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PATRIS The Week Ahead - 8 October 2018

8 Oct 2018

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Key highlights for the coming week:

  1. UK Cabinet will convene on Thursday and Friday to discuss BREXIT proposals. UK’s BREXIT white paper on the future relationship with EU is due for publication on the 9th of July;
  2. We will have a holiday-shortened week in the US, with markets closed on the 4th of July due to the Independence Day holiday;
  3. Key economic data to watch this week include US June payrolls and PMI/ISM indexes;
  4. On central banks, on Thursday, the Minutes from the FOMC’s June meeting will be released. In Mexico, the Banxico releases the minutes of the June MPC meeting, on the same day;
  5. 25% tariff on goods imported from China worth about $34bn, to be imposed on 6 July (on 818 imports from China) in the US. China will immediately impose equivalent tariffs on $34bn of goods imported from the US;
  6. Key risk events calendar for the month of July.

The rating agencies’ calendar for EMEA remains very light this week. DBRS could update its view on Denmark on Friday, while on Moody’s calendar we find Cabo Verde, Croatia and Romania.

Looking to EGB issuance in the coming week, Austria (RAGBs 0.75% Feb28 and 4.15% Mar37, up to €1.15bn, on Tuesday), France (OAT 0.75% 2028, 1.5% 2031 and 1.25% 2034) and Spain (SPGBs 0.05% 2021, 4.7% 2041, 1.95% 2030, and linkers 0.65% 2027, on Thursday) are all scheduled to sell bonds. There are €8.8bn of coupons and €21bn of redemptions that will more than offset the supply expected for this week.

  • There are no UST supply or cash flows this week;
  • Netherlands, France, Malta, Belgium, Greece are all scheduled to sell Treasury Bills during the week.

Further signs of economic slowdown in euro area or higher corporate and EM spreads remain risks to 10-year periphery government spreads. For now, Spanish and Portuguese 10-year spreads are still below the levels recorded by the end of 2017, even considering lower Bunds yields. Escalating trade tensions and weak global market sentiment continue to support very long bonds in Germany.

Key economic data to watch this week include US June payrolls and PMI/ISM indexes.

  • Portugal: The Bank of Portugal is scheduled to release this week its statistical press release on public debt (Monday), data on the Portuguese banking system (Thursday) and the 1Q18 Financial Stability Report (Friday). INE’s economic climate indicator and the European Commission’s ESI both for June revealed last week some positive signals for the Portuguese economy at the end of 2Q18.
  • US: June payrolls will be the highlight of the week. Consensus expects the recent solid momentum to continue, with wage growth remaining strong, which should lift the y/y growth rate by 0.1pp to 2.8%, consistent with solid US economic momentum. Monthly non-farm payrolls remain well above the Fed estimate for the rate needed to hold the unemployment rate steady. We will also get both ISM surveys of business sentiment for June. Investors will probably look for signs that Trump administration’s recent policy moves may already been impacting business sentiment. The core PCE price index, the Fed’s preferred inflation measure, for May, released last week, reached the central bank’s target rate for the first time since 2011. St Louis Fed price pressure measure and New York Fed’s underlying inflation gauge both continue to rise, suggesting that higher price pressures may still lie ahead for the US economy.
  • Latin America: In Brazil, the highlights this week will be the industrial production and the IPCA inflation data for June. Both releases are expected to be impacted by the truckers’ strike, but the situation is likely to normalise over the following months. 

    In Mexico, election aside, the week should be calm in terms of economic data. We will get the remittances inflow numbers for May and June PMIs (both due today), leading indicators for May (due on Tuesday), as well as the investments indicators (due on Thursday). In Argentina, we are only going to get the tax revenue report for June.

    In Colombia, the focus this week will be on the inflation print for June, to be released on Thursday. Consensus expects a slight acceleration, but still close to the central bank’s centre target of 3% y/y. On Tuesday, we should get the export numbers for May. On the political front, the new President is likely to make his cabinet announcement. In Chile, the economic data calendar is heavy this week with the release of the May economic activity index (due on Thursday) and June inflation (due on Friday) reports. Trade figures for June and the May retail sales report should be released on Tuesday, while on Thursday we will get the nominal wage growth figures.

  • Eurozone: we will get the final June manufacturing PMIs (due on Monday) and final composite and services PMIs (due on Wednesday). Italian and Spanish PMIs, which do not have flash estimates, will give an update of developments in the periphery. May industrial production data will begin to be published this week, with Spain on Thursday, followed by Germany on Friday. Eurostat releases May retail sales on Tuesday. 

    European Commission’s ESI for Euro area was little changed in June (-0.2 points to 112.3). The index is down by 2.9 points from the current expansion’s high recorded in December 2017 and is still 1.2 standard deviations above its long-term average. In June, confidence was stable in manufacturing and in services, increased slightly in retail and reversed some of the May’s gains in construction. Escalating trade tensions may still have a bigger impact in future, but the evolution of narrow monetary aggregate M1 suggests that Euro area sentiment could even stabilise over coming months (see chart). At the country level, sentiment fell in June in Germany, the Netherlands, Finland, Greece and was stable in Spain, Belgium, while improved in France, Italy, Portugal.

    Italy’s ESI is still consistent with annual GDP growth picking up from 1Q18’s 1.4% (see chart). The increase in Eurozone consumers’ 12-month inflation expectations suggests that core inflation for the region could also rise moderately over coming months.

  • UK: June manufacturing (due on Monday) and services PMIs (due on Wednesday) will be released this week.

On Central Banks, the Banxico releases on Thursday the Minutes of the central bank’s meeting in June, which are expected to highlight the risks identified for the second half of the year. At that meeting the MPC hiked the policy rate by 25bps to 7.75%, reflecting the deterioration of the balance of risks for inflation (MXN and energy prices), which could affect the convergence of inflation to its target. The MPC remains focused on the potential pass-through to domestic prices of changes in the MXN and on the domestic output gap, supporting a cautious stance in order to secure convergence of inflation to the 3% target. The central bank’s monthly survey will also be disclosed today, with investors probably focused on inflation expectations, following the MXN depreciation. In Argentina, the central bank’s release of its monthly survey of economists on Tuesday should give an update on inflation expectations.

This week we have MPC meetings in Sweden, Australia (both Tuesday) and Romania (Wednesday).

  • We will have speeches from ECB Board Executive members Peter Praet, Yves Mersch and Benôit Coeuré. In the UK, BoE Governor Mark Carney will deliver a speech on Thursday;
  • On Thursday, the Minutes from the FOMC’s June meeting will be released. At that meeting, the FOMC upgraded the statement’s language and forecasts, projecting a total of 4 rate hikes this year, which showed an increased confidence regarding the outlook for growth and inflation.

The earnings release calendar remains very light in the coming week, as we approach the start of the 2Q18 earnings release season in the US and in Europe.

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