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Patris Daily - 13 September 2018

13 Sep 2018



Europe: The session was positive for the main European stock indices, on the back of positive credit data coming from China. France and Portugal outperformed, with daily gains of +0.91% and +0.71%, respectively. STOXX600 closed 0.47% higher, with 14 out of 19 industry groups closing positive on the day. Utilities (-1.39%) and Technology (-0.68%) were the biggest losers.

Oil& Gas, Technology and Healthcare are the key outperformers in Europe so far this year. Banks, Telecoms, Autos and Basic Resources are amongst the laggards in the STOXX600.

Eurozone sovereign debt market: 10-year EGB yields dropped, with the exception of Italy that rose 0.6bps to 2.943%. 10-year Bund yields closed 2bps lower at 0.714%.

According to Italian press reports, Italian Finance Minister Giovanni Tria telephoned Prime Minister Giuseppe Conte on Wednesday to discuss the 2019 budget, threatening to resign.

The Portuguese Treasury sold yesterday €672mn in October 2028 bonds (with an average yield of 1.854% and a bid-to-cover ratio of 2.32x) and €328mn in October 2023 bonds (with an average yield of 0.647% and a bid-to-cover ratio at 3.76x).

According to yesterday’s new flow, at today’s updated staff macroeconomic projections, the ECB was said to keep the inflation outlook unchanged. However, projections for economic growth should be slightly lower, reflecting weaker external demand, as the technical committee sees downside risks to growth.

Portugal: PSI20 edged 0.71% higher on Wednesday. 11 out 18 members closed positive, with Navigator (+3.7%) and Mota-Engil (+2.8%) outperforming. BCP (-1.9%) and Corticeira Amorim (-1.1%) were hit the hardest.

In a statement on an Article IV consultation regarding Portugal, the IMF said that there has been an increase in external risks from slower growth of the country’s trading partners and financial-market spillover. The fund adds that a significant weakening of growth in the eurozone or a turn in the global economy towards protectionism could impact Portugal, reflecting its linkages to other European countries.

IMF kept unchanged its forecasts for GDP growth, and sees an expansion of 2.3% and 1.8% in 2018 and 2019, respectively. IMF highlighted that unemployment continues to decline, on the back of sustained employment growth. On the banking sector, further steps are needed to increase its strength, including a concerted effort to reduce the level of non-performing loans.

FX & Commodities: The first future of Brent finished the day up by 0.86% (-0.54% as we type). Gold closed 0.64% higher (-0.13% as we type). EUR/USD finished the day up by 0.17%, on its third consecutive positive session (0.00% as we type).

The Brent-WTI spread has, once again, risen sharply over the last few months.

US Equity & Debt Markets: S&P500 finished the day little changed (+0.04%), in a lackluster trading session. 8 out of the 11 major industry groups were positive, with Telecommunications (+1.42%) and Consumer Staples (+1.26%) leading the gains. Apple finished the day lower by 1.24%, as the company disclosed its new line of iPhones. According to WSJ, the US is proposing a new round of trade talks with China in the near future. 10-year UST yields fell by 1.2bps to 2.964%.

St. Louis Fed President James Bullard (a non-voter this year on the rate-setting FOMC) considered yesterday that an inflation surge is unlikely.

According to James Bullard, the fed funds rates has already reached a neutral to restrictive level, given the flattening yield curve and subdued market-based inflation expectations. James Bullard mentioned that the yield curve suggests that financial markets do not see excessive real growth or excessive inflationary pressure over the forecast horizon. He added that inflation compensation data derived from TIPS shows that markets do not expect the FOMC to achieve the inflation target on average over the next decade

He added that a yield curve inversion would likely increase the vulnerability of the economy to recession. An inflation outbreak is seen as unlikely at this point. Moreover, by closely monitoring market-based inflation expectations, the FOMC can keep inflationary pressure under close surveillance. James Bullard believes that US monetary policymakers should put more weight than usual on financial market signals.

