The week ahead, w/c 19 November 2018

Mantas Vanagas

The S&P500 managed a small 0.2% gain on Friday – paring its loss for the week to 1.6% – with investors responding very cautiously to President Trump’s remark that further tariffs on China might not be necessary (Trump had told reporters that “China would like to make a deal”). Even so, the 10-year Treasury yield fell 5bps to end the week at 3.06% – a level last seen at the beginning of October – and the US dollar weakened against most currencies. Judging by coverage of the weekend’s APEC summit in Papua New Guinea – at which China’s President Xi and US Vice President Pence exchanged criticism of the others’ respective policies – there is still plenty of work to be done to break the current impasse. Indeed, because of disagreement with regard to trade policy, the 21 countries attending the summit were unable to agree a post-meeting communique. Even so, equity markets in the Asian region have mostly begun the week with generally modest gains today. In Japan the TOPIX rose 0.5%, shrugging off a firmer yen and a wider-than-expected trade deficit in October. In keeping with his recent commentary, BoJ Governor Kuroda gave a speech in which he reiterated the Bank’s determination to continue with its current monetary policy settings, while also being mindful of risks to financial stability. Equities were also firmer in mainland China, Hong Kong and South Korea but fell in Singapore and Australia.                                                              

Looking ahead at the week ahead, UK politics will remain in the spotlight, with Theresa May looking to seal the Withdrawal Agreement deal with EU leaders at the European Council summit on Sunday. Of course, ahead of this May might well need to survive (which we would expect her to do) a no confidence vote in her leadership – one report over the weekend suggested that as many as 42 Tory MPs had submitted their letters to the 1922 Committee Chairman, only 6 short of the number required to trigger a vote. While it appears that some Cabinet members, despite having approved the draft Withdrawal Agreement text last week, are planning to press May to negotiate some last minute changes to the deal, the EU’s chief Brexit negotiator Barnier at the weekend reiterated to EU27ambassadors that there was ‘no need to reopen the text’. However, Barnier also proposed that under the ‘extension’ clause in the Withdrawal Agreement Britain’s transition out of the bloc could be extended to no later than December 2022. Ultimately, however, it does not look as though the Withdrawal Agreement will be approved by the UK Parliament when it gets to vote on it later in the year. So, while this week may see a period of relative calm for sterling as we head into the weekend, volatility is likely to pick up thereafter as the parliamentary vote approaches and the possibility of further Cabinet resignations grows.

Otherwise, this week the news flow will include some headlines on Italy, with the European Commission due to publish its latest Opinion on Italy’s fiscal plans. The ECB account from its October Governing Council meeting (on Thursday) and BoE Carney’s testimony at the Treasury Select Committee (tomorrow) will also be worth watching. 

The only major economic report released in Japan today concerned external trade during October. As expected, this report revealed a clear rebound in activity following the disruptions caused by natural disasters in September, albeit more so for imports than exports. In seasonally-adjusted terms, Japan reported a trade deficit of ¥302.7bn. This deficit – the fifth recorded in the past six months – by a narrow margin exceeded that recorded in May to mark the largest deficit since September 2015. After declining 2.3%M/M in September, export values rebounded 4.3%M/M in October – much as expected – lifting annual growth to 8.2%Y/Y from -1.3%Y/Y previously. By contrast, after declining 3.7%M/M in September, imports rebounded a stronger-than-expected 6.6%M/M in October and were up a whopping 19.9%Y/Y. Within the detail, export values recovered across all major categories. For example, exports of manufactured goods rose 9.2%Y/Y, compared with a 2.2%Y/Y decline in September. And exports of general machinery rose 7.7%Y/Y after posting virtually no growth last month. A significant driver of import growth continues to be mineral fuels (up 36.3%Y/Y), although this was not the driver of the pick-up in growth in October. Rather, the pick-up owed to strength across a broad sweep of products, but especially general machinery (up 28.1%Y/Y after being flat in September) and manufactured goods (up 20.1%Y/Y, compared with a rise of just 2.8%Y/Y in September).

As usual today the BoJ also released its estimates of export and import volumes, thus providing a timely assessment of what these figures might mean for the prospect of a rebound in GDP growth in Q4. The BoJ estimates that real exports rose 6.2%M/M in October, slightly more than reversing the 5.5%M/M slump that occurred in September, causing annual growth to rise to 4.1%Y/Y from -0.2%Y/Y previously. Real imports rose a sturdy 7.4%M/M in October, following a 2.9%M/M decline in September, lifting annual growth to 8.8%Y/Y from 2.8%Y/Y previously. As a result, while real exports are 3.0% above the average level experienced through Q3, real imports are an even greater 5.8% above their Q3 average. While this suggests that net merchandise exports are presently on course to make another negative contribution to GDP growth in Q4, it will be very important to see where exports and imports have settled when the November outcomes – less impacted by recent disruptions – become available next month.

The BoJ will publish export volume data by region and commodity later this week. For now, the MoF’s own export volume index rose 3.8%Y/Y in October, compared with a 4.9%Y/Y decline in September. The MoF’s breakdown indicates that exports volumes rebounded sharply across all major markets. In particular, exports to the US rose 10.1%Y/Y, following a 3.0%Y/Y decline in September. Exports to China rose just 1.0%Y/Y, but this followed an 8.7%Y/Y decline in September. Exports to the rest of Asia rose 1.3%Y/Y and exports to the EU rose 6.9%Y/Y. The MoF’s estimates indicate import volumes rose 10.3%Y/Y following a 2.7%Y/Y decline in September.

