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PATRIS The Week Ahead - 27 August 2018

27 Aug 2018


Key highlights for this week:

1.Negotiators from the US and Mexico have reached an agreement to new vehicle tariff rules. The US had been pressuring Mexico to accept a higher percentage of a vehicle’s components to come from within the NAFTA trade bloc if it is to qualify for tariff-free trade, as well demanding higher wage requirements in areas where passenger cars and trucks are assembled. This agreement resolves an important point of dispute between the US and Mexico but could create headwinds (for example) to future plans for German automakers’ expansion in Mexico. Key focus should now be on possible solutions to NAFTA energy rules. Meanwhile, US President Donald Trump has asked Secretary of State Mike Pompeo to cancel his visit to North Korea, reflecting the expectation that little progress would be made towards denuclearisation.

2.This will be a full week in terms of economic data in Portugal, as INE releases business and consumer surveys for August, employment and unemployment data for July, retail sales and industrial production numbers (Thursday), CPI/HICP flash estimates for August, and 2Q18 quarterly national accounts (Friday).

3.Confidence and economic sentiment indicators for August in the Eurozone, July personal income and spending in the US and China’s official PMIs are the key highlights of this week’s data calendar.

4.Fitch reviews Italy on Friday. Current rating (BBB/Stable) has been unchanged since 21 April 2017, when Fitch downgraded the sovereign debt rating by one notch from BBB+ to BBB. An outlook downgrade can’t be ruled out.

5.The central bank of Mexico publishes on Wednesday the 3Q18 Inflation Report.

6.German Chancellor Angela Merkel gives her annual summer interview to public broadcaster ARD on Monday.

7.Mota-Engil (Thursday) and Teixeira Duarte (Friday) report 1H18 results.

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

 In Portugal, Mota-Engil reports its 1H18 results on Thursday, before market opening. On Friday, we will get Teixeira Duarte’s 1H18 results.

Confidence and economic sentiment indicators for August in the Eurozone, July personal income and spending in the US and China’s official PMIs are the key highlights of this week’s data calendar .

Latin America:  This is a full week in terms of economic data in Brazil, with the release of the external sector report (due on Monday), the credit report (Tuesday), labour market data (Wednesday), July’s fiscal report (Thursday) and the 2Q18 GDP print (due on Friday). Real GDP growth in 2Q18 will reflect the impact of the truck drivers’ strike between May and June. In Mexico, focus should be on the NAFTA talks and Banxico’s Quarterly Report. NAFTA negotiators continue to suggest that a trade deal is still possible until the end of the month. On the data front, we will get trade balance data (due on Monday), the unemployment numbers (Tuesday), budget numbers (Thursday) and the credit report (Friday), all for July. In Colombia, this week will likely reveal the first draft of the fiscal reform. Unemployment data will be released on Friday. In Chile, we will get this week July industrial sector (due on Thursday) and labour market indicators (Friday).

ChinaNBS PMIs will be disclosed on Friday. Policy easing over the past two months could support activity growth, while trade tensions may have weighed.

Eurozone: There will be several national and region-wide confidence and economic sentiment indicators for August, including the German Ifo business climate survey (Monday) and the European Commission confidence survey (Thursday). Business surveys suggest that GDP growth has stabilised for the region as a whole, after the slowdown seen in 1H18.

The ECB discloses money and credit data for July on Tuesday. Flash HICP inflation data for August and the unemployment numbers for July will both be released on Friday.

The second estimates of 2Q18 GDP growth for France and Italy will be released on Wednesday and Friday respectively.

UK: Focus should be on two surveys: the Lloyds Business Barometer (due on Thursday) and the GfK Consumer Confidence (Friday).

Portugal: This will also be a full week in terms of economic data, as INE releases business and consumer surveys for August, employment and unemployment data for July, retail sales and industrial production numbers (Thursday), CPI/HICP flash estimates for August, and 2Q18 quarterly national accounts (Friday). On Tuesday, the Bank of Portugal discloses the statistical press release on loans granted by the financial sector to households and non-financial corporations.

According to the flash estimate released by INE in mid-August, real GDP grew 0.5%q/q in 2Q18, after 0.4%q/q in the previous quarter, consistent with an annual rate of expansion of 2.3%y/y (vs. 2.2%y/y in 1Q18). The press release disclosed by INE mentioned that the positive contribution of domestic demand remained unchanged in 2Q18, while the contribution of net exports to quarterly rate of change of real GDP was slightly less negative, reflecting the stronger acceleration of exports than in imports. For the annual rate of change, domestic demand recorded a stronger positive contribution, reflecting the acceleration of private consumption, while investment showed a slowdown (due to a negative base effect). Net exports posted a negative contribution similar to the quarter before.

The Bank of Portugal disclosed last Friday the July reading for its coincident indicators. The data released is consistent with a slower pace of expansion for the Portuguese economy, on the back of weaker private consumption.

The coincident indicator for economic activity maintained the downward path seen since October 2017, declining from 1.9 in June to 1.8 in July, the lowest level since December 2016. The coincident indicator for private consumption posted a strong decline on the month, from 1.9 in June to 1.6 in July, reaching the lowest reading since July 2016.

US: This week’s economic data calendar includes the Conference Board’s gauge of consumer confidence index for August (Tuesday), BEA’s second estimate for 2Q18 GDP print (Wednesday) and July personal income and spending (Thursday). Consensus expects a decline in the Conference Board’s index, despite the strong labour market and gains in the stock market. Retail sales point towards solid growth in personal spending. Consensus expects core PCE to accelerate from 1.9%y/y in June to 2.0%y/y in July.

Moody’s could review its rating for Slovakia on Friday. On the same day, Fitch may update its view on Hungary and Italy, while in the calendar of Standard & Poor’s we find Sweden.

EGB supply is expected from Germany (€3bn of Bobl 0% October 2023, on Wednesday) and Italy (Tuesday and Thursday). There are €10.6bn of coupons eligible for reinvestment. Cyprus (Monday), France (Monday), Malta (Tuesday), Italy (Wednesday) and Greece (Wednesday) are scheduled to sell Treasury bills next week.

In the US, the Treasury will issue around $121bn across 2-year ($36bn on Monday, new benchmark), 5-year ($37bn on Tuesday, new benchmark), 7-year ($31bn on Wednesday, new benchmark) and 2-year FRN ($17bn on Wednesday, re-opening). There will be $6.6bn of coupons and $71.7bn of redemptions eligible for reinvestment.

Moody’s has decided to extend its review for possible downgrade of Italy’s credit rating from Baa2 up to end-October from 7 September, in order to get better visibility on the country’s policy direction and on potential structural reforms. Italy’s has not been trading in line with a BBB rating for a long time, as the market seems to price already a one-notch downgrade. Given the ECB’s plans to normalise its monetary policy, fading reform efforts, and downside risks to GDP growth in Italy (which is incompatible with debt sustainability), BTPS are likely to keep an elevated risk premium until the government increases visibility in public finances and structural reforms.

It looks increasingly likely that economic reforms will need to be imposed by the outside (European Commission threats or higher bond yields that leads to higher funding costs for the government and the private sector). Italy is likely to remain an important driver for risk appetite in peripheral EGBs over the coming weeks.

On central banks, we will have policy meetings only in South Korea (Friday) this week. The central bank of Mexico releases on Wednesday the 3Q18 Inflation Report, with updated forecasts for real GDP growth and inflation, a discussion on the balance of risks and the policy rate forward guidance.

During the week, we will have speeches from ECB Board members Peter Praet (Tuesday) and Luis de Guindos (Friday).

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