The week ahead, w/c 26 Nov

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
During a shortened trading session Wall Street posted further losses on Friday, with the S&P500 declining 0.7% to its lowest close since May – not least due to a sharp weakening of energy stocks amidst a further slump in the price of crude oil. Treasury yields nudged lower but the US dollar firmed, with the euro weighed down by a disappointing PMI report. However, notwithstanding reports that Russian warships had fired on Ukrainian vessels on Sunday – an action that will be discussed at an emergency meeting of the UN Security Council later today – US equity futures have reopened higher today. And many Asian bourses have also begun the week on a modestly positive note. Japan’s TOPIX returned from Friday’s holiday and also rose 0.2%, with a weaker yen and news of Osaka’s successful bid to host the 2025 World Expo countering news of a disappointing manufacturing PMI report (more on the latter below).Taiwan led the way after the China-friendly Kuomintang enjoyed a surge in support at Saturday’s local elections. But China’s CSI300 began with a 0.1% retreat as investors looked ahead to a scheduled meeting between President Trump and President Xi at the end of the week. And a further exception to the modestly positive tone in the region was Australia’s ASX200, which fell 0.8% as commodity-related stocks moved sharply lower.

So far this morning, BTPs have made further gains ahead of a meeting of key Italian government members this evening to discuss options to ‘fine-tune’ the budget, with Reuters this morning suggesting a reduction in the headline deficit target to 2.0-2.1% of GDP from the current planned 2.4%. And after yesterday’s agreement of the EU-UK Brexit Withdrawal Agreement and associated Political Declaration, sterling is stable even as the UK House of Commons ‘meaningful vote’, slated for 12 December, still seems bound to see the deal rejected and huge uncertainty persists over what the next steps would be thereafter. There will be further Brexit newsflow this week with an ECJ hearing underway tomorrow on whether Article 50 can be unilaterally revoked by the UK government and the BoE publishing assessments of the financial stability and macroeconomic consequences of the draft Brexit deal (Wednesday and Thursday). This week will bring plenty of commentary from the other major central banks too, including speeches from the ECB’s Draghi and Praet today, and the Fed’s Clarida and Powell (tomorrow and Wednesday respectively), as well as the latest FOMC minutes (Thursday), to give plenty of opportunity for signals of increased dovishness that would tally with recent shifts in market pricing.  

Japan:
This week’s local economic reporting kicked off today with the release of the flash manufacturing PMI for November. Unfortunately, and ahead of METI’s IP report due at the end of this week, the news from the factory sector was disappointing. The headline business conditions index fell 1.1pts to 51.8, marking the weakest reading in two years. Within the detail the output index fell 1.0pts to 51.8, reversing the improvement seen in October. More worryingly, the new orders index slumped 3.0pts to a 26-month low of 49.6, while the new export orders index edged down a further 0.3pts to 50.8. Surprisingly in light of those results, the employment index rose 0.7pts to 53.7 – the highest reading since February. Elsewhere in the survey, after rising sharply last month, the pricing indices moved lower in November – doubtless partly reflecting developments in commodity prices (especially energy). The input prices index fell 0.7pts to 61.9 and the output prices index fell 1.0pts to 53.5 – the latter still the second-highest level recorded over the past decade.

Looking at the remainder of this week’s diary, the only noteworthy releases scheduled over the next three days are tomorrow’s service sector PPI and Thursday’s retail sales report (both for October). But as is often the case, the week will end with a rush with Friday bringing the release of a number of economic reports that will cast light on the prospect of a rebound in economic activity in Q4. Of particular interest will be the IP report for October, with both the outcome for the month and firms’ collective forecast for November and December providing some insight as to whether manufacturing production will return to positive growth following a 1.4%Q/Q contraction in Q3. Data on housing starts and construction orders for October will also be released on Friday, as will the household employment survey for October. Adding to the day’s busy diary is the Cabinet Office survey of consumer confidence for November and the advance November CPI for the Tokyo area. In the bond market, the MoF will auction 40-year JGBs tomorrow and 2-year JGBs on Thursday.

Euro area:
A busy week for new euro area economic data releases brings, perhaps most notably, preliminary euro area inflation figures for November, which are out on Friday. We think that the core inflation rate should remain unchanged, having risen by 0.2ppt to 1.1%Y/Y in October. But given the recent drop in oil prices, we expect that energy inflation will start falling from its peak of more than 10%Y/Y reached last month, and that will push the headline rate lower – we anticipate a drop of 0.2ppt to 2.0%Y/Y. The equivalent inflation data from Germany and Spain, due the day before, will provide further clues as to what to expect.

Thursday will also bring the European Commission’s economic sentiment survey. The flash consumer confidence estimate, released last week fell to its lowest level in 1½ years, and with Friday’s PMIs suggesting a further deterioration of business sentiment, the headline European Commission economic sentiment index is also likely to show a notable drop from the seventeen-month low of 109.8 reported in October. Meanwhile, euro area unemployment data are also due on Friday. Having moved sideways at 8.1% for three consecutive months, the headline unemployment rate seems likely to post another unchanged reading in October.

The first half of the week will be busy too, with several survey results from the large  member states, including business climate indices from Germany’s Ifo institute (today) and France’s INSEE (tomorrow), the German GfK consumer sentiment indices (Wednesday), and the Italian ISTAT economic sentiment survey (also tomorrow). Euro area bank lending figures are also out on Wednesday. Policy-wise, ECB President Draghi will testify at the European Parliament later today, while Chief Economist Praet’s speech this morning should also be watched for dovish signals, and other ECB officials are scheduled to speak on Wednesday. In the bond markets, after a disappointing take-up by retail investors of its inflation-linked bonds last week, and following this evening’s key government discussion on the draft budget, Italy will issue BTPs tomorrow and Thursday. Germany will auction 10-year Bunds on Wednesday.

UK:
After EU leaders approved the Brexit Withdrawal Agreement and associated Political Declaration yesterday, the ‘meaningful vote’ in the House of Commons now seems likely to be held on December. But following an earlier ruling by Scotland’s highest court, tomorrow the European Court of Justice will hold an emergency hearