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PATRIS The Week Ahead - 5 November 2018

5 Nov 2018

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Key themes for the coming week:

1.Democrats have a high chance of winning control of the House from the Republicans at next Tuesday’s US midterm elections, while the Republicans seem to have a high chance of maintaining control of the Senate, according to polling data. A split Congress may lead to legislative gridlock.

2.The November two-day FOMC meeting concludes on Thursday (a day later than usual, because of the US midterm elections). The market is expecting another rate hike only in December. The focus will be on the accompanying statement, which is not expected to show major changes.

3.The Eurogroup is expected to discuss on Monday the European Commission’s assessment of member states’ draft budget plans, including Italy’s budget situation. The Eurogroup will also discuss the EU’s banking union. Italy has until 13 November to submit a re-drafted budget. The meeting will see participation by ECB President Mario Draghi and ECB Executive Board member Benoît Coeuré. ECB Vice President Luis de Guindos will participate in the ECOFIN meeting in Brussels on Tuesday.

4.Big week for 3Q18 earnings season in Portugal, with EDPR, Corticeira Amorim (Wednesday), NOS, EDP, REN, BCP and Sonae Capital (Thursday) all reporting results for the last quarter.

  1. The October services PMI/ISM indices and September’s industrial production readings for several countries in the eurozone are the highlights of this week’sdata calendar.

6.Additional US sanctions against Iran go into effect on Monday. Focus should be on details on the duration of the waivers and volume allowances that, according to press reports, at least eight countries (including China, India, Iraq, Japan, South Korea and Turkey) will benefit.

7.China’s Xi Jinping to deliver a speech on Monday at a Shanghai import-export forum. Investors will look for indications of how far China could go to ease building trade tensions with the US. Meanwhile, Australia’s recent ratification of the Comprehensive and Progressive Trans-Pacific Partnership represents positive news on the trade front.

8.DBRS confirmed Greece at B(high)/Positive trend last Friday.

9.Update to the key risk events calendar for the coming months.

EGB supply this week is expected from Germany (€3bn of Bund 0.25% August 2028, on Wednesday), Ireland (on Thursday), France (OATs 0.25% 2026, 0.75% 2028, 2.5% 2030 and 4.5% 2041, on Thursday) and Spain (SPGBs 0.35% 2023, 3.45% 2066, 4.2% 2037 and 0.05% 2021, on Thursday). There will be no coupons or redemptions to offset the supply scheduled for this week.

The Netherlands, France, the ESM, Greece, Belgium and Malta are scheduled to sell Treasury Bills.

In the US, the Treasury will issue $83bn across the 3-year ($37bn on Monday), 10-year ($27bn on Tuesday) and 30-year ($19.0bn on Wednesday) sectors. There will be no UST cashflows to offset the supply.

The rise seen in 2-year real UST yields is already not far from what occurred in the last expansion cycle.

During the upcoming week, 77 S&P500 companies, including 1 DOW30, are scheduled to report 3Q18 results.

74% of the companies in the S&P500 have reported earnings to date for 3Q18. Of these companies, 78% have reported actual EPS above consensus (8% in line and 14% below estimate), above the 1-year (77%) and the 5-year (71%) averages. In aggregate, companies are reporting earnings that are 6.8% above expectations. This surprise percentage is above the 1-year (+5.4%) and the 5-year (+4.6%) averages, according to FactSet.

In terms of revenues, 61% of companies have reported actual sales above estimated sales (39% below consensus). The percentage of companies reporting sales above estimates is below the 1-year average (73%) but above the 5-year average (59%). In aggregate, companies are reporting sales that are 1.0% above expectations, below the 1-year average (+1.3%) but above the 5-year (+0.7%) average.

Considering the results already disclosed and consensus expectations for the companies that have not reported earnings growth for 3Q18 is 24.9%y/y (8.5%y/y for sales).

70 companies in the S&P500 have issued EPS guidance for 4Q18. Of these 70 companies, 46 have issued negative EPS guidance, or 66% of the total, which is below the 5-year average of 70%.

Meanwhile, according to FactSet, during October, consensus dropped the S&P500 4Q18 bottom-up EPS estimate by 1.1% (see chart). During the past five years, the average decline in the bottom-up EPS estimate during the first month of a quarter has been -1.6% (-2.1% during the past ten years and -1.6% during the past fifteen years).

DBRS may review the credit rating for France on Friday. Moody’s could update its view on Denmark.

Meanwhile, last Friday, DBRS confirmed Greece at B(high)/Positive trend. DBRS sees real GDP growing by 1.5% in 2018 and 2.5% in 2019. Budgetary performance is considered to be sound and DBRS expects the target for 2018 to be exceeded. The rating agency stresses that further sustained progress is needed, while Greece has yet to fully return to the markets. DBRS expects Greece to continue its reform path in the post-programme period.

The October services PMI/ISM indices and September’s industrial production readings for several countries in the eurozone are the highlights of this week’s data calendar.

US: This will be a quiet week on the data front for the US economy. Focus should be on the October ISM non-manufacturing index (due to be released on Monday), the October producer prices and on the November preliminary reading for the University of Michigan’s measure of consumer confidence (both due on Friday).

Consensus expects the ISM non-manufacturing index to fall in October from the 21-year high reached in September, consistent with the decline seen in the regional Fed services sector indices. However, the index should remain well above its historical average, pointing towards a solid domestic demand and above-potential GDP growth. Headline PPI inflation could remain supported by energy prices. The rise in the trade-weighted dollar should remain a headwind to producer prices. Falls in equity prices probably weighed in consumer confidence.

Business surveys continue to point towards a positive evolution of capital spending. 

Eurozone: Germany will release the September industrial production data on Wednesday. We will also get the September industrial output in Spain (Thursday) and France (Friday). Eurostat discloses September’s retail sales for the euro area on the same day. Final Markit services and composite PMIs for October will be disclosed on Tuesday.

According to consensus expectations, German industrial production recorded a slight rise in September, following the contraction recorded in the previous 3 months, reflecting the new emissions tests which weighted on car production. However, the construction PMI, the Markit manufacturing PMI and industrial orders all suggest that industrial production could disappoint again in September.

On the political front, European Parliamentary group EPP will select its lead candidate on Thursday. The EPP is the largest group in the European Parliament. The candidate chosen will become the front-runner in the race to be selected President of the European Commission. Meanwhile, the ECB Governing Council will sumit its proposed candidate for Chair of the SSM Supervisory board (vote expected to take place on Thursday, with final confirmation hearing of the European Parliament scheduled for 14 November).

China: This week will show the release of the October foreign exchange reserves (Wednesday), trade data (Thursday), and CPI & PPI inflation (Friday).

CPI inflation in October is likely to have continued to reflect higher food prices, while the economic slowdown should weigh on core inflation. The trade data will be closely watched for evidence of the impact of tariffs, as well as of signs of a broader softening in foreign demand. The foreign exchange reserve data will be watched for signs that the PBOC is selling reserves, as the renminbi moved closer to 7.0 against the US dollar.

Last week’s Politburo statement gave signals that further policy support could be announced over coming weeks, as downward pressures on the economy remain a concern. 

UK: Next week will bring the first estimate of 3Q18 GDP (Friday). We will also get the Markit/CIPS services for October (Monday), the September industrial production reading (Friday) and trade date for September (Friday).

3Q18 is expected to have been a good quarter for net exports. The European Commission’s survey of business confidence for the UK rose in October, which could be a positive signal for the Markit/CIPS services sector. The manufacturing PMI (already released) fell in October, while the construction PMI posted a rise on the month. Car production could have dragged down industrial production in September. The first estimate of 3Q18 GDP is likely to show that growth accelerated compared to 2Q18’s 0.4%q/q pace of expansion. Consensus sees GDP having increased by 0.6%q/q, which would be the strongest quarter for growth since 2016.

Portugal: INE releases 3Q18 employment statistics (Wednesday) and international trade statistics for September (Friday).

ECB communication this week includes ECB Vice President Luis de Guindos, with a keynote speech in Belgium on Monday, ECB Executive Board member Peter Praet on Tuesday, ECB Executive Board member Sabine Lautenschlager, with a speech in Germany on Tuesday, and ECB Executive Board member Benoît Coeuré (Tuesday in Belgium and Thursday & Friday in Germany). In the US, we will have speeches from NY Fed President John Williams, Dallas Fed President Robert Kaplan, Philadelphia Fed President Patrick Harker and Fed Vice Chairman Randal Quarles.

Despite declining last month, the ISM manufacturing index is still consistent with an environment where inflation could continue to surprise on the upside. 

We will have MPC meetings this week in Australia, Romania (both on Tuesday), New Zealand, Poland (Wednesday), Peru and Malaysia (both on Thursday)

In Brazil, the central bank will publish on Tuesday the minutes from the 31 October COPOM meeting. At that meeting, the COPOM decided to leave the SELIC policy rate unchanged at 6.50%, in a unanimous decision. The forward guidance continued to have no signals on near-term policy direction. InChile, the central bank will publish on Tuesday the minutes from the 18 October MPC meeting. At that meeting, the MPC raised the policy rate by 25bps to 2.75%, with the forward guidance signaling a gradual hiking cycle.

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