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PATRIS The Week Ahead - 3 December 2018

3 Dec 2018

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Key themes for the coming week:

1.The results of the Trump-Xi meeting will be the focus of markets this week. The meeting ended with a temporary ceasefire in the trade dispute. The 10% tariff rate imposed on $200bn of Chinese imports will not rise to 25% on the 1st January 2019, while China has agreed to make a very substantial purchase of a range of US goods, including US agriculture products. Both countries agreed to a 90-day negotiation period.

2.Fitch affirmed Portugal at BBB/Stable on Friday.

3.The new President in Mexico took office on Saturday.

4.Russia and Saudi Arabia agreed to extend into 2019 their deal to manage the oil market.

5.Argentina’s central bank signed a deal with China on Sunday to extend a currency swap by $8.6bn.

6.The Eurogroup is expected to discuss this Monday the member states’ budget plans for 2019, with investors’ attention focused on Greece and Italy.

7.The manufacturing and services PMI/ISM readings for November as well as the US employment report for the same month are the highlights of this week’s data calendar.

8.Fed Chairman Jerome Powell delivers on Wednesday his congressional testimony. Powell and Fed Vice Chair Richard Clarida both characterised current interest rates as being just below the range of longer-run estimates of neutral last week. However, there were no signs that they were more worried about the outlook for growth and inflation. Meanwhile, the market has significantly reduced hiking cycle expectations for 2019.

9.OPEC meeting on Thursday. Focus should be on any production adjustment in order to balance the market.

10.In Germany, CDU holds its annual party convention on 7-8 December to vote on a new party leader to replace Angela Merkel.

11.The Federal Reserve releases its Beige Book on Wednesday.

12.Chinese President Xi Jinping visits Portugal on 4-5 December.

13.German automaker executives from BMW, Daimler and Volkswagen visit the White House on Tuesday.

14.The European Court of Justice’s advocate general will issue his opinion on Tuesday as to whether the UK can unilaterally call off its exit from the EU under Article 50 of the EU treaty.

15.In the UK, on 4-7 December, MPs in the House of Commons will debate the specifics of the Withdrawal Agreement and Future Framework. On 9 December, Prime Minister Theresa May and the Leader of the Opposition Jeremy Corbyn are due to debate the merits of the Withdrawal Agreement and Future Framework.

16.Update to the Key Risk Event Calendar for the following months.

The manufacturing and services PMI/ISM readings for November as well as the US employment report for the same month are the highlights of this week’s data calendar.

Eurozone: Eurostat releases on Friday the third estimate of eurozone GDP in 3Q18, which includes the expenditure breakdown. October’s retail sales volumes will be published on Wednesday. We will also get October’s industrial production for Spain, France and Germany during the week, which could suggest some rebound in industrial activity in 4Q18 (following the effects from transitory factors).

Excluding the volatile energy, food, alcohol and tobacco components, CPI inflation fell from 1.1%y/y in October to 1.0%y/y in November, according to the flash reading released by Eurostat last week. According to the breakdown disclosed by Eurostat, the lower core inflation reflected weaker services inflation (from 1.5%y/y to 1.3%y/y), despite ECB’s expectations that rising wage growth will push core inflation higher. This could put pressure on the ECB after adopting a slightly more hawkish line communication. Nevertheless, survey measures of consumers and firms’ inflation expectations still suggest that core inflation may rise over the course of next year, while the unemployment rate in the region is at a 10-year low.

Monetary data published by the ECB last week added to the evidence from the activity surveys that the euro area continues to lose momentum.

US: We will get on Monday the November ISM manufacturing index. The regional manufacturing surveys for November have been mixed, while the deterioration in the global backdrop and the stronger US dollar remain key headwinds. The Markit manufacturing PMI edged lower, while global surveys have continued to deteriorate. The November ISM non-manufacturing index will be released on Wednesday. The Markit services PMI declined slightly in November.

