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PATRIS The Week Ahead - 3 September 2018

3 Sep 2018

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Key themes for the coming week:

1.The USTR’s public comment hearing period on the proposed 25% tariffs on $200bn worth of Chinese goods is due to end on 5 September.

2.US negotiations with Canada should resume on Wednesday. Last week, US President Donald Trump notified Congress that he is prepared to sign a revised version of NAFTA with Mexico in 90 days and that Canada may also join if the country is willing. US President Donald Trump will probably struggle to get permission from Congress to reach separate deals with Mexico and Canada.

3.In Argentina, the Minister of the Treasury should start a new round of negotiations with the IMF on Tuesday, after the government decided to request a front loading of the IMF disbursements. On Monday, the government will disclose details of its proposed fiscal adjustments.

4.Fitch reaffirmed Italy at BBB and revised the Outlook to Negative, from Stable, reflecting fiscal and other policy risks, compounded by the high degree of political uncertainty.

5.Eurogroup meeting on Friday. On the following day, we will have an informal meeting of EU economic and financial affairs ministers.

6.August ISM/PMI indices and the US nonfarm payroll report are the main releases of the week on the economic front.

7.Update to the Key Events Risk Calendar for the following months.

EGB supply this week is expected to come from Austria (RAGB 0% September 2022 and RAGB 0.75% February 2028, on Tuesday, for a total amount of $1.265bn), Germany (€250mn of 0.1% I/L 2046 and €500mn of I/L 2030, both on Tuesday), France (Thursday) and Spain (Thursday). There are no cashflows to be reinvested this coming week.

Netherlands (Monday), France (Monday), Malta (Tuesday), Belgium (Tuesday), and the ESM (Tuesday) are scheduled to sell Treasury Bills this week.

The following two tables highlights the main stocks in Europe and in the US expected to disclose earnings during the upcoming week.

In the US, according to FactSet, during the first 2 months of 3Q18, consensus lowered earnings estimates for the quarter for companies in the S&P500 by 0.9%. During the past 5 years, 10 years and 15 years, the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.5%, 3.6% and 2.8%, respectively. At the sector level, 8 sectors have recorded a decline in their bottom-up EPS estimate during the first 2 months of the quarter, led by the Consumer Staples sector (-4.0%). Two sectors have recorded an increase in their bottom-up EPS estimate, led by the Telecom Services sector (+4.6%). The Heath Care sector has recorded no change in its bottom-up EPS estimate during this period.

For 2Q18, companies in the S&P500 are reporting earnings growth of 25% and revenue growth of 10.1%. For 3Q18 and 4Q18, consensus is looking for earnings growth of 20% and 17.4%, respectively (7.7% and 6% for revenues in 3Q18 and 4Q18, respectively).

August ISM/PMI indices and the US nonfarm payroll report are the main releases of the week on the economic front.

Eurozone: August manufacturing PMIs for Italy and Spain will be published on Monday, followed by services and composite PMIs on Wednesday. Both give some indication of developments in the periphery. Flash composite PMIs suggested divergence between France & Germany and the rest of the region.

The week will end with the release of industrial production data for July in Germany, Spain and France (due on Friday). We will also see on Friday the release by Eurostat of the third GDP estimate. This will be the first time that an expenditure breakdown will be published.

Portugal: no meaningful data should be released this coming week.

INE released last week the Quarterly National Accounts. 2Q18 real GDP growth was reiterated at 0.5%q/q, following +0.4%q/q in 1Q18, consistent with a y/y growth rate of 2.3% (vs. 2.1%y/y in 1Q18). The Portuguese economy grew 2.2%y/y in 1H18, a slowdown compared to the 2.7% growth rate recorded in FY17, although still comfortably above the 1.6% potential rate for GDP growth according to Eurostat. Domestic demand excluding stocks rose at an annual rate of 2.5% in 2Q18, on the back of a solid evolution by private consumption (2.6%y/y). The evolution of the European Commission Economic Sentiment Index suggests that economic momentum remains favourable for the Portuguese economy.

UK: We will get this week August manufacturing (due on Monday), construction (Tuesday) and services (Wednesday) PMIs.

