian CPI the last major reading before the BoC’s next decision
• US retail sales expected to post a solid gain
• Can Australia’s jobs juggernaut keep it up?
• UK jobs, wages, CPI and retail sales to solidify BoE expectations
• Pricing for another 50bps from the RBNZ to be informed by CPI
• BC’s close election precedes tough choices
• ECB expected to cut, remain data dependent
• BCCh is in more of a hurry to ease
• BI unlikely to deliver a repeat surprise
• BSP expected to cut because they said so!
• BoT will probably hold, but there is a case for easing
• Turkey’s central bank to retain high policy rate
• Global macro

Chart of the Week

I have cautioned throughout this year that global fiscal policy is going to continue to contest efforts to ease global monetary policy over the full cycle ahead. Pump priming is set against the backdrop of a very different bond market environment that is much more sensitive to debt issuance and inflation than in the prior decade between the GFC and pandemic. That conviction is rising.

The coming week will bring heightened focus upon China’s fiscal plans in the context of already existing fiscal bloat. It’s not outside the scope of possibilities that China will be adding hundreds of billions of dollars of stimulus into its economy with announcements expected soon after this publication goes out.

A new era of fiscal largesse is on the way and being led by the world’s two largest economies. One of them might need it but with serious doubts about its efficacy (China) while the other one (the US) may be playing Russian roulette with the bond market no matter who wins the election on November 5th. They are not alone, with, for example, high odds Canada applies more stimulus into an election.

The most recent attempt to quantify the impact of the Trump and Harris platforms on the US fiscal deficit is shown in chart 1. That was a few tax cut promises ago to boot. Since those projections, Trump has loosely (and foolishly) pledged to allow auto loan interest write-offs on taxes and end double taxation that applies to some Americans abroad perhaps without realizing this would induce more Americans to leave the country. New tax cuts are being pledged each week.

Charts 2 and 3 offer projections for US government debt as a share of GDP under either a Trump or Harris presidency using the sourced Committee’s estimates added to the CBO’s baseline projections for US debt. Under either candidate, the US would be venturing into uncharted waters that will test the country’s reserve currency status. Trump’s plans would be worse, but it’s possible that the Harris plan is understated given her incomplete platform and her historical preference for very expensive initiatives. Both candidates laugh off fiscal rectitude and are behaving in stunningly irresponsible fashion.

China’s announcements will kick off the week, but it will be an otherwise packed agenda. Let’s dig into it.

CHINA’S FISCAL ANNOUNCEMENTS TO PRECEDE KEY MACRO REPORTS

China-watchers will be keenly following a planned press conference on Saturday that is to be held by Finance Minister Lan Fo’an at 10am Beijing time, or 10pmET Friday and hence shortly after this publication is distributed. Lan is expected to roll out potential fiscal stimulus measures and guidance on financing including bond issuance. Saturday’s potential fiscal policy announcements are designed to front-run the week’s round of major macroeconomic reports on the health of the overall economy.

The prevailing sense into the announcements is that they are likely to disappoint any expectations for a grand gesture that would meaningfully lean against China’s economic challenges. That sense was fed by the absence of material hints or commitments at this past week’s press conference by the National Development and Reform Commission. Distinguishing new initiatives and issuance plans from previous and forward commitments will be one challenge. Another will be separating programs that may have almost immediate effect from ones that may be phased in over time.

The fiscal stimulus briefing is designed to follow through on the monetary policy and regulatory initiatives that were announced on September 24^th. This note provided a summary of the measures that were undertaken at the time and the potential challenges to meeting success not least of which is the fact that China’s government is already running relatively large fiscal deficits in excess of fiscal targets (chart 4) plus the moribund state of local government finances. IMF projections for general government debt (all levels) as a share of GDP point toward more than a five-fold increase this century (chart 5). A further mitigating step is that China must avoid creating the kinds of imbalances and excesses that followed large scale stimulus following the Global Financial Crisis that set the stage of China’s property market struggles.

What may inform the magnitude of the announced measures will be the government’s knowledge of releases that will follow the announcements. Core CPI fell by the most on record for a month of August (chart 6) and so September’s reading on Saturday evening eastern time will offer a further assessment of the deflation risks.

