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PATRIS The Week Ahead - 24 September 2018

24 Sep 2018


Key themes for this week:

1.The Italian government is due to release an update to its Stability Programme by 27 September. Investors expect 5 Stelle and Lega to take a pragmatic approach to public finances. This would support further tightening in the Italy-Germany spreads. However, headline risk is likely to remain high. France discloses today the 2019 budget law and the update of the Stability Programme. Public debt and deficit should be higher than previously projected. Focus should be on any efforts to reduce its structural deficit.

2.In the UK, the annual Labour Party conference began yesterday and ends on Wednesday, with BREXIT in focus.

3.On the economic data front, the German Ifo survey and the preliminary reading for Eurozone HICP inflation in September are key releases this week. In the US, we will get August PCE inflation and durable goods orders.

4.Today sees the implementation of the next round of tariffs from the US (10% on additional $200bn of US imports from China) and China (5%-10% tariff on $60bn of US exports to China).

5.In Brazil, the central bank releases on Thursday the 3Q18 Quarterly Inflation Report.

6.DBRS may release its updated rating for Spain next Friday. Meanwhile, Standard & Poor’s affirmed Spain at A-/Positive.

7.The US needs to have a finalised text for a new NAFTA deal by the end of September, in order to be signed before Mexico’s new president takes office.

8.President Donald Trump addresses this week the United Nations General Assembly with a special focus on Iran. National security adviser John Bolton and Secretary of State Mike Pompeo will also speak this week on Iran. Moreover, French President Emmanuel Macron meets with US President Donald Trump and Iranian President Hassan Rouhani on the side-lines of the General Assembly.

9.The FOMC is widely expected to boost its policy rate range by another 25bps to 2.00%-2.25% on Wednesday.

10. EU and Japanese trade ministers present a proposal on WTO reform to US Trade Representative Robert Lighthizer this week.

11.ECB President Mario Draghi gives introductory statement at the ECON of the European Parliament on Monday. Then, on Thursday, Mario Draghi will give a welcome address at the 3rd Annual ESRB conference in Germany.

12.At the meeting that took place in Algiers, OPEC and Non-OPEC Energy Ministers ruled out yesterday an additional increase in oil output. OPEC added that the rise in US oil output will gather pace over the next five years.

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

EGB supply this week will come from Italy (€1.75bn of 2020 zero bonds and €1bn of 2032 linkers, both on Tuesday), the Netherlands (up to €2.5bn of 2024 bonds on Tuesday), and Germany (€3bn of 2023 bonds on Wednesday). Italy will be back to markets to sell bonds on Thursday.

Germany (Monday), France (Monday), and Italy (Wednesday) are scheduled to sell Treasury Bills this week.

The US Treasury will sell 2-year ($37bn on Monday), 5-year ($38bn on Tuesday) and 7-year ($31bn on Thursday) notes this week. The Treasury will also reopen the 2-year FRN on Tuesday for $17bn.

On the economic data front, the German Ifo survey and the preliminary reading for Eurozone HICP inflation in September are key releases this week. In the US, we will get August PCE inflation and durable goods orders.

Eurozone: We will get the release of several national and euro-wide economic sentiment indicators for August, following the release last week of September EC consumer confidence and flash Markit composite PMI. Both surprised on the downside, while PMI export orders continued to fall. Key releases this week should be the German Ifo business climate survey (to be released today) and the EC ESI survey (due on Thursday). The ECB discloses August money and credit data for the region (Tuesday). On Friday, Eurostat publishes the flash estimate of euro-wide headline and core HICP inflation for September. Country-level flash estimates will be released on Thursday (Germany) and Friday (Spain, France and Italy).

UK: This week will show the release of three surveys for UK activity: the CBI industrial trends survey (due today), the Lloyds business barometer (Thursday) and the GfK consumer confidence survey (Friday).

China: September Caixin manufacturing PMI comes out on Friday. This will be the first indicator released for September in China.

US: The Conference Board’s measure of consumer confidence for September (Tuesday), August durable goods orders (Thursday) and August personal income/spending report are the key data releases to watch this week.

The percentage of those not in labour force that want a job remains at a low level, suggesting that there is not much slack left in the US labour market. According to the Atlanta Fed’s wage tracker, people switching job are getting bigger wage increases, when the quits rate released by BLS in the Job Openings and Labour Survey reached in July a new high for the expansion.

Portugal: INE releases business and consumer surveys for September on Thursday. On Friday, INE discloses September CPI & HICP inflation data, August employment and unemployment estimates, August industrial production and retail sales data. The Bank of Portugal publishes on Thursday August loans to households and non-financial corporations.

BoP coincident indicators for August were disclosed last Friday. Monthly coincident indicators for economic activity and private consumption have both declined in August, suggesting a weaker pace of expansion for the Portuguese economy. The coincident indicator for economic activity dropped by 0.2 points to 1.6, reaching the lowest level since September 2016. The coincident indicator for private consumption also declined by 0.2 points to 1.6, and now stands at the lowest level since July 2016.

