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PATRIS The Week Ahead - 9 July 2018

9 Jul 2018

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Key highlights for this week:

Eurogroup meets in Brussels on Thursday. The EU Economic and Financial Affairs Council meets in Brussels on Friday;

Mario Draghi delivers speeches at the European Parliament on Monday and at the ECB’s Statistics Conference on Wednesday;

The UK government releases the BREXIT white paper on the country’s future partnership with the EU;

China implemented retaliation on the same amounts of US imports on Friday, in response to US’s decision to activate tariff hikes on $34bn of Chinese imports. Focus should be on whether the US administration will respond with tariffs on further Chinese imports;

Fitch may update its rating for Spain (A-/Stable) on Friday. DBRS may also review Italy (BBB high, Stable Trend);

On the economic data front, US June CPI report (due on Thursday) should be the highlight this week;

The account of the June ECB monetary policy meeting will be released on Thursday. Focus should be on the rationale for the announced rates guidance and QE tapering;

Economy ministers of Germany and France to meet in Paris this week for talks on the European Union’s trade conflicts with U.S. Germany’s Peter Altmaier travels to Paris on 11-12 June, and will meet France’s Bruno Le Maire;

Portugal is going to auction on Wednesday PGBs maturing on October 2028 and on April 2034, with an indicative global range amount of €750mn to €1000mn;

We will have the start of 2Q18 earnings season for the US financial sector, with JPMorgan, Wells Fargo and Citigroup reporting results on Friday;

Key risk events for the following months.

This week, we will have MPC meetings in Argentina (Tuesday), Malaysia, Canada, Poland (all on Wednesday), Korea (Thursday) and Peru (Thursday).

In Argentina, in its regular bi-monthly MPC meeting, the central bank should hold the policy rate at 40% on Tuesday, reflecting the challenging inflation environment, as the MPC aligns the inflation trajectory and inflation expectations with the 17% target for 2019. The central bank may introduce changes to its monetary policy framework. In Colombia, the central bank publishes on Friday the Minutes from the 29 June MPC meeting. At that meeting, the MPC decided to leave the policy rate unchanged at 4.25%, in a unanimous vote. In the policy statement, the MPC highlighted uncertainty regarding the pace of economic recovery and some upside risks to inflation. In Peru, the MPC stated at the June meeting that it was appropriate to keep monetary policy accommodative until convergence of inflation to the 2% target.

ECB President Mario Draghi will speak twice this week. He will deliver speeches at the European Parliament on Monday and an opening address at the ECB’s Statistics Conference on Wednesday. ECB Executive Board member Sabine lautenschläger will speak at the same conference the day before. In the UK, BoE Deputy Governor Jon Cunliffe will give a speech on Friday.

Fed speak this week includes Minneapolis Fed President Kashkari, Atlanta Fed President Bostic, Philadelphia Fed President Harker and New York Fed President Williams. All eyes should be on discussions regarding trade policy risks and the flattening of the yield curve. The June FOMC Minutes released last week revealed that the Committee sees an intensification of risks over trade policy, and further debate over the flattening of the yield curve.

 

Moody’s may update its rating for Germany this Friday. We also find Spain and Turkey in Fitch’s calendar on the same day. Finally, DBRS could review Italy on Friday.

Fitch upgraded Spain on 19 January from BBB+ to A-, with a Stable Outlook, reflecting (a) the continuing reduction in macroeconomic imbalances, underpinned by a strong economic recovery, (b) further reduction in the general government deficit and (c) a steady external adjustment, leading to a further reduction in external vulnerabilities.

On 12 January, DBRS confirmed Italy at BBB (high), Stable Trend, as the combination of continued progress with fiscal consolidation and higher economic recovery offset the challenges arising from the high public debt, still elevated level of NPLs and political uncertainty.

 

On the economic data front, US June CPI report (due on Thursday) should be the highlight this week:

  • China: Key data releases in the coming week include inflation (due on Tuesday), money & credit (8-15 July) and trade (Friday) readings for June. June inflation data should continue to be supportive of a loose policy stance, while both export and import growth are likely to stay firm in June.
  • Eurozone: We will get May industrial production for Italy, France (both due on Tuesday) and the Euro area (Thursday), following Germany’s strong reading last week, which pointed towards a potential rebound in 2Q18 real GDP growth.

 

Chinese Premier Li Keqiang concludes a visit to Germany on Tuesday. Japan and the EU sign a free trade agreement in Brussels on Wednesday. NATO leaders meet in Brussels on 11-12 July.