Q3 GDP arrives late in the week on Thursday evening and is widely expected to continue to track beneath the government’s annual target for 5% growth. Growth of under 1% q/q SA nonannualized is expected.

Other releases will include an update on falling home prices on Thursday (chart 7), plus industrial production, retail sales and the jobless rate all for September that same evening. Trade figures including export growth (Monday) and probably credit growth figures are also expected. 

CANADA INFLATION—THE LAST PRE-BOC PRINT MAY NOT MATTER

Canada reports CPI figures for September on Tuesday. It will be the last consequential release ahead of the October 23^rd policy decision and full suite of communications including updated forecasts.

At present, markets are on the fence over whether the Bank of Canada will cut by 25bps or 50bps at the October 23^rd meeting, but a cut is assured nonetheless. Consensus is somewhat divided on the magnitude of the reduction. As argued here, the job market remains strong while consumer and business surveys of inflation expectations have improved but remain too high on balance. The CPI report will be used to finalize the call.

I’ve estimated that headline CPI will slip by -0.1% m/m in seasonally unadjusted terms. Since September is often a seasonal down-month of broad prices we have to seasonally adjust the reading which translates into an estimate 0.25% m/m SA rise. In year-over-year terms the rate of inflation is forecast to stay at 2%, unchanged from the prior month.

And none of that matters. Literally. Canada doesn’t even have a meaningful inflation-linked bond market since the government’s decision to cease issuance and because outstandings are sat on by the longer-term investors like pensions and life cos that snap them up.

And what matters to the Bank of Canada is evidence on core inflation, especially its preferred trimmed mean and weighted median CPI gauges. Those readings picked up in August and are off their lowest readings from earlier in the year (chart 8).

BoC officials have flagged that there is more work to be done to bring down these core inflation readings which doesn’t sound like policy officials who are in a rush to upsize cuts. Unfortunately, it’s futile to attempt to forecast the gauges in m/m terms given the extreme sensitivities of the weighted median calculation that is derived from the 50^th percentile price in the complete basket and given the trimmed mean measure’s sensitivity toward what gets removed each month in the top and bottom 20% of the basket. We don’t have the richness of price data to tell.

US EARNINGS SEASON SWINGS INTO HIGHER GEAR

Almost four-dozen firms listed on the S&P500 will release earnings this week. As usual, the early part of the season is particularly focused upon financials.

Among the key names will be Bank of America, Goldman Sachs and Citigroup (Wednesday), Morgan Stanley and Netflix (Thursday), and Amex (Friday).

CENTRAL BANKS—ECB TO LEAD FURTHER EASING

Six central banks will weigh in fresh decisions this week. One of them—the European Central Bank—could be impactful to global markets, while the rest could be impactful to regional markets. In the wake of strong nonfarm payrolls and core CPI it may also be important to hear from the week’s line-up of Fed speakers including Governor Waller’s outlook speech on Monday and several regional Presidents.

ECB—Balancing the Risks

Economists are in universal agreement that the ECB will but all of its policy rates by 25bps on Thursday. Markets are largely priced for a 25bps cut as well.

Core CPI inflation has been declining to 2.7% y/y and the latest estimate for core CPI inflation in m/m seasonally unadjusted terms clocked in at the weakest reading for all like months of September (chart 9). 

The present deposit facility rate of 3.5% remains in restrictive territory relative to most economists’ estimates for the neutral rate that sit at 2¼% or 2½% (chart 10). Policy easing balances the risks of being less restrictive, while nevertheless still restrictive in the face of uncertainties that are likely to keep the forward bias relatively open-ended and data dependent.

BCCh—A Faster Path to Neutral

Chile’s central bank is expected to cut its overnight rate target by 25bps on Thursday. BCCh said in its September Monetary Policy Report (here):

“The Board estimates that, if the assumptions of the central scenario of this Report materialize, the reduction of the monetary policy rate towards its neutral level will be somewhat faster than expected in June. This will occur at a pace that will factor in the evolution of the macroeconomic scenario and its implications for the path of inflation.”

