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PATRIS The Week Ahead - 12 November 2018

12 Nov 2018


Key themes for this week:

1.Tuesday is the deadline for the Italian Government to submit a re-drafted budget. If Italy does not change its plans, the European Commission could recommend the country to be put into an Excessive Deficit Procedure as early as the 21 November for violation of the debt rule, which would mean greater oversight by the European Commission of Italy’s budget through the corrective arm of the Stability and Growth Pact.

2.ECB President Mario Draghi will deliver a speech at the European Banking Congress on Friday.

3.Fed Chairman Jerome Powell will speak on the economic outlook at the Dallas Fed on Wednesday.

4.In Portugal, Sonae reports 3Q18 results on Wednesday after the market close.

5.The central bank of Mexico meets on Thursday. Consensus expects a 25bps hike to 8.00%, reflecting the MPC’s hawkish guidance and the dissenting vote for a hike at the 4 October MPC meeting, as well as the MXN depreciation seen in recent weeks.

6.In Portugal, INE releases on Wednesday the 3Q18 GDP flash estimate.

7.According to press reports, in the US, Democrats plan to investigate the Trump administration’s decisions on AT&T and Amazon. Donald Trump warned last week that bipartisan policymaking will be difficult if Democrats go ahead with investigations and Congressional hearings on the Trump administration.

8.October’s US CPI inflation, industrial production and retail sales, as well as October’s activity and spending data in China, are the highlights of this week’s data calendar.

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

EGB supply this week should come from Germany (€4bn of Schatz 0% December 2020 on Tuesday and €1.5bn of Bund 1.25% August 2048 on Wednesday), Italy (BTPs on Tuesday) and the Netherlands (up to €1.0bn of DSL 3.75% January 2042 on Tuesday).

In the US, there is no supply this week. There are more than €79bn of coupons and redemptions that could be reinvested.  We've had higher US nominal yields over recent months on the back of the increase in real yields (reflecting the expectation of higher rates by the FOMC), as inflation compensation has moved in opposite direction.

Last week, in Italy, the Prime Minister and the Finance Minister defended the budget and criticised the European Commission’s update to its economic forecasts for the country. Moreover, the weak 3Q18 GDP data and the October Markit composite PMI in contractionary territory were probably both seen by the Government as supporting the need for fiscal stimulus.

During the upcoming week, 12 S&P500 companies (including the last 3 DOW30 components) are scheduled to report 3Q18 results.

According to FactSet, of the 415 companies that have conducted earnings conference calls, 138 companies or 33% cited the term “tariff” during the call, which is below the number and percentage through the same point in time in 2Q18 (157 companies or 38%).

Overall, 90% of the companies in the S&P500 have already disclosed 4Q18 results. According to FactSet, of these companies, 78% have reported EPS above the mean estimate (7% in line and 15% below the mean estimate), which is a percentage above the 1-year average (77%) and above the 5-year average (71%). In aggregate, companies are reporting earnings that are 6.7% above expectations (vs. 1-year average of +5.4% and 5-year average of +4.6%). If +6.7% is the final number for the quarter, it will mark the second-highest EPS surprise percentage since 2Q11.

In terms of revenues, 61% of companies have reported sales above expectations (39% below estimated sales), which is below the 1-year average (73%) but above the 5-year average (59%). In aggregate, companies are reporting sales that are 1.5% above expectations(vs. 1-year average of +1.3% and 5-year average of +0.7%).

Considering the results already reported and consensus expectations for the companies that have not disclosed their numbers, earnings growth stands at 25.2%y/y in 3Q18 (+9.4%y/y for sales).

83 companies of the S&P500 have issued EPS guidance for 4Q18. Of these 83 companies, 58 have issued negative EPS guidance, or 70%, which is equal to the 5-year average. According to FactSet, for 4Q18, consensus is projecting earnings growth of 14.2% and revenue growth of 6.7%. For FY19, consensus expects earnings growth of 9.2% (vs. 20.6% in FY18) and revenue growth of 5.3% (vs. 8.9% in FY18).

