The week ahead, w/c 12 November 2018

Mantas Vanagas
Grant Lewis

Overview:
The post-election rally on Wall Street was further unwound on Friday, with the S&P500 closing down 0.9% amongst weakness in the technology and consumer discretionary sectors. The risk off tone was reflected in a decline in Treasury yields (the 10-year note falling 5bps to 3.18%), wider credit spreads and weakness across most of the commodities complex.

For the most part it has been a quiet start to the new week across Asian markets – hardly surprising given the light local news flow and with the US Treasury market closed for the Veterans’ Day holiday (stock exchanges are open). After falling 1.4% on Friday, China’s CSI300 rebounded 1.2% overnight as investors await key activity reports that will be released midweek. Japan’s TOPIX was essentially unchanged while modest losses were seen in South Korea and Singapore. Crude oil futures began the week on a stronger note on reports that Saudi Arabia will reduce sales in December in response to the sharp decline in prices over the past month or so. 

Looking ahead it should be an eventful week, with a handful of top-tier data releases due. Indeed, US and UK inflation, Japanese and German GDP, as well as Chinese activity numbers will certainly be on everyone’s radar. However, this week’s political developments might prove to be move important in driving asset prices. Italian markets are set to remain under pressure as the deadline for the Italian government to resubmit its coming years’ fiscal plans to the European Commission is tomorrow. The 10Y BTP spread over Bunds widened back to 300bp on Friday after the European Commission published its latest economic forecast, which showed much higher deficits and much lower GDP growth than expected by the Italian government itself. Finance minister Tria and PM Conte both rejected the Commission’s estimates, maintaining that their own projections will be the basis for the plans. So reports suggest that they will maintain their 2.4% of GDP deficit plan for next year, even thought they might be prepared to scale down they economic growth expectations. We expect that the standoff will continue and that BTP spreads will remain wide.

Of course, the Brexit drama will be no less interesting. Events over the weekend highlighted the precariousness of the Government’s Brexit plans, with both Leave and Remain supporters increasingly vociferous in their opposition to the shape of the deal emerging. The weekend got off to a bad start for Theresa May with the resignation of a junior minister on Friday afternoon. This resignation attracted particular attention, given that Jo Johnson is the brother of Boris, his more famous but less competent, brother. Johnson (Jo) argued that the deal being negotiated by Theresa May offered the UK the option of “vassalage” (i.e. accepting the EU’s rules without having a say in them) or crashing out with no deal, which would cause untold economic harm. Given this unpalatable choice, which was so far removed from the fantasy Brexit offered by the Brexiteers during the referendum campaign, the only option, he argued, would be to have a referendum on the final deal. Johnson (Boris) meanwhile has today called for a Cabinet rebellion against the proposed deal.

The fact that the two Johnson brothers, despite coming from the opposite ends of the Remain/Leave spectrum, are both opposed to the May plan highlights May’s broader problem – that there is neither Cabinet or Parliamentary support for her proposed deal. And while she continues to push for a resolution to the Irish backstop question, there appears no solution that won’t involve Cabinet resignations and the DUP (which provides her with her Parliamentary majority) voting against the deal in Parliament. All the while time is running out for a deal to be agreed at a November EU Summit, pushing the next possible date to December, which would provide the UK Government with a huge problem to get the necessary legislation through Parliament before 29th March.

It may well be that May agrees a deal with the EU, rides out Cabinet resignations. But when it comes to Parliament her chances of getting it approved look increasingly slim. And with a majority of MPs opposed to a no deal outcome, pressure for some sort of extension (or even withdrawal) of the Article 50 process will build if Parliament rejects the deal, with another referendum an increasing possibility as a way for MPs to dodge the difficult decisions they should be taking themselves. So, far from moving smoothly to an end game, the Brexit drama may well crank up a notch or two over the coming days and weeks.