Since then, GDP growth has slowed with August recording a decline of -0.2% m/m. Progress on inflation has been a little greater than expected with CPI falling to 4.1% y/y but still above the 2% target. BCCh has said they expect inflation to remain elevated in 2025Q3 at 4.3% before falling to 3% in 2026Q3. Unemployment is continuing to rise (chart 11).

BCCh estimates their neutral policy rate to be between 3½% and 4½%, thus portraying the current 5½% rate as significantly restrictive.

Bank Indonesia—Expected to Avoid Another Surprise Cut

After surprising most economists by cutting 25bps on September 18^th, most economists think Bank Indonesia will hold at a reference rate of 6% on Wednesday. Another surprise cut might further destabilize the rupiah that has been among the depreciating Asian FX crosses to the dollar since a) the first BI cut, and b) since the FOMC’s 50bps rate cut on the same day.

Philippines Central Bank—What He Said

BSP is expected to follow up on the initial rate cut in August with another 25bps this Wednesday. Why? Because inflation is tumbling (chart 12) and because Governor Remolona said so. In an interview earlier this month, the Governor said:

“Our latest estimates show that even if some risks to inflation materialize, inflation will settle at 3.3 % this year, 2.9% next year, and 3.3% in 2026. These are all within the target range of 2–4%. With inflation now on a target-consistent path, we have room for a calibrated shift to a less restrictive monetary policy stance. If the data are as we expect, then you would have the normal easing, which is small steps at a time, baby steps.”

Bank of Thailand—Maybe a Nudge is Needed?

The Bank of Thailand is expected to hold its benchmark rate unchanged at 2.5% on Wednesday with a slim minority in the 25bps cut camp. BoT has not eased monetary policy to date because it was under less pressure to raise it in the past and the present rate is in line with its estimated neutral rate. The risk of a cut, however, is focused upon the fact that headline and core inflation are both running well under 1% y/y which may invite a move toward an easier stance especially given the baht’s 10% appreciation to the dollar since early July.

Turkey’s Central Bank—Still Sky High

The Central Bank of Turkey is widely expected to hold its one-week repo rate unchanged at 50% on Thursday. Yes 50%. Inflation remains in nosebleed territory at just shy of 50% in terms of headline and core CPI and inflation expectations remain very high (chart 13). 

BRITISH COLUMBIA’S ELECTION—CHALLENGES APLENTY

British Columbians go to the polls on Saturday October 19^th. Polls indicate a close outcome. The NDP has regained the lead in some popular polls. This site uses a poll aggregator to show that the parties are neck-and-neck in their shares of the popular vote. The same site translates polling into seat projections that give the chances at a slim majority a touch higher for the NDP than the Conservatives (chart 14), but within wide ranges of possible outcomes. The BC election kicks off a few others with New Brunswick’s voters heading to the polls two days later and followed by Saskatchewan’s vote on October 28^th. Nova Scotia’s provincial election is next July, and then Newfoundland and Labrador vote next October. Canada’s election could be on or before October 20^th next year.

Scotia’s Laura Gu penned this piece as a preview of provincial Fall fiscal updates. Chart 15 shows that of the provinces facing elections this Fall, BC’s deficits are the biggest and neither of the two parties offer materially different prospects of repairing them.

As Laura writes, the ruling NDP party has suggested tax cuts that could reduce revenue by $2 billion annually, and both NDP and the Conservative Party have signaled a potential removal of B.C.’s carbon tax. Both parties emphasize the natural resource sector in their economic policies but diverge significantly in their climate policies. The Conservative Party plans to reverse the NDP’s electrification agenda, potentially altering the energy sector outlook in B.C. Both parties have committed to increasing funding for housing affordability and healthcare, which could add $2–3 bn or more to B.C.’s widening deficits over the next fiscal year. While these proposals aim to address key issues, they also risk further deepening the province’s fiscal deficit. Nova Scotia might also face an early election ahead of next summer’s fixed date.

The past year has seen frequent credit actions in a challenging fiscal environment. S&P downgraded British Columbia (B.C.), stripping the province of its triple-A rating and assigning a negative outlook. Moody’s, while still rating B.C. at Aaa, has also placed the province on a negative outlook and is closely monitoring the situation. Despite these downgrades, B.C. maintains a relatively low debt load compared to other provinces.