US: On Friday, nonfarm payrolls should continue to show a solid reading, with consensus expecting the unemployment rate to remain stable at 3.9% in August and wages accelerating by 0.1pp to an annual rate of 2.8%y/y.

Latin America: In Argentina, the government will disclose details of its proposed fiscal adjustments on Monday. The central bank discloses the August monthly survey of expectations on Tuesday, where we will likely see another increase in inflation expectations given the strong weakening of the currency. We will also probably have some news flow on the discussions between the government and IMF regarding disbursements from the loan programme signed. In Brazil, industrial production for July will be released on Tuesday. On Thursday, we will get the release of the IPCA inflation data for August. In Mexico, and following the preliminary deal reached with the US, investors’ attention should now be back to economic data releases. PMIs for August are released on Monday, which will probably reflect the positive impact in terms of confidence from the aforementioned deal. Banxico’s monthly survey of economists will be disclosed also on Monday. On Wednesday we will get consumer confidence data for August, followed by the gross fixed investment indicator on Thursday. The main release of the week in Mexico is the inflation report for August (due on Friday). In Colombia, the main release of the week will also be the inflation report for August (due on Wednesday). Finally, in Chile, the July consumption indicators will be released on Monday. The economic activity index for July is released on Wednesday, while on Friday the INE will publish the August inflation report. On the same day, the external trade figures will be released.

On central banks, several ECB Executive Board members will speak this week. Yves Mersch will give on Monday a speech at an event on strengthening the European financial industry and participate in a panel at the reinventing Breton Woods conference. Peter Praet and Sabine Lautenschlager will give speeches at the Eurofi Financial Forum on Wednesday and Thursday, respectively.

In the UK, BoE Governor Mark Carney, Chief Economist Andy Haldane and two external MPC members will be before the Parliamentary Treasury Select Committee to discuss the August Inflation Report on Tuesday.

We will have MPC meetings in Chile, Australia (both on Tuesday), Malaysia, Poland, Canada (all on Wednesday) and Sweden (Thursday). The Riksbank will release an update Monetary Policy Report with revised forecast paths for GDP growth, inflation and the repo rate. The central bank of Chile releases its monetary policy report on Wednesday, with likely references to official expectations for GDP growth, inflation and interest rates.

ECB Board Member Benoît Coeuré will participate in the Eurogroup meeting on Friday. ECB Vice-President Luis de Guindos and ECB Board Member Benoît Coeuré will both participate in an informal ECOFIN meeting.

On Friday, Fitch reaffirmed Italy at BBB but decided to revise the Outlook to Negative, from Stable. Fitch sees a degree of fiscal loosening that would leave Italy’s very high level of public debt more exposed to potential shocks. Fitch also considers that the downside risks to fiscal forecasts have increased, reflecting the new government, the policy differences between its coalition partners and the inconsistencies between the high cost of implementing new policies and the stated objective of reducing public debt.

Fitch forecasts a 2.2% of GDP deficit in 2019, after 1.8% of GDP in 2018, which would miss the structural target under the EU Preventive Arm. For 2020, Fitch forecasts a further increase in the general government deficit to 2.6% of GDP.

Fitch believes that the risk of financial market instability will act as the main constraint on the degree of fiscal expansion, as well as the 3% of GDP deficit threshold under the EU Excessive Deficit Procedure. The potential for early elections is seen as increasing the degree of uncertainty around the fiscal forecast, given the ideological and policy differences between the Five Star Movement and Lega, and their narrow majority in the Senate. Fitch does not expect the current government to see out a full term and see an increasing possibility of early elections from 2019.

Fitch expects a somewhat higher path of public debt, with general government debt falling only slightly from 131.8% of GDP in 2017 to 130.4% in 2020. The risk of a reversal of structural reforms negatively impacting Italy’s credit fundaments is also seen as having increased somewhat, while the antipathy of the government towards the EU and the euro presents an additional downside risk, according to Fitch.

Fitch expects real GDP to expand 1.2% this year, compared with 1.5% in 2017. For next year, growth should stand also at 1.2% and then dropping to 0.9% in 2020. Trend growth is seen around 0.6%. Despite the improvement in 1H18, Fitch still sees the banking sector as weak.

For further information, or to receive the PDF file, please contact +351 912 897 835 or research@fincor.pt

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