On the labour market, James Bullard sees the labour market as normal and not overheated. On trade policy, he said that getting a NAFTA deal would be a big positive for the US economy. Finally, he considered that it makes sense to raise questions if the US Federal Reserve really can continue normalise its monetary policy when interest rates in Europe and in Japan remain so low. In that backdrop, it is easy to understand that when 10-year UST yields approach 3%, it just looks very attractive to international buyers, which contributes to pressure the yield curve. Given that backdrop, it also makes sense that the US equity market is more highly valued. On the pace of economic expansion, James Bullard sees the US economy probably continuing to grow at 3% over the rest of the year, and slow down next year. He stressed that he may upgrade his estimate of long-term US growth beyond 2% next year if the economy remains strong. Even if the economy is growing faster than potential growth rate, the feedback to inflation is not very strong, he added.

Federal Reserve Governor Lael Brainard said yesterday at the Detroit Economic Club that, over the next year or two, and barring unexpected developments, she sees as appropriate gradual increases in the federal funds rate to sustain full employment and inflation near its objective. She added that, with stimulus in the pipeline providing tailwinds to demand over the next two years, it appears reasonable to expect the short-term neutral rate to rise somewhat higher than the longer-run neutral rate.

She acknowledged the need to keep a close watch on the yield curve as an important signal on financial conditions, but stressed that this is only one of the considerations informing the appropriate monetary policy. According to Lael Brainard, the Fed’s assessment suggests that financial vulnerabilities are building, citing rising risks in the corporate sector, while leveraged lending is again on the rise.

On the economy, Lael Brainard said that growth is likely to remain solid, with a strong labour market. She considered inflation data to be encouraging, with little sign of a breakout. On potential risks to the economic outlook, trade tensions are seen as causing uncertainties, while economic growth abroad is moderating.

The Federal Reserve released yesterday its latest Beige Book. The US economy was seen expanding at a moderate pace through August, with consumer spending growing at a modest pace and manufacturing expanding at a moderate pace. Construction was mixed, with home sales a bit softer. Lending grew across the US, with businesses generally optimistic, although most districts reported concerns related to trade policy uncertainty. The Beige Book mentioned that trade concerns prompted some businesses to curb investment.

The labour market was referred as being tight. Employment growth continued to expand, with modest to moderate wage growth. There were reports of continued shortages of high-skill workers and a number of districts reported increased shortages of lower-skill workers. Price rises were seen as modest to moderate in most districts. All districts noted widespread input price pressures, while a few districts noted some increase in inflation pressures. Trade tariffs were seen as contributing to higher input costs, mainly for manufacturers.

Latin America: In Mexico, the President-elect’s chief staff said that the incoming administration wants oil contracts to be good for the companies and the country. The incoming government was said to be working with companies that have oil contracts. More oil auctions are expected in order to boost production. New policies should help lift GDP growth. In Argentina, the 10-year sovereign bond yield in USD has recently declined as investor await news coming from talks with the IMF.

Asia: sentiment was more constructive today. Stocks traded mostly with a positive tone overnight: TOPIX +1.11%, HANG SENG +2.02% as we type, SHANGHAI COMPOSITE +1.15%, HSCEI +2.29% as we type, TAIEX +0.04%, KOSPI +0.14% and S&P/ASX200 -0.76%.


Eurozone: July Industrial Production

Euro area industrial production inched down by 0.8%m/m in July, below consensus expectations of -0.5%m/m. This is consistent with an annual growth rate of -0.1%y/y, down from +2.3%y/y in June. Industrial output fell in Germany (-1.8%m/m), Italy (-1.8%m/m), Finland (-1.2%m/m), Netherlands (-0.6%m/m), Spain (-0.3%m/m) and rose in France (+0.7%), Greece (+1.0%m/m), Ireland (+2.8%m/m) and Portugal (+0.8%m/m).

Details revealed output declines in Durable Consumer Goods (-1.9%m/m), Non-Durable Consumer Goods (-1.3%m/m), Intermediate Goods (-0.8%m/m), which more than offset production gains recorded in Energy (+0.7%m/m) and Capital Goods (+0.8%m/m).