Consistent with the opening theme of this publication, however, is the fact that many Canadian provinces are well advanced in their issuance plans partly out of fear that the US election will unveil heightened uncertainties.

GLOBAL MACRO—KEY REPORTS FOR THE FED, BOE, RBNZ AND RBA

US (Columbus Day) and Canadian (Thanksgiving) markets will be shut on Monday before a combination of US earnings and a wave of global indicators is unleashed. A lot of key data will arrive in the US, UK, Australia and New Zealand in addition to what has already been cited. Chart 16 summarizes the releases.

US Retail Sales—Could Post a Solid Gain

The key macroeconomic indicator for the US will be Thursday’s retail sales figures for September. A solid gain is expected to be partly fed by a jump in auto sales, a slightly firmer than expected CPI reading including details, and seasonal factors like back-to-school sales. Also keep an eye out for industrial production for September on Thursday that may give up some of the prior month’s strong gain. Weekly initial jobless claims will probably spike higher again on Hurricane effects on Thursday. Housing starts in September wrap it up Friday.

Quiet in Canada After CPI

Canada markets face an otherwise fairly quiet week by way of calendar-based risk aside from CPI. Wholesale trade figures for August will likely decline on Tuesday at the same time that CPI arrives, and then existing home sales during September arrive thirty minutes later. Housing starts may rise but manufacturing sales will probably fall for the same month of September when they are updated on Wednesday.

UK Job Markets & CPI to Inform BoE Expectations

This week’s key UK data on employment conditions and inflation will be set against the backdrop of markets that are mostly priced for another quarter-point Bank Rate cut by the Bank of England on November 7^th and less than 50bps cumulatively in November and December.

On Tuesday we’ll get payroll figures for September, total employment stats for August, jobless claims in September and wage growth in August. Wages ex-bonuses have continued to rise well above the rate of inflation, but the rate of growth is sharply decelerating at the margin (chart 17). Employment surged by 233k in June and July combined (chart 18) as payrolls have fallen in each of the past three months.

Then on Friday there will be updates on CPI inflation and retail sales—both for September. Key will be core CPI that has continued to ride at or above seasonal norms in m/m NSA terms as shown for the past couple of months in charts 19–20. 

Australia’s Jobs Juggernaut

Can Australia’s job creating machine keep it up? There must indeed be something in the water ‘down under’ given a string of five consecutive large employment gains from April through to August and only one dip this year in March. Wednesday’s update for September will be closely watched against this trend.

Employment is at a record high. Over 1.5 million jobs have been created since just before the pandemic struck. Over 300k jobs have been created year-to-date for an annualized pace of 465k jobs should September to December evolve at a similar average pace as the first eight months. The unemployment rate has risen from a low of 3.5% in late 2022 to 4.2% now because the labour force has expanded by even more than employment. Some of the reason for this labour force expansion has been because the labour force participation rate is at an all-time high of 67.1% and 1.4 percentage points higher than pre-pandemic.

Such a strong performing job market has driven wage growth to be faster in the pandemic-recovery era, although the rates of increase are off the very temporary peak (chart 21).

New Zealand’s Inflation

Markets are pricing another 50bps cut by the RBNZ on November 27^th as a follow-up to the 50bps cut on October 8^th and the opening quarter-point cut on August 13^th. Tuesday’s Q3 CPI inflation figures could either reaffirm such pricing or shave it. Key will be the non tradeable CPI measure that is more aligned with the domestic economy. This measure posted the softest q/q seasonally unadjusted rise (+0.9%) for a second calendar quarter since 2020Q2 (chart 22). Should Q3 also prove to be softer than seasonally normal then market pricing could be reinforced. 

Latin American markets will be mainly focused upon monthly GDP proxies for August in Brazil (Monday), Peru (Tuesday, and Colombia (Friday).

Other readings to keep an eye out for will include India’s CPI inflation for September (Monday), Japan’s CPI on Thursday that is likely to follow the advance Tokyo release, Q3 GDP figures from Singapore and Malaysia, South Korea’s employment report (Tuesday), and ZEW investor confidence for the Eurozone (Tuesday).