 

  • Portugal: INE releases the first semi-annual investment survey for 2018 (due on Monday), trade statistics for May (Tuesday), perspectives on exports of goods (Wednesday), and June CPI data (Wednesday). Bank of Portugal releases on Tuesday data on loans to households and non-financial corporations for May.
  • US: The June CPI report (to be released on Thursday) is the highlight for this week’s data. June CPI should show inflation continuing its gradual increase.

US President Donald Trump meets British Prime Minister Theresa May on Friday, during a four-day visit to UK.

The nonfarm US economy added 213k jobs in June, while the prior two months’ figures were revised up by 37k. A rising labour force participation rate helped the unemployment rate to increase from 3.8% in May to 4.0% in June, while hourly earnings growth remained unchanged at 2.7% y/y. The participation rate increased by 0.2pp to 62.9%, near the upper end of the range it has been in over the past four years.

Therefore, the June employment report supports an above-trend pace for GDP growth in the US and ease concerns that FOMC could accelerate its rate hike campaign.

Nevertheless, the Minutes from June PMC meeting released last week left the impression that the Committee sees a strong US economy, which will likely require restrictive rates sometime next year.

  • UK: ONS begins the publication of monthly GDP on Tuesday, with the release of readings for April and May.
  • Latam: In Brazil, Thursday’s retail sales for May should reflect the effect of the end-May truck drivers’ strike. In Mexico, the focus this week will be on the inflation data, due to be released on Monday. On the political front, we should see 2019 budget discussions between the current economic team and the López Obrador administration. The 2019 budget should be a joint effort between the two economic teams. The industrial production report for May will be released on Thursday. In Colombia, the focus should be on May retail sales (due on Friday), which should probably be supported by improving consumer confidence. Friday will also see the release of industrial production for May. During the week, we should get news on the composition of the new government’s cabinet. In Chile, we will see the release of the monthly survey of economists (due on Tuesday).

In terms of estimate revisions for companies in the S&P500, the consensus increased estimates in aggregate for 2Q18 EPS by 0.8% during the quarter. Over the past 60 quarters, earnings estimates have fallen by 3.9% on average during a quarter. Moreover, of the 109 companies that have issued EPS guidance for 2Q18, 62 have issued negative EPS guidance (or 57%, which is well below the 5-year average of 72%), and 47 have issued positive EPS guidance.

According FactSet, the estimated y/y growth rate for 2Q18 earnings stands at 20.0% (following the 24.8% growth reported in 1Q18), with all eleven sectors predicted to report y/y earnings growth. Seven sectors are projected to report double-digit earnings growth, led by Energy. Meanwhile, the estimated y/y sales growth rate for 2Q18 stands at 8.7%. All eleven sectors of the S&P500 are projected to report y/y growth in revenues. Three sectors are predicted to report double-digit growth in revenues: Energy, Materials and Information Technology.

Consensus currently projects earnings growth to continue at double-digit levels through the remainder of the year (21.7% y/y for 3Q18 and 17.9% y/y for 4Q18). Consensus also expects a solid growth in revenue growth for 2H18 (7.6% y/y for 3Q18 and 5.8% y/y for 4Q18).

 

In the Eurozone, EGB supply this week is scheduled from Germany (0.5% I/L 2030 Bonds and 0.1% I/L 2046 Bonds, on Tuesday, for a total amount of €750mn, and €4bn of 2028 Bonds on Wednesday), the Netherlands (0.75% 2028 Bonds on Tuesday), Ireland (Thursday), Portugal and Italy (Thursday). There will be €4.5bn of coupons and €12.9bn of redemptions eligible for reinvestment.

In Portugal, on 11 July, the Treasury and Debt Management Agency is going to auction PGBs maturing on October 2028 (OT 2.125% 17Oct2028) and on April 2034 (OT 2.25% 18Apr2034), with an indicative global range amount of €750mn to €1000mn.

In the US, the Treasury will issue around $69bn across 3-year (new), on Tuesday, 10-year (re-opening), on Wednesday, and 30-year (re-opening), on Thursday, sectors. There will be $4.3bn of coupons and $41.4bn of redemptions eligible for reinvestment.

 

At this week’s meeting, Eurogroup President Mário Centeno will inform ministers of the outcome of the June Euro Summit. He will also outline the issues related to the deepening of the Economic and Monetary Union, on which the Eurogroup will be expected to work until the next Euro Summit meeting, which is scheduled for December.

Ministers will discuss the economic situation and outlook for the euro area. Ministers will also hold another discussion on the budgetary situation in the euro area, focusing on prospects for 2019.

Finally, the EC and the ECB will present to the Eurogroup their main findings from their post-programme surveillance missions to Ireland and Spain.

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