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PATRIS The Week Ahead - 10 December 2018

10 Dec 2018


Key themes for the week ahead:

1.The vote on the Prime Minister’s BREXIT deal will take place on Tuesday. Betting odds suggest that the deal will fail to make it through Parliament on the first attempt. If the Parliament does not approve the deal this week, political uncertainty is likely to remain over the economy and UK markets for at least the next few weeks. Moreover, if we see a defeat by a larger margin, Theresa May might have to face a vote of no confidence in the government and a leadership challenge. Theresa May can also try to persuade EU partners to change parts of the agreement to make it more tolerable for British lawmakers during the EU summit on 13-14 December.

2.The ECB is widely expected to confirm on Thursday the end of its net asset purchases at its December meeting. The ECB may simply maintain that risks are broadly balanced, as it would make it easier to communicate the intention to end net asset purchases. The Governing Council is likely to stress that monetary policy will remain very accommodative due to the reinvestment of the stock of assets that the ECB has in its balance sheet and the ECB’s forward guidance about interest rates. The current EONIA pricing over the next few years is already very dovish.

3.The Euro summit will take place on Friday. Leaders will discuss the reform of the EMU, including a common budget for the region and the backstop to the stabilisation fund.

4.In Brazil, the MPC will meet on Wednesday, and is expected to leave the SELIC rate unchanged at 6.50%. Real activity growth remains modest, while recent inflation prints have been benign.

5.TheEuropean Court of Justicewill rule on Monday whether the UK can unilaterally revoke the Article 50 Brexit process.

6.The Bank of Portugal releases on Friday November’s coincident indicators.

7.The December flash Markit PMIs for France/Germany/Eurozone, as well as US CPI inflation, retail sales and industrial output for November are the highlights of this week’s data calendar.

8.China’s exports decelerated from +15.6%y/y in October to +5.4%y/y in November, while growth in imports slowed from +20.8%y/y in October to +3.0%y/y in November. Both readings were below consensus. Imports of major commodities decelerated in both value and volume terms in November. China’s CPI inflation moderated from +2.5%y/y in October to +2.2%y/y in November. China’s PPI inflation slowed from +3.3%y/y in October to +2.7%y/y in October, the lowest since September 2016 after moderating for five consecutive months.

9.Update to the Key Risk Events Calendar for the following months.

The earnings release calendar remains quiet this week both in the US and in Europe.

DBRS has confirmed Germany’s rating at AAA/Stable, as the country continues to steadily reduce its public-sector debt ratio and is well prepared to respond to potential challenges. DBRS also confirmed Poland at A/Stable, reflecting continued strong macroeconomic performance, prudent fiscal and monetary policy frameworks, a flexible exchange rate regime and the increasing level of integration within the EU.

On the EU sovereign calendar for this week, DBRS may review the UK on Friday. On the same day, Fitch may update its view on Ireland and Turkey.

EGB supply this week is scheduled only from Germany (Schatz 0% December 2020, €3bn on Tuesday). There will be around €13bn of coupons and reinvestments eligible for reinvestment.

In the US, the Treasury will issue around $78bn across the 3-year ($38bn on Tuesday, new issue), 10-year ($24bn on Wednesday, re-opening) and 30-year ($16bn on Thursday, re-opening) sectors. There are around €25b of coupons and redemptions eligible for reinvestment.

The December flash Markit PMIs for France/Germany/Eurozone, as well as US CPI inflation, retail sales and industrial output for November are the highlights of this week’s data calendar.

Portugal: INE releases this week the October trade statistics (Monday) and November’s CPI inflation data (Wednesday). The Bank of Portugal should disclose October’s loans to households and non-financial corporations (Tuesday), as well as November’s coincident indicators.

China: The Economic Work Conference could take place during the week, with China’s leadership defining its priorities for the year ahead. On the data front, focus should be on credit (10-15 December) and activity data (due to be released on Friday). Credit conditions have been a headwind to the economy. Indicators for industry suggest that factory activity remained weak in November. Investment growth is likely to reflect increased fiscal support strengthening infrastructure spending. Car sales suggest that retail sales growth remained subdued.