The July reading stands 0.8% below the 2Q18 suggesting a weak start to industrial production in 3Q18. The Markit PMI for the manufacturing sector has not yet stabilised.

Italy: July Industrial Production

Industrial production registered a monthly decline of 1.8%m/m in July, below the market expectation of -0.3%m/m. June reading was revised downward, from +0.5%m/m to +0.3%m/m. Durable consumer goods and capital goods dropped the most over the month, by -4.8 m/m and -2.2% m/m, respectively.

When compared to July 2017, industrial production fell 1.3%y/y, vs. consensus of +1.6% y/y. The previous month reading was revised from +1.7%y/y to +1.4%y/y.

The July reading stands 1.4% below the 2Q18 average, which suggests a very weak start to industrial output in 3Q18. The 3M/3M rate of change remains in negative territory.

China: August Money and Credit Data

The annual rate of change for the monetary aggregate M2 slowed to 8.2% in August, from 8.5% in July (vs. consensus 8.6%). New CNY loans stood at CNY1280bn in August (vs. consensus CNY1400bn), after CNY1450bn in July. Outstanding CNY loans grew 13.2%y/y in August (vs. 13.2%y/y in July). However, total social financing surprised significantly on the upside at CNY1520bn (vs. consensus CNY1300bn), after CNY1041.5bn in July, probably reflecting the policy loosening efforts.

Italy: 2Q18 Unemployment rate

Employed population increased by 1.7%y/y in the 2Q18. Unemployment rate decreased from 11.0% in 1Q18 to 10.7% in 2Q18. Job seekers diminished 1.5%q/q to 2.8mn. The number of employed rose by 0.9%q/q and stood at 23mn in 2Q18.


Sonae: The group announced that the transaction for the acquisition of a 20% stake in Sonae Sierra, from Grosvenor Group, for a total consideration of €255.9mn was concluded (Sonae’s filing on CMVM)

Abengoa: The Company said it will recommend voting against share split proposed by some shareholders in extraordinary meeting scheduled for 1-2 October (Bloomberg)

Europe: International Monetary Fund MD Christine Lagarde said she wasn’t interested in securing a role as president of ECB or of European Commission (Bloomberg)

Italy: Deputy Prime Minister Matteo Salvini said the 2019 budget law will introduce some tax cuts, a form of citizen income, pension reform and tax settlements (Bloomberg)

Ferragamo: Salvatore Ferragamo may consider strategic options, including a sale, after being approached by several Private Equity firms (Bloomberg)

Italy: Deputy Premier Matteo Salvini said the government is planning a tax settlement worth €20bn to help finance promises to voters and stay within the European Union’s deficit limit (Bloomberg)

Santander: Blackstone Group and Centerbridge Partners plan to offer about €3bn for the Spanish bank´s headquarters in Madrid. The firms have until the beginning of next week to submit their joint-offer (Bloomberg)

Acciona: Marshall Wace reported a net short position in Acciona of 0.70% of the company´s stock, as of 11th of September (Bloomberg)

WHAT TO WATCH TODAY: The ECB meeting will probably be the main focus of the day. We will be watching the updated staff macroeconomic projections, namely any changes to growth and inflation forecasts, as well as on the balance of risks for the economic outlook, given mixed economic data in the region and increasing concerns around EM growth.

The ECB will announce the outcome of the September monetary policy meeting today at 12:45 BST. Mario Draghi’s press conference starts 45 minutes later. No changes to ECB policy rates or forward guidance are expected. Regarding the BoE meeting (decision at 12:00 BST), market consensus does not see any change in monetary policy, after the BoE’s unanimous decision last month to increase the Bank rate by 25bps. Focus should be on the published minutes and on any references to BREXIT in MPC discussions.

On the economic data front, the main focus today should be the release of CPI inflation for August in the US. In Brazil, the May retail sales report is out today. In Argentina, the August inflation report will be released.

We will also have MPC meetings in Peru and Turkey. In Turkey, the Bank has already communicated that monetary policy will be adjusted, due to significant risks to price stability. Market expectations should be on whether Turkish President Recep Tayyip Erdogan's pressure continues to affect any decision by the central bank.

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