Japan:
This week’s local data flow began today with the release of the goods PPI for October. The BoJ reported that the headline index rose a solid 0.3%M/M for a second consecutive month. The rate of annual producer price inflation nonetheless declined 0.1ppts to 2.9%Y/Y, although this outcome was still 0.1ppt above market expectations. Within the detail, prices in the manufacturing sector rose a steep 0.6%M/M, in large part due to a further 4.9%M/M rise in prices for petroleum and coal. Agriculture sector prices fell 1.0%M/M (down 0.1%Y/Y) and prices in the utility sector fell 2.6%M/M (up 6.1%Y/Y). Measured in yen terms, import prices rose 1.6%M/M in October and were up 9.5%Y/Y. As with the headline PPI, this owed substantially to a 4.6%M/M rise in prices for energy products (up 36.1%Y/Y).

In other news, the BoJ reported that the value of outstanding bank loans rose 3.02%Y/Y in September, virtually unchanged from the 2.99%Y/Y growth reported in August. Loans to individuals rose 2.06%Y/Y while loans to corporations rose 3.53%Y/Y – the latter marking the fastest pace of growth since August last year.

Looking ahead to the remainder of the week, the key focus for investors will be Wednesday’s preliminary national accounts for Q3. Following a surprisingly robust 0.7%Q/Q advance in Q2, our colleagues in Tokyo estimate a 0.2%Q/Q contraction in output in Q3 – an outcome that reflects an element of ‘payback’ as well as the impact of a number of climatic events and the Hokkaido earthquake. The only other economic indicators of any note to be released in Japan this week are the final IP report for September and the Tertiary Industry Activity Index for September (both also released on Wednesday). In the bond market the MoF will auction 30-year JGBs tomorrow and 5-year JGBs on Thursday.

Euro area:
The week of euro area data releases kicked off with the announcement of the Bank of France business sentiment survey this morning. Results were quite mixed. Business confidence in the manufacturing sector deteriorated, with the relevant indicator easing from 104 to 103, a level matching its average over the last twelve months. Weakness in the auto sector seems to have been the major factor. Meanwhile, service sector sentiment continued moving sideways at 102 – it has been at around this level for over a year – while construction sector index reported a small improvement. The Bank of France expected that GDP growth remained unchanged in Q4 at 0.4%Q/Q.

Later this morning Italy will release its latest industrial production figures – expectations are for a 0.6%M/M drop in output in September following a steep rise of more than 1½%M/M in August. Together with quite disappointing figures from other major member states, they would imply a fall in the euro area IP of more than ½%M/M.  These figures will be released on Wednesday alongside a handful of other notable reports, including euro area and German GDP, as well as euro area employment, all for Q3. While euro area GDP growth in Q1 is expected to align with the preliminary estimate of 0.2%Q/Q, given the preliminary estimate’s proximity to the rounding range, however, there is a risk of a downwards revision. Germany will also announce its Q3 GDP data for the first time – with most activity indicators having weakened significantly last quarter, we expect the economy to have moved sideways, which would mark the first non-positive growth in 3½ years. Against a backdrop of slowing growth, euro area labour market figures might also show limited employment growth over the third quarter. Thursday will bring euro area trade figures for September, as well as new car registrations data for October. And Friday will see the final release of euro area inflation figures for October, which are expected to confirm that headline CPI rose 0.1ppt to 2.2%Y/Y, a near-6-year high, while core CPI rose 0.2ppt to 1.1%Y/Y. With respect to national releases, the latest surveys from the Bank of France and ZEW are due on Monday and Tuesday respectively, while final inflation numbers are due from Germany (Tuesday), France and Spain (Thursday). Also due are Italian September industrial production data (Monday) and orders and sales figures (Friday).