US: The data release calendar over the week ahead is busy with producer prices (Tuesday), consumer prices (Wednesday), retail sales and industrial production (both on Friday). PPI inflation is likely to ease in November reflecting a combination of the strengthening dollar and falling commodity prices. The sharp decline in gasoline prices have also probably pushed lower headline CPI inflation. Subdued unit labour costs suggest that core inflation will not accelerate over the near-term.

Meanwhile, autos and gasoline prices are likely to have held down nominal retail sales in November. Core retail sales should remain supported by incomes still rising, high consumer confidence and the increase in purchasing power due to the decline in households’ gasoline bills, in spite of the fading boost from the earlier tax cuts. The weakening global backdrop and the stronger dollar remain key headwinds to industrial production over coming months. However, in November, industrial production should be supported by utilities and mining.

Eurozone: We will get this week October’s industrial production for the region (Wednesday), the December flash Markit PMIs (Friday) for France/Germany/Euro area and 3Q18’s labour costs (Friday). We already know that industrial output grew by 1.2%m/m in both France and Spain, and by 0.1%m/m in Ireland. However, industrial output fell by 0.5%m/m in Germany during October. The Markit composite PMI fell from 53.1 in October to 52.7 in November, a 26-month low and pointing to quarterly GDP growth of about 0.2% - 0.3% (see chart). Moreover, the forward-looking components of the survey (new orders and future output) both fell in November.

Final November inflation for France, Germany (Thursday), Spain and Italy (Friday) will also be released. The December ZEW Survey expectations index for Germany will be released on Tuesday.

UK: Investors’ attention will be centred on Tuesday’s BREXIT vote. On the data front, monthly GDP and services output data (both for October) will be released on Monday. October’s labour market data will be released on Tuesday. On Monday, we will also get October’s trade report and industrial production figures.

October’s monthly GDP is likely to suggest that the economy might slow in 4Q18, as the temporary factors that helped the economy in the last quarter have probably faded. Nevertheless, the economy also seems to be losing some of its underlying momentum, consistent with the services PMI’s decline.

Meanwhile, surveys continue to point to a steady even if moderate pace of jobs growth. The trade deficit is likely to have widened in October, after narrowing to its lowest level since 2013 in 3Q18. The October industrial production data is expected to show that the manufacturing sector has made a poor start to 4Q18, as BREXIT uncertainty weigh on output. The Markit/CIPS manufacturing PMI’s output sub-index declined from 55.1 in September to 51.6 in October, while the CBI’s industrial trends survey also weakened. Overall industrial production should have been helped by oil and gas production.

The ECB will announce the outcome of its December MPC meeting on Thursday at 12:45 GMT. The ECB will likely confirm the end of its net asset purchases at its December meeting. Markets’ attention will also be on whether the weakness of recent data leads the Governing Council to assess that risks to growth have shifted to the downside, given rising questions about the strength of domestic demand.

The Eurozone Markit composite PMI appears consistent with another weak performance from the economy in 4Q18, while the Italian index has dipped into recession territory (confirmed by the November reading of the Ita-coin coincident indicator). More importantly, core inflation fell in November from 1.1%y/y to 1.0%y/y.

Given increased downside risks to growth and inflation, the ECB is not expected to give any guidance about the timing or pace of future hikes at this week’s meeting. Therefore, attention will probably be on the ECB’s plan for reinvesting the proceeds from maturing QE assets and to the possibility of additional long-term loans to banks. The ECB will likely choose to keep its options open on both, while reassuring that it is prepared to move if needed. Forward guidance about interest rates is expected to remain unchanged. ECB staff macroeconomic forecasts will be published this week, including its preliminary forecasts for 2021.

At the October meeting, President Draghi mentioned that GDP growth was returning to trend after a very strong 2017, while the Governing Council still saw risks to the growth outlook as “broadly balanced”. Net asset purchases were expected to end in December and interest rates would remain unchanged through the summer.

We will also have MPC meetings this week in Brazil (Wednesday), Peru, Turkey, Norway, Switzerland (Thursday) and Russia (Friday).

At the November meeting, the MPC in Peru decided to leave the policy rate unchanged at 2.75%. The forward guidance was also kept unchanged, as the MPC saw as appropriate to keep the current accommodative monetary policy as long as inflation expectations remain anchored and the level of economic activity stays below potential.


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