Looking ahead to the remainder of this week’s diary, ahead of Friday’s Labor Thanksgiving holiday, the only other major economic report due this week is Thursday’s national CPI for September. Bloomberg’s survey indicates that the market expects a modest lift in headline inflation (by 0.2ppt to 1.4%Y/Y), but the BoJ’s forecast and preferred measures of core inflation – the former excluding fresh food and the latter excluding both fresh food and energy – are expected to be steady at 1.0%Y/Y and 0.4%Y/Y respectively. The final results of the Monthly Labour Force Survey for September are also released Thursday, while the All Industry Activity Index for September is due on Wednesday. In the bond market, the MoF will auction 20-year JGBs tomorrow and enhanced liquidity (maturities 5-15.5 years) on Thursday.

Euro area:
This week brings several releases of note from the euro area, including the ECB’s account from its October meeting (Thursday), the Commission’s latest Opinion on Italy’s budgetary plan (Wednesday) and November sentiment surveys. In particular, while the Governing Council at the last meeting still considered risks to the outlook to be broadly balanced, it will be interesting to see to what extent discussions focussed on the recent weakening in the euro area data, while attention will also be on any further insight into the future monetary policy debate, including possible changes to the reinvestment policy to be agreed in December and options for another round of very long-term refinancing operations. With respect to Italy, the Commission is likely to reiterate its previous criticisms, noting again that the budgetary plan represents a ‘significant deviation’ from what was required under the EU rules.

With regards to the data, the first half of the week should be relatively quiet with just euro area balance of payments and construction output data for September due today. Thursday, meanwhile, will bring the European Commission’s flash consumer confidence indicator for November – expected to post a modest decline on the month, albeit remaining at a relatively elevated level – as well as the French INSEE business confidence survey for the same month. In addition, Friday will see the flash PMIs surveys from the euro area and largest two member states. Having declined sharply in October, the euro area’s composite PMI is expected to edge lower in November to 53.0, which would be a fresh 26-month low. The final reading of German GDP growth for Q3 is also due on Friday and expected to confirm that the economy contracted last quarter (-0.2%Q/Q) for the first time in 3½ years. This release will also provide an official expenditure breakdown. In the markets, Germany will sell 5Y bonds on Wednesday, while France and Spain will issue bonds with various maturities on Thursday.

While politics will remain at the centre stage, this week UK monetary policy will receive some attention too, with Governor Carney and other MPC members testifying at the Treasury Select Committee tomorrow. Data-wise, a quiet week will see the release of the latest public finance data, which are out on Wednesday. The public finances so far this year have performed better than expected which – assuming an orderly Brexit – had provided the Chancellor room to loosen fiscal policy in the near term. The CBI’s Industrial Trends survey, due on Tuesday, will be worth watching too for any insights into how sentiment in the manufacturing sector is holding up against the backdrop of high uncertainty about the future trading arrangement between the UK and the EU. Today we received on the Rightmove house price index, which showed that asking prices inched lower last month, by 0.2%Y/Y, for this first time since 2011. London was the main source of weakness – asking prices at the centre of the capital declined nearly 7.0%Y/Y.

It should be a relatively quiet for US dataflow ahead of Thursday’s Thanksgiving holiday. Housing market indicators include November’s NAHB housing index (today), October’s housing starts (tomorrow) and existing home sales figures (Wednesday). Wednesday will also bring preliminary durable goods orders data for October, along with the Conference Board’s Leading index for the same month and the revised University of Michigan’s consumer sentiment survey for November. Supply-wise, the US Treasury will sell 10Y TIPS on Wednesday. 

There were no economic reports released in China today and there are no reports scheduled over the remainder of the week. Indeed, the next economic reports of any note in China are the official PMIs, to be released on 30 November.

The Australian economic diary was also bare today. And looking out over the remainder of this week, there is little in the local diary that stands much chance of moving the market. Tomorrow’s minutes from this month’s RBA Board meeting are unlikely to deviate from the messaging provided in the Statement on Monetary Policy. Internet job vacancy data for October will be released on Wednesday, followed by the little-followed flash PMI readings for November on Friday.

New Zealand:
Following an improved showing in Friday’s manufacturing PMI report, today’s service sector PMI also pointed to some improvement in business conditions in October. The headline index rose 1.2pts to a 5-month high of 55.4. Within the detail the activity index rose 1.6pts to 57.8 and the new orders index rose 1.7pts to 57.9. Most interestingly of all, the employment index rose 4.3pts to a 10-month high of 54.0 – an outcome that is more in line with the strong employment growth that continues to be depicted in the Household Labour Force Survey. In other news, the PPI inputs index rose 1.4%Q/Q in Q3, lifting annual growth to 4.0%Y/Y. The output price index rose a similar 1.5%Q/Q and 3.6%Y/Y while capital goods prices rose 1.2%Q/Q and 3.1%Y/Y. The relatively large quarterly increases were influenced by the weakening of the NZ dollar, while higher prices for energy products also placed upward pressure on the PPI indices.

The only economic report scheduled in New Zealand over the remainder of the week is Thursday’s tourism and migrant count for October. 


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