UK:
Following the Q3 GDP announcement last Friday, the flow of key UK economic data releases will continue this week with the latest labour market, inflation and retail sales figures out on Tuesday, Wednesday and Thursday respectively. Headline wage growth picked up in the three months to August, and further increases are on the cards in September, with headline average weekly earnings set to reach 3.0%3M/Y% for the first time in three years. Excluding bonuses, growth will probably be a touch stronger at 3.1%3M/Y, unchanged from August. This notwithstanding, this report is likely to show that the period of subdued employment growth continued. The headline three month pace dropped to around zero in the last two months, and while we will probably see somewhat higher reading for September, it should be far from the triple-digit increases often seen in the first half of the year. The weaker employment growth should leave the headline unemployment rate unchanged at 4%. With regard to inflation data, we expect little change, with headline and core rate remaining at 2.4%Y/Y and 1.9%Y/Y. Risks to the former appear to be skewed to the upside given that energy inflation should take another step up due rises in auto fuel prices as well as gas and electricity tariffs. Finally, the figures from the retail sector will be of no less interest. After a period of strong growth over the summer months in September the annual pace eased to a four-month low of 3.0%Y/Y and it appears likely that we will see a further moderation in October.  

US:
The holiday shortened week in the US – today the country is marking Veterans’ Day – brings a number of top-tier releases, including the latest CPI, retail sales and IP figures for October (on Wednesday, Thursday and Friday respectively). With respect to inflation, the headline index is expected to rise 0.3%M/M in October, breaking out of the recent range. This should leave the annual pace increasing for the first time since June, by 0.2ppt to 2.5%Y/Y. The rise in core prices should be a touch softer 0.2%M/M, to leave the year-on-year rate unchanged at 2.2%. The latest retail sales figures, meanwhile, are expected to report a steeper rise than of late, by around ½%M/M. October industrial production data should remain positive too, reporting the fifth consecutive monthly increase at the start of Q4. Ahead of these, we will see the release of the NFIB small business optimism index and the federal budget (Tuesday), as well as the Empire manufacturing and the Philly Fed activity indicators (Thursday). There should be some notable headlines on monetary policy, with the number of FOMC members, including Fed Chair Power on Wednesday, scheduled to speak this week. Supply-wise, the US Treasury will auction 10Y notes on Tuesday and 30Y bonds on Wednesday.

China:
There were no major economic reports released in China today. As in Japan, the key day for local data over the coming week is Wednesday, which features the remainder of China’s key activity indicators for October. According to Bloomberg’s survey, analysts expect that growth in IP and retail sales was steady at 5.8%Y/Y and 9.2%Y/Y respectively, while growth in fixed asset investment is expected to have nudged up 0.1ppts to 5.5%Y/Y (the latter measured on a year-to-date basis). China will print October property price data on Thursday and the October money and credit aggregates should also be released at some point over the next few days.

Australia:
There were no economic reports of note in Australia today. Looking ahead to the rest of this week, with the RBA’s Board is paying close attention to developments in wages, a key focus this week will be Wednesday’s Wage Price Index for Q3. Bloomberg’s survey indicates that analysts expect a second consecutive 0.6%Q/Q lift in wages – assisted by a 3.5% lift in the national minimum wage – which should raise annual growth to a 3-year high of 2.3%Y/Y. While clearly moving in a positive direction, this would still leave wage growth 0.6ppts below the average rate recorded over the past decade and below that likely to be consistent with sustained inflation at around the midpoint of the RBA’s target. The October Labour Force survey follows on Thursday. Here the market expects the unemployment rate to rise 0.1ppts to 5.1% – technical payback for a surprisingly large decline last month – despite  expecting a solid 20k lift in employment. The other key economic reports in Australia this week are tomorrow’s NAB business survey for October and Wednesday’s Westpac consumer confidence survey for November.

New Zealand:
Today saw the release of the October edition of the Electronic Card Transactions report – a timely indicator of retail spending based on payments processed electronically. The value of total spending in the retail sector rose just 0.1%M/M, albeit following strong monthly gains of 1.1%M/M in both September and August. A 1.4%M/M increase in spending on fuel was countered by lower spending on apparel and vehicles. Core spending, which excludes fuel and vehicles, was flat in the month but up 5.1%Y/Y. Moreover, given strong gains over the previous two months, core spending in October was still 1.0% above the average level that prevailed through Q3.

The only scheduled economic reports remaining in New Zealand this week are October editions of the Food Price Index (tomorrow), the REINZ housing report (Wednesday) and the manufacturing PMI (Friday).

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