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Patris The Week Ahead - 29 October 2018

29 Oct 2018

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Key themes for the coming week:

1.Standard & Poor’s affirmed Italy at BBB but revised the Outlook to Negative from Stable.

2.The IMF Executive Board completed the first review of the Argentine $56.3bn 3-year SBA. The IMF programme targets a zero primary balance in 2019 and primary surpluses starting in 2020. The IMF programme will no longer be treated as precautionary and frontloads the access to funding.

3.In Germany, CDU came first at the Hesse election that took place yesterday, but recorded a huge drop compared to the 2013 election. The SPD recorded its worst results in the state since 1946, according to the local press. The AfD entered the Hesse regional assembly for the first time.

4.Jair Bolsonaro won Brazil’s Presidential elections.

5.In the UK, the Chancellor will update the government’s tax and spending plans in the Budget on Monday.

6.BoE’s November MPC’s policy decision and Inflation Report are disclosed on Thursday. We will also have an MPC meeting in Brazil on Wednesday.

7.The October manufacturing PMI/ISM indices and the US employment report are the highlights for the coming week, on the economic data front.

8.Galp Energia (Monday), Navigator, Jerónimo Martins, CTT (Tuesday), Semapa and ALTRI (Wednesday) report 3Q18 results this week.

9.In the US, 139 S&P500 (including 6 DOW30 components) are scheduled to report 3Q18 results.

10.The 2019 budget is scheduled to be voted in the Portuguese parliament on Monday and Tuesday.

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

EGB supply this week should come from Italy on Tuesday. There will be around €44bn of redemptions and coupons that will more than offset the supply expected for this week. In the US, there will be no supply this coming week. We will have around $119bn of coupons and redemptions.

DBRS should review its credit rating for Greece on Friday. Moody’s may update its view on Slovenia. Last Friday, Fitch affirmed the UK at AA/Negative, reflecting the continued downside risks of a disruptive exit from the EU, which would have negative consequences for UK trade, investment and economic prospects in the short to medium term. On the same day, Fitch affirmed the Netherlands at AAA/Stable. The rating agency sees general government debt on a firm downward trend, while large current account surpluses are seen as contributing to the country’s strong net international investment position.

Meanwhile, Standard & Poor’s affirmed the UK at AA/Negative, reflecting the uncertainty on the UK’s future relationship with the EU, and whether a transition period will come into force when the UK leaves the EU on 29 March 2019.

The rating agency decided to affirm Italy at BBB but revised downwardly the Outlook to Negative from Stable. S&P sees the Italian government’s economic and fiscal policy settings weighing on the country’s economic growth prospects. According to S&P, rising yields on government debt is consistent with the idea of lower investor confidence. Higher government bond yields are also seen affecting the banks’ access to capital market funding, reducing the capacity of the banking sector to fund the Italian economy. S&P sees a 2019 budget deficit of around 2.7% (vs. the government’s target of 2.4%). S&P no longer expects a downward path to Italy’s government debt to GDP. Instead, the rating agency sees gross and net government debt remaining about 128.5% and 123.2% of GDP over the next three years, respectively.

The October manufacturing PMI/ISM indices and the US employment report are the highlights for the coming week, on the economic data front.

Eurozone: Focus should be on 3Q18 GDP preliminary data for France, Italy, the euro area and Spain (due on Tuesday). The European Commission releases the October Economic Sentiment Indicator on Tuesday. On Wednesday, the Eurostat discloses the October flash HICP for the region. Final Markit manufacturing PMIs will be released on Friday. The September TARGET 2 Balance statistics will also be disclosed on Friday.

Consensus expects a pick-up in the pace of GDP expansion in France for 3Q18, from its weak start of the year (0.2%q/q in both 1Q18 and 2Q18, in part due to temporary factors). In Italy, the economy is set to have remained weak again in 3Q18. In Spain, the economy is expected to have fared better than the region (the Bank of Spain estimates that the economy grew 0.6%q/q). For the euro area as a whole, the flash estimate will likely show that the economy continued to grow at pace similar to the previous quarter, as domestic demand growth more than offset a drag from net trade. However, risks seem to be on the downside.

The European Commission’s Economic Sentiment is likely to have fallen again in October, a trend seen since the beginning of the year, suggesting that the economy continues to slow. France’s INSEE business confidence, Germany’s Ifo Business Climate Indicator and the eurozone Markit composite PMI fell in October. Nevertheless, the ESI should remain consistent with a fairly strong GDP growth. Core inflation has remained subdued. With unit labour costs continuing to rise, focus should be on whether core inflation start to slowly rise over coming months, while Mario Draghi reiterated his confidence last week at his post-meeting press conference that inflation is rising towards target.

