And the ECB grabbed the mike

While no action is expected, the recent tendency for central banks to deliver policy surprises may even rub off on the ECB. The state of the US labor market and its implications for Fed policy will be in focus with the nonfarm payrolls report on Friday; we expect another month of solid employment growth and a 5.8% unemployment rate.

Following last week’s almost euphoric market reaction to the BoJ’s surprise policy easing on Friday, markets will face a hangover in the wake of the release of China’s official October PMI, which surprised to the downside by falling to 50.8 from 51.1 in September.

The FX market reaction to the BoJ was significant, with the USD rallying strongly, especially against the JPY given the stark divergence in policy stance between the Fed and the BoJ, as reflected in last week’s hawkish-leaning FOMC statement.

The momentum of the move may carry USDJPY higher this week, but we do not look for a renewed depreciation trend in the JPY. The Fed highlighted a strengthening in US job market conditions and this week’s October jobs report (Friday) should confirm this assessment. We expect another solid report, with nonfarm payrolls growth of 225k and an unemployment rate of 5.8%.

Expectations of a firm report will keep the USD supported over the week. There will be plenty of Fed speakers on tap too, and they may provide some more clarity in the shift in the Fed’s thinking, and the midterm elections will also garner plenty of attention.

On the data front, manufacturing and service sector surveys will be in focus, including the US ISM manufacturing index today, which we expect to drop to 56.0 in October (cf. 56.2, last 56.6).  We also expect a weaker-than-consensus reading for the UK October manufacturing PMI today – a drop to 51.0 (cf. 51.4, last 51.6).

However, the eurozone manufacturing PMI, also due for release today is likely to remain unrevised at 50.7. Following the weaker-than-expected Chinese PMI data this weekend, softer US and UK PMIs may dampen risk appetite early in the week. Central banks will remain in the spot light, with banks in Europe, UK, Australia, Malaysia, Thailand, Poland and the Czech Republic all set to deliver policy decisions.

Of these only the NBP in Poland is likely to move, cutting policy rates by 25bp, in our view. However, most attention will be on the ECB for any hints of future QE. While no action is expected, the recent tendency for central banks to deliver policy surprises may even rub off on the ECB. In Asia a number of inflation data are scheduled for release in Indonesian and Thailand today. In line with the global trend of inflation undershoots, we look for readings of 4.5% y/y and 1.5% y/y, respectively (cf. 4.7% and 1.6%).

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