Global Anxieties Mount

• Emerging market stresses to resonate further following weak US employment report
• Global growth anxieties could prompt policy loosening in Japan and Australia
• MPC still on hold, despite stronger domestic cost pressures in revised data

Weak US employment data push focus back on emerging market anxieties. With worries about the external environment contributing to the Fed's September decision to leave policy unchanged, evidence of ebbing strength in the US labour market will cast doubt on whether a first tighterning in 2015 still remains a viable prospect. While the week's Fed speakers - including Williams, Lockhart and Evans - and the minutes of the September FOMC meeting (Thu) still hold scope to influence the perceived timing of liftoff, developments in emerging markets remain highly relevant to the policy outlook. Notably, the IMF's updated World Economic Outlook (Tue) is expected to highlight increasing fragility in emerging market prospects. China's Golden Week - which leaves local markets closed until 7 October, and with no data releases due - should offer some respite.

Brazil a possible flashpoint. A worsening situation in Brazil could provide the trigger for wider market stress. A constellation of deepening economic weakness, a worsening political climate - with impeachment calls for President Rousseff mounting - and a fiscal impasse could prompt a second agency to downgrade Brazil, possibly below investment grade. Although downward pressure on the currency has abated this week, renewed turmoil could bring the central bank's lack of options to manage the slide of the Brazilian real into much sharper relief.

Global growth worries adding to calls for further ECB policy loosening. With Eurozone inflation slipping below zero in last week's data and softness in closely watched measures of inflation expectations, comments from ECB President Draghi (Tue) and the minutes of the ECB's September policy meeting (Thu) will be judged in the context of a possible extension of the ECB's QE. Nevertheless, with the political capital for an expanded programme hard to amass, the ECB is likely to await more convincing evidence of slippage relative to its recent forecasts.

BoJ and RBA could be readier to act. With Australia on the front line of weakness of commodities and emerging markets, and its monetary policy still having scope to readily ease from its current 2% rate, the RBA could adopt a pro-active stance (Tue). The likelihood of a move, however, was seen as remote by markets in advance of the weak US labour market data. Similarly, the BoJ's policy decision (Wed) was seen as having an outside chance of an expanded stimulus, against a backdrop of accumulating evidence of economic weakness and softening inflation expectations. However, BoJ Governor Kuroda has given no strong steer on an imminent expansion of QE, and the BoJ's next end-Oct meeting would give sight of further data in the interim.

Contrast between domestic and external pressures sharpening for the MPC. The BoE's policy decision (Thu) - with no change still universally expected - was arguably becoming a more balanced call. Following Blue Book revisions to the profile of recent GDP growth, the acceleration in domestic cost pressures is sharper than on previous estimates, with unit labour cost growth now close to historic averages. Meanwhile, the recent softening of the sterling trade-weighted exchange rate should ease concerns about imported disinflation. These could prompt some more hawkish MPC members to see the balance of risks becoming more skewed to an inflation overshoot. As the November Inflation Report would provide a natural stocktake of the competing influences - including any weaker assessment of UK-weighted world growth prospects - we do not expect a shift in the voting pattern.

UK activity data to show signs of recovery. The coming week also sees a number of key UK releases which will flesh out the Q3 activity picture. The services PMI (Mon), industrial production (Wed) and construction output (Fri) will all need to be seen in the context of the revised activity profile following the Blue Book revisions.

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