US: Key highlights for this week’s data calendar are the September personal income and spending report (due on Monday), the October ISM manufacturing index (Thursday), International Trade data for September (Friday), and the October employment report (Friday). The 3Q18 employment cost index will be released on Wednesday.

Consensus expects another month of strong payroll growth, in spite of the uncertainty related with the impact of recent hurricanes. The unemployment rate is projected to remain at 3.7%, while average hourly earnings should accelerate, reflecting further evidence of diminishing labour market slack. Meanwhile, the ISM manufacturing index is expected to have dropped in October reflecting the stronger US dollar & input costs (after the imposition of additional tariffs on Chinese imports), as well as slowing global demand.

UK: October’s Markit/CIPS manufacturing PMI will be released on Thursday and will likely show that the manufacturing sector’s weak backdrop remains unchanged, given BREXIT uncertainty and slowing global demand. The CBI industrial trends survey reached in October its lowest reading in almost three years. The Lloyds business barometer (Tuesday) and the GfK consumer confidence survey for October (Wednesday) will be released this week.

China: The data release calendar is thin this week. Focus should be on PMIs. Both the NBS manufacturing PMI and the Caixin index suggest that the economy has lost momentum over recent months.

Portugal: INE is scheduled to release this week October’s business and consumer surveys, September’s retail sales and industrial data, the September employment and unemployment estimates (Tuesday), as well as October’s CPI/HICP inflation flash estimate (Wednesday). The Bank of Portugal discloses data on loans granted by the financial sector (Tuesday), and public debt (Friday).

Data published by the CPB Netherlands Bureau show that global trade volumes rose 3.7%y/y in August, suggesting a recovery in 3Q18 when compared to 2Q18. However, the evolution of world export prices, Ifo manufacturing expectations and new export orders sub-indices from Markit manufacturing PMIs all suggest that the pace of growth for global trade volumes could continue to slow over coming months.

This week, we will get MPC meetings in Brazil, Japan (decisions on Wednesday), Czech Republic and the UK (Thursday).

The Bank of England is expected to leave its Bank Rate unchanged this week. GDP growth and CPI inflation are tracking in line with MPC expectations, while there are signs of a pick-up in wages. Downside risks to global growth and uncertainty around BREXIT should also be considered by the BoE. The BoJ will release on Wednesday its quarterly outlook, with updated forecasts for core CPI and real GDP growth.

In Brazil, the COPOM is expected to leave the SELIC policy rate unchanged at 6.50% on Wednesday, reflecting the recent benign recent inflation prints, sluggish real activity data and the favourable market reaction to the election news flow.

On the ECB communication, we will get ECB chief economist Peter Praet chairing a panel at an ECB conference on monetary policy on Tuesday. ECB Executive Board member Sabine Lautenschläger will also deliver a keynote speech on the same day.

On the earnings front, during the upcoming week, 139 S&P500 (including 6 DOW30 components) are scheduled to report 3Q18 results.

According to FactSet, companies in the S&P500 that reported positive earnings surprises for 3Q18 have seen a decline in share price of 1.5% on average from two days before the company reported results through two days after the company reported results (vs. a 1.0% increase in share price on average during the 4-day window over the past 5 years). If this is the final percentage for the quarter, it will be the largest average price decline for S&P500 companies reporting EPS surprises since 2Q11, according to FactSet. Companies that are reporting results below expectations are seeing a price decline on average of -3.8% during the same 4-day window (vs. a 5-year average of -2.5%).

Meanwhile, 63% (i.e. 26 of 41) of the companies that have issued EPS guidance for 4Q18 have issued negative guidance (vs. 5-year average of 70%). Moreover, analysts have also made smaller cuts than average to 4Q18 EPS estimates during October.

48% of the companies in the S&P500 have reported earnings to date for 3Q18. Of these companies, 77% have reported EPS above estimate (8% in line and 15% below estimate), which is equal to the 1-year average but above the 5-year average (71%). In aggregate, companies are reporting earnings that are 6.5% above expectations (vs. 1-year average of 5.4% and 5-year of 4.6%). In terms of revenues, 59% of companies have reported sales above estimate (41% below estimate), which is below the 1-year average of 73% but equal to the 5-year average. In aggregate, companies are reporting sales that are 0.8% above expectations (vs. 1-year average of 1.3% and 5-year average of 0.7%). Considering earnings from the companies that have already released 3Q18 results and consensus estimates for those that have not reported, the earnings growth rate for 3Q18 is 22.5%, vs. 19.4% last week (7.6% for sales, vs. 7.4% last week).

According to FactSet, consensus is projecting earnings growth of 16.1%y/y and revenue growth of 6.3%y/y for 4Q18 (earnings growth of 6.5%y/y and revenue growth of 6.6% for 1Q19).

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