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PATRIS The Week Ahead - 15 October 2018

15 Oct 2018

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Key themes for the coming week:

1.Moody’s upgrades Portugal from Ba1/Positive to Baa3/Stable. DBRS confirmed Portugal at BBB/Stable.

2.In Germany, CSU suffered their worst election result since 1950 on the regional elections in Bavaria that took place on Sunday. CSU has lost its absolute majority for only the second time since 1962. The Greens came out in the second place (after more than doubling their share of the vote), while the far-right AfD entered the state assembly for the first time. The CSU will now need to form a coalition. SPD also showed a weak result.

3.Galp Energia discloses its 3Q18 trading update on Monday, before market opening.

4.Italy and other eurozone countries will have to submit its budget plans to the EC for approval by 15 October, providing details on the specific measures the government intends to implement. Focus should be on signs that the EC is going to ask Italy to send a revised draft budget.

5.The US Treasury’s bi-annual report on the exchange rate policy of major trading partners is due this week. According to press reports, Treasury officials have decided that China is not manipulating its currency.

6.The European Council will convene on Wednesday and Thursday. The Council will discuss BREXIT, migration and internal security.

7.The minutes to the September FOMC meeting will be released on Wednesday.

8.The September retail sales and industrial production reports in the US, as well as China’s 3Q18 GDP figures, are the highlights of this week’s economic data calendar.

9.The IGCP is going to auction Treasury Bill lines maturing on January 2019 and September 2019, with an indicative global range amount of €1000mn to €1250mn.

10.The 3Q18 earnings season will now move to centre stage in Europe and in the US. In the US, 55 S&P500 companies (including 7 DOW30 components) are scheduled to report 3Q18 results.

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

Moody’s has decided last Friday to upgrade Portugal to Baa3/Stable reflecting the fact that the country’s elevated general government debt has moved to a sustainable, albeit gradual, downward trend, with limited risks of reversal. Moreover, the broadening of Portugal’s growth drivers and a structurally improved external position has increased its economic resilience. DBRS reiterated Portugal at BBB/Stable. According to DBRS, real GDP growth in 2018 is projected at 2.3%, still above the euro area average. The fiscal deficit and the government debt-to-GDP ratio are expected to continue declining, while Portuguese banks’ NPLs are decreasing. Nevertheless, according to the rating agency, the high government debt ratio limits the fiscal space and leaves public finances vulnerable to negative shocks. Moreover, NPLs also remain high, in particular in the corporate sector.

This Friday, Moody’s may update its credit rating for Belgium and Finland, while Fitch is expected to review Cyprus.

The 3Q18 earnings season will now move to centre stage in Europe and in the US (see tables). The earnings season will also start this week in Portugal, as Galp Energia releases its 3Q18 trading update. In the US, 55 S&P500 companies (including 7 DOW30 components) are scheduled to report 3Q18 results.

According to FactSet, 6% of the companies in the S&P500 have reported earnings to date for 3Q18. Of these companies, 86% have reported actual EPS above the mean EPS estimate (4% in line and 11% below the mean EPS estimate), which is above the 1-year (77%) and the 5-year (71%) averages. In aggregate, companies are reporting earnings that are 2.1% above expectations (vs. 1-year average of 5.4% and 5-year average of 4.6%). In terms of revenues, 68% of companies have reported sales above consensus expectations (32% below estimated sales), which is below the 1-year average (73%), but well above the 5-year average (59%). In aggregate, companies are reporting sales that are 0.4% above expectations (vs. 1-year average of 1.3% and 5-year average of 0.7%).

According to FactSet, FX has been cited by more than 60% of the companies that have reported to date as a factor that either had a negative impact on earnings or revenues in 3Q18 or is expected to have a negative impact in future quarters.

The September retail sales and industrial production reports in the US, as well as China’s 3Q18 GDP figures, are the highlights of this week’s economic data calendar.

Portugal: INE releases on Thursday the September monthly economic survey. On Friday, the Bank of Portugal discloses September’s coincident indicators.

Eurozone: The August trade balance is scheduled to be released by Eurostat on Tuesday.

Meanwhile, the account of the September ECB Governing Council meeting (released last week) reinforced the idea that the rise in wage growth supports the increased confidence in the inflation outlook.

China: This week we have a number of key releases, including the September money & credit (Monday), inflation (Tuesday) and activity (Friday) data. 3Q18 GDP figures are also due on Friday and could confirm that the economy is slowing. Focus should be on infrastructure investment and credit growth, as investors look for signs of a policy-driven rebound.

September’s retail sales, industrial production and FAI are expected to be released on Friday. Manufacturing PMIs suggest that industrial activity weakened further last month. Data released during the golden week suggests a softening in consumption growth.

UK: This will be a data-packed week. Labour market data for the three months to August should be disclosed on Tuesday. We will also get September’s inflation data (Wednesday) and the September retail sales report (Thursday).

US: We will get this week the release of September’s retail sales (Monday) and industrial production (Tuesday), as well as the October NAHB index (Tuesday) and September’s housing starts (Wednesday).

Wage growth at the bottom of income distribution (see chart) remains solid, which bodes well to consumer spending over the coming quarters. This is also consistent with a labour market whose slack continues to decline.

We will have MPC meetings in Hungary (Tuesday), Chile and Korea (both on Thursday). On Monday, ECB Vice-President Luis de Guindos will speak at an award ceremony in Spain. ECB board member Peter Praet will give a keynote speech in Spain on Wednesday. BoE Governor Mark Carney will be speaking at the Economic Club of New York on Friday.

The minutes to the September FOMC meeting will be released on Wednesday. At that meeting, the fed funds rate was increased to 2.00%-2.25%, while the policy statement and the economic projections were left mostly unchanged. The minutes may provide more details on how Fed officials see the balance of risks, and on the discussion around the neutral level of interest rates. However, the minutes will not include any discussion of the latest increase in UST yields or the sell-off in stock markets.

According to Tobias Adrian, Richard Crump, and Emanuel Moench, as of 11 October, the 10-year UST term premium was at -0.35%, still in negative territory, despite the rise from the August lows. The risk neutral rate continues to rise and stood at 3.50%, which compares to the 3.00% median dot for the longer run that came out of the September FOMC meeting. 

In Mexico, the central bank will publish on Thursday the minutes from the 4 October MPC meeting. At that meeting the MPC decided to leave the policy rate unchanged at 7.75%, while one director dissented for a 25bps rate hike. The MPC said that it will remain vigilant to factors that could impact inflation. In Chile, at the 4 September MPC meeting, the policy rate was left unchanged at 2.50%, in a unanimous decision and in line with market consensus. The forward guidance showed that the Bank now sees as less needed to keep the current monetary stimulus, given that economic growth as exceeded expectations. The MPC guided towards a gradual withdrawal of monetary stimulus over the coming months.

EGB supply this week is expected to come from Finland (RFGB 0.5% Sep. 2028, up to €1bn, on Tuesday), Germany (Schatz 0% Sep. 2020, €4.0bn on Tuesday, and Bund 2.5% Jul. 2044, €1.5bn on Wednesday), France (OATs and OATi/ei, on Thursday) and Spain (Bonos on Thursday). There will be more than €18bn of coupons and redemptions next week that will almost completely offset the supply scheduled for the coming week.

The US Treasury will issue around $5bn of 30-year TIPS next Thursday. There are no coupons and redemptions expected for this week. 

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