Latin America: In Brazil, an Ibope poll to the October presidential election will be released sometime during the week. On the data front, we will get the external sector numbers (Monday), the credit sector report (Wednesday) and the fiscal report (Friday). In Mexico, the data calendar is heavy this week, with the highlight being the CPI data for 1H of September due to be released today. On Tuesday, we will get the GDP proxy data for July, while August trade balance is disclosed on Wednesday. The credit report for August will be unveiled on Friday. On the same day, we will get the fiscal report for August. In Argentina, talks between local authorities and the IMF remain at centre stage. On the data front, we will get August trade balance report (Wednesday), the July monthly GDP proxy report (Wednesday), the 2Q18 current account data (Thursday) and the September consumer confidence report (Thursday). In Colombia, focus remains on the tax reform debate. On the data front, we will get business confidence and unemployment. In Chile, the August unemployment report will be disclosed on Friday.

This week will be very quiet in terms of earning releases in the US and in Europe, as illustrated by the following tables.

In the US, and according to FactSet, 98 S&P500 companies have issued EPS guidance for 3Q18. Of these 98 companies, 74 have issued negative EPS guidance (while 24 companies have issued positive EPS guidance), or 76% of the total, which is above the 5-year average of 71%. If 76% is the final percentage for the quarter, it will be the highest percentage of S&P500 issuing negative EPS guidance for a quarter since 1Q16. Meanwhile, the number of companies issuing positive EPS guidance (24) is 23% below the 5-year average, while the number of companies issuing negative guidance (74) is 3% below the 5-year average. Finally, if 98 is the final number for the quarter, it would mark the lowest number of S&P500 companies issuing EPS guidance for a quarter since 1Q15, which, according to FactSet, may be related to the uncertainty surrounding trade deals and the impact of tariffs.

On central banks, there will be MPC meetings in Czech Republic (Wednesday), Taiwan, Philippines, Indonesia (all on Thursday), and Colombia (Friday).

In Brazil, the central bank will release on Tuesday the minutes from the 19 September COPOM meeting. At that meeting, the COPOM decided to leave the SELIC policy rate unchanged at 6.50%, in a unanimous decision. The post-meeting policy statement showed that monetary accommodation will start to be gradually removed if the outlook for inflation deteriorates. Meanwhile, the central bank will disclose on Thursday the 3Q18 Quarterly Inflation Report, with updated forecasts for real GDP growth and inflation, discuss the balance of risks for both inflation and growth and provide guidance about the path for the SELIC policy rate.

In Chile, the central bank publishes today the minutes from the 4 September MPC meeting. At that meeting, the MPC decided to leave the policy rate unchanged at 2.50%, in line with market expectations. However, the MPC said that macro conditions make the current monetary stimulus less needed, as economic growth has been stronger than expected. Therefore, the MPC highlighted that monetary stimulus could begin to be gradually removed over coming months.

ECB President Mario Draghi will give an introductory statement at the ECON hearing of the European Parliament on Monday. He will also give introductory remarks at the ESRB conference on Thursday. ECB Executive Board member Benoît Coeuré and ECB Chief Economist Peter Praet will have both several speeches this week. BoE external MPC member Gertjan speaks on Tuesday, while BoE Deputy Governor Dave Ramsden delivers a speech on Friday.

All eyes will be on the September FOMC meeting, with the Fed scheduled to release the updated summary of economic projections. The FOMC is very likely to raise its interest rates by 25bps on Wednesday, bringing the fed funds target range to 2.00%-2.25%, and continuing its gradual withdrawal of policy accommodation. The FOMC will likely highlight the strength of the domestic economy (despite the US - China trade war risk), namely the recent uptick in wage growth, while financial markets remain strong.

Focus should be on any move higher in the dots for 2019-20, due to Fed Governor Lael Brainard’s recent comments on the trajectory of the underlying neutral rate, in response to fiscal stimulus and easy financial conditions. Vice Chair Clarida’s dot will be included for the first time at this week’s meeting. The Fed will extend the SEP and “dot plot” to 2021. Describing monetary policy as neutral would be dovish. It would signal the FOMC is considering a rate pause over coming quarters but could also focus attention on the debate around the need to lift rates into restrictive territory.

The gap between market pricing and the Fed’s dots remains elevated, as investors do not see Fed rates surpassing the 3% level. Furthermore, money markets are even starting to price rate cuts in 2020.

Next Friday, DBRS may release its updated rating for Spain. Meanwhile, DBRS has confirmed Austria at AAA/Stable trend. Standard & Poor’s reaffirmed Belgium at AA/Stable. S&P sees the Belgium economy expanding by 1.6% both this year and next, supported by domestic demand. A slower pace of budgetary consolidation over 2018-20 is expected nevertheless to result in a further decline in the general government debt-to GDP ratio. S&P also affirmed Spain at A-/Positive. The press release disclosed by Standard & Poor’s showed that the Spanish economy is seen continuing to expand faster than the eurozone average over 2018-2021. Despite the recent restatement of budgetary goals, the government deficit should continue to trend down, while Spain continues to run current and capital account surpluses. S&P could raise its rating for Spain if budgetary consolidation continues in line with expectations, or if net external debt declines at a faster pace. Further easing of political tensions in Catalonia would also support an upgrade by S&P.

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