Speculative net long positions in crude oil have declined significantly this year, reflecting the change in market sentiment on the back of the 180-day sanction waiver period granted by the US to eight importers of Iranian oil, upside surprises in production for the US, Saudi Arabia and Russia, and lower expectations for oil demand (on the back of softer leading indicators of global growth).

Indonesia (Thursday), Thailand (Wednesday), Philippines (Thursday) and Mexico (Thursday) will hold central bank meetings this week.

Several ECB Executive Board members are expected to speak this week: Peter Praet (Tuesday and Thursday), Sabine Lautenschlager (Monday and Tuesday), Luis de Guindos (Monday, Tuesday and Thursday), Benoît Coeuré (Thursday), and Mario Draghi (Friday).

Fed speak this week will come from San Francisco Fed President Mary Daly (Monday and Tuesday), Minneapolis Fed President Neel Kashkari (Tuesday and Thursday), Fed Vice Chairman Randal Quarles (Wednesday and Thursday), Fed Chairman Jerome Powel (Wednesday), Dallas Fed President Robert Kaplan (Wednesday) and Chicago Fed President Charles Evans (Friday).

October’s US CPI inflation, industrial production and retail sales, as well as October’s activity and spending data in China, are the highlights of this week’s data calendar.

Eurozone: Destatis releases on Wednesday the first estimate for German 3Q18 GDP. Growth is likely to have slowed sharply from 2Q18’s 0.5%q/q expansion, in part due to temporary factors reflecting delays to car production from new emissions testing. On the same day, September’s euro area industrial production will be disclosed by Eurostat. Output is expected to have contracted in September, while surveys suggest that the sector could continue to struggle over the coming months. In Italy, industrial output data for September will be released on Monday.

The second estimate of euro area 3Q18 GDP will be disclosed on Wednesday, while the final reading for October’s HICP inflation should be disclosed by Eurostat on Friday.

In Germany, the November ZEW survey will be released on Tuesday.

According to the European Commission’s Autumn forecasts fiscal policy is likely to become a modest tailwind to GDP growth in the euro area next year. 

US: We will get October’s consumer prices on Wednesday. Gasoline prices probably helped CPI inflation in October, even though lower crude oil prices mean that the effect is likely to be reversed in November. The moderate rise in unit labour costs and the stronger US dollar remain both headwinds to core CPI inflation over coming months. The October retail sales report will be disclosed on Thursday. Nominal sales are likely to have been supported by a price-related increase in gasoline sales. The October industrial output data will be released on Friday. The strong US dollar and the slowdown in global demand, particularly in China, remain headwinds to industrial production over the coming months.

China: The data calendar is fairly busy this week with the release of the activity and spending data (Wednesday), monetary and credit data (during the week) for October. Credit conditions remains a headwind to the economy. Manufacturing PMIs still point to weak factory activity. Looser fiscal policy may have started to support infrastructure spending.

UK: The data calendar will also be very busy this week in the UK, with the release of the labour market report for September (Tuesday), October’s consumer and producer prices (Wednesday), and the October retail sales data (October).

Portugal: INE releases on Tuesday the final reading for October’s CPI inflation. The flash reading for 3Q18 real GDP growth will be disclosed on Wednesday. Bank of Portugal releases data on loans to households and non-financial corporations for September (Tuesday) and the October coincident indicators (Friday).

DBRS reiterated France at AAA/Stable trend, reflecting the government’s commitment to improving the country’s future macroeconomic outcomes. According to DBRS, the recent upward revisions to debt and deficit targets do not reflect a retreat by authorities from previously stated policy commitments. The government is expected to continue its push to implement structural reforms in order to improve France’s medium-term fiscal balance and reduce its public sector debt ratio. On the economy, DBRS sees a 2H18 rebound due to supportive tax policy and healthy domestic demand.

Moody’s may review its rating for Austria on Friday, while Standard & Poor’s is expected to update its view on the Netherlands and Switzerland.


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