October’s international trade will be disclosed on Thursday and will likely suggest that net trade could be a drag on 4Q18 GDP growth, on the back of stronger US dollar. On Friday, we will get November’s employment report and the preliminary reading for University of Michigan’s measure of consumer confidence in December. Consensus sees average hourly earnings stable at 3.1%y/y, while the unemployment rate should remain unchanged at 3.7%.

China  We will be watching the November Caixin manufacturing PMI on Monday. The NBS manufacturing PMI edged down to 50.0 in November, its lower level in over two years. The November foreign exchange reserves will be released on Friday.

UK: On the data front, focus this week should be on the release of November’s Markit/CIPS manufacturing (Monday) and services (Wednesday) PMIs. The forward-looking components of October’s manufacturing PMI contained few signs of a recovery in November. The outlook for the UK manufacturing remains cautious, reflecting BREXIT uncertainty and the slowdown in global growth. The forward-looking components of the services PMI dropped sharply in October, suggesting that the UK economy lost momentum in the last quarter of the year.

Portugal: The Bank of Portugal releases on Wednesday its Financial Stability Report, which assesses emerging risks in the Portuguese markets and financial system.

We will have MPC meetings this week in Australia, Chile (both on Tuesday), India, Poland, Canada (all on Wednesday).

Federal Reserve Chairman Jerome Powell will testify on the economic outlook before the Congress’s Joint Economic Committee on Wednesday. During the week, we will also get speeches from John Williams, Lael Brainard, Robert Kaplan and Raphael Bostic.

In the UK, Governor Carney and Chancellor Hammond will appear before the Treasury Select Committee to discuss the BoE’s and government’s views of the different BREXIT scenarios, on Tuesday. On Monday, the UK government publishes its legal advice on the BREXIT deal.

Last Friday, Standard & Poor’s affirmed Ireland at A+/Stable. S&P sees BREXIT remaining a key risk to Ireland’s strong domestic economy. Despite the economy’s rapid pace of growth, S&P highlights the still high public and private debt, while the budget remains in deficit. Meanwhile, Fitch affirmed Belgium at AA-/Stable. Fitch expects a continued decline in the government to GDP ratio, from 103.4% of GDP at end-2017 to 100.2% next year and 98.7% in 2020 (i.e. falling below 100% for the first time since 2010).

Fitch affirmed Portugal at BBB/Stable on Friday. Fitch sees the gross general government debt ratio continuing to decline over the medium-term (from 124.8% at the end of 2017 to 121.5% at the end of 2018 and close to 95% by 2027), reflecting the prudent fiscal policy. GDP growth is expected to reach 2.2% in 2018 (after 2.8% last year), 1.8% in 2019 and 1.5% in 2020. Fitch highlights the dynamic export growth since 2009 as one of the key drivers of Portugal’s economic adjustment (which helps the external deleveraging of the economy). Financing conditions are still considered to be favourable, as the spill-over from the higher Italian yields have so far been limited, and the German yield curve has remained very low. Fitch stresses that the issuing maturity of PGBs is 11.1 years, while the average maturity of the entire debt stock is 8 years, which increases the resilience to future financial shocks.

On the EU sovereign calendar for this week, DBRS is scheduled to review on Friday Germany and Poland, while Moddy’s may update its view for the UK. Fitch is expected to review EFSF and ESM.

EGB supply this week is expected to come from Spain (Wednesday) and France (Thursday). There are no coupons and redemptions to offset the supply scheduled for this week.

Netherlands, Germany, France, Spain, Belgium, the ESM and Greece will sell Treasury Bills this week.

In the US, there are no UST supply or cash flows this week.

The earnings release calendar remains quiet this week both in the US and in Europe.

In the US, and according to FactSet, during the first two months of 4Q18 analysts lowered estimates for companies in the S&P500 such as the bottom-up EPS estimate has dropped by 2.6% during this period. During the past 20 quarters, the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.4% (-3.3% for the last 40 quarters and -2.9% for the last 60 quarters). 4Q18 marks the largest percentage decline in the bottom-up estimate over the first two months of a quarter since 1Q17.

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