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PATRIS The Week Ahead - 22 October 2018

22 Oct 2018

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Key themes for the week ahead:

1.Following a cabinet meeting, PM Giuseppe Conte said over the weekend that Italy’s ruling coalition has overcome divisions over a tax amnesty included in next year’s budget. The conflict within the coalition regarding a planned tax amnesty was seen at the end of last week as a possible trigger for a collapse of the Italian government.

2.After the European Commission’s letter to Italy’s government about its draft budget, the government was asked to reply by midday on Monday.

3.October’s ECB meeting ends next Thursday. The outcome of the MPC meeting should be announced at 12:45, with the press conference taking place 45 minutes later. President Draghi is expected to reiterate the Bank’s forward guidance.

4.The ECB publishes the Bank Lending Survey on Tuesday. The ECB Survey of Professional Forecasters will be released on Friday.

5.Credit ratings agency Standard & Poor’s will release its assessment of Italy on Friday. Last Friday, Moody’s downgraded Italy to BBB-/Stable, concluding the review initiated on 25 May.

6.Second round of Brazil’s presidential elections take place on Sunday. The current polls indicate Jair Bolsonaro as the clear winner.

7.The October flash Markit PMIs and German Ifo Business Climate survey are the highlights of this week’s economic data calendar.

8.The US Federal Reserve releases its latest Beige Book on Wednesday.

9.Update to key risk events calendar for the following months.

Moody’s may update its credit rating for France and Luxembourg next Friday, while Fitch may review Latvia, the Netherlands, Ukraine and the UK. In the calendar of Standard & Poor’s we find EFSF, Italy and the UK. Finally, DBRS may review Sweden.

Last Friday, Fitch upgraded Cyprus to BBB- from BB+, with a Stable Outlook, reflecting the country’s prudent fiscal policy, while gross general government debt to GDP is projected to remain on a firm downward trajectory, benefitting from a strong economic recovery.

Moody’s downgraded Italy to Baa3/Stable, concluding the review initiated on 25 May, reflecting a material weakening in Italy’s fiscal strength (as the public debt ratio will probably stabilise close to the current 130% of GDP in the coming years, rather than start trending down as previously expected by the rating agency) and the negative implications for medium-term growth of the stalling of plans for structural economic and fiscal reforms.

Moody’s stressed that the public debt trend is vulnerable to weaker economic growth prospects. Even in the near-term, Moody’s sees the fiscal stimulus providing a more limited boost to growth than the Italian government assumes. According to Moody’s, the rating would come under downward pressure if the Italian government were to pursue a fiscal strategy that would lead to a rising debt trend in the coming years, possibly as a result of a weaker growth performance than expected. Moody’s will also consider the willingness to pursue such a strategy and/or the inability to address the fiscal consequences of a growth shock. Moody’s highlights that the Italian government has large refinancing needs and will need to maintain the confidence of both foreign and domestic investors. Therefore, Moody's will assess whether any increase in the government's funding costs signaled a sustained reduction in the government's debt affordability or put the banking sector and potentially the wider economy under significant stress. Finally, the rating would likely also be downgraded if Moody's were to conclude that the risk of Italy exiting the euro area were to rise materially.

The October flash Markit PMIs and German Ifo Business Climate survey are the highlights of this week’s economic data calendar.

Eurozone: Focus should be on the October flash Markit PMIs (due on Wednesday) for Germany, France and the Euro area, as well as on the German Ifo Business Climate Survey (Thursday). The Eurozone ZEW and SENTIX measures of investment sentiment have both declined in October (although they probably mainly reflected falling equity prices). Moreover, forward-looking components of the PMI have continued to be weak. The two indicators are likely to remain consistent with fairly solid growth in the region.

The European Commission’s Euro area consumer confidence survey for October will be published on Tuesday.

US: 3Q18 GDP figures will be released on Friday. Growth is likely to have slowed, following the strong 3.3% annualised rate of expansion recorded in the previous quarter, as higher interest rates restrain rate-sensitive spending. Residential investment should have been once again a drag on the economy in 3Q18. Nevertheless, growth should remain well above the economy’s potential pace of expansion.

Before that, on Thursday, we will get the September durable goods data, which will probably confirm a favourable evolution from equipment investment. Headwinds coming from the US dollar’s appreciation and weaker global demand remain risks to equipment investment growth.

Portugal: The Bank of Portugal releases this week data on the non-financial sector indebtedness, general government financing, loans to households and non-financial corporations.

The September reading of the central bank’s coincident indicators represented the latest evidence suggesting that GDP growth continues to weaken. The coincident indicator for economic activity slowed for the 13th month in a row, reaching the lowest level in two years. The slower pace of economic expansion also reflects a weaker domestic demand as the coincident indicator for private consumption showed a similar evolution and reached the lowest value since the end of 2013.

INE also disclosed last week the September monthly economic survey. The GFCF indicator reached the lowest level in more than 2 years, reflecting the weakening of the Machinery and Equipment component.

We will have MPC meetings in Indonesia (Tuesday), Sweden (Wednesday), Norway, Turkey, Eurozone (all on Thursday), Russia and Colombia (both on Friday).

The ECB is not expected to change policy rates, the APP or forward guidance. Focus should be on any updated details on the reinvestment of maturing bonds held under the APP, as well as on the risk assessment (given that weaker trade, higher oil prices and Italian risks present a more challenging backdrop for the ECB), including whether Mario Draghi repeats confidence in the inflation outlook. Italy will probably be discussed in the press conference.

In Colombia, in the previous meeting, the MPC left the policy rate unchanged at 4.25% in a unanimous vote, reflecting the weak activity growth, the uncertainty regarding the pace of expansion, the stability of current and expected inflation around the 3% target and the impact from changes in financial conditions.

ECB President Draghi will deliver the Lamfalussy lecture at the National Bank of Belgium on Friday. ECB Board member Benoît Coeuré will be giving a speech in France on the same day. Bank of England Governor Mark Carney will be speaking at the University of Toronto’s fourth annual conference. In the US, Fedspeak this week will come from Kashkari, Bostic, Kaplan, Evans, Bullard and Mester.

None of the 16 Fed officials identified downside risks to core PCE inflation at the September FOMC meeting.

158 S&P500 companies (including 10 DOW30 components) are scheduled to report results for the third quarter during the upcoming week. Bank Millennium, BCP’s Polish subsidiary, should report 3Q18 results on Thursday.

17% of the companies in the S&P500 have already reported earnings for 3Q18. Of these companies, 80% have reported EPS above estimate (vs. 1-year average of 77% and 5-year average of 71%), 11% have reported EPS equal to estimate and 10% have reported EPS below estimate. In aggregate, companies are reporting earnings that are 3.9% above expectations (vs. 1-year average of +5.4% and 5-year average of +4.6%). In terms of revenues, 64% of companies have reported sales above estimate (vs. 1-year average of 73% and 5-year average of 59%), while 36% have reported sales below estimate. In aggregate, companies are reporting sales that are 0.5% above expectations (vs. 1-year average of +1.3% and 5-year average of +0.7%).

Considering the results already disclosed and consensus expectations for those companies that are still to report, the projected annual earnings growth rate for 3Q18 is 19.5% (vs. 18.9% last week and 19.3% at the end of 3Q18), reflecting the positive earnings surprises reported by companies in the Financial sector. The annual sales growth rate for 3Q18 is 7.4% (vs. 7.3% last week and 7.5% at the end of 3Q18).

Stock market sentiment remains clearly positive, according to the Federal Reserve Bank of Minneapolis, using option market-based estimates of probabilities.

EGB supply this week comes from the Netherlands (DSL 0.75% July 2028, €1.5-2.5bn on Tuesday), Germany (Bobl 0% October 2023, €3bn on Wednesday) and Italy (BTPei and CTZ November 2020, both on Friday). There will be around €42bn of coupons and redemptions that will more than offset the supply expected for this week.

In the US, the Treasury will issue around $127bn across 2-year ($38bn on Tuesday), 5-year ($39bn on Wednesday) and 7-year ($31bn on Thursday) sectors (all new benchmarks), as well as 2-year FRN ($19bn on Wednesday). There will be no cashflows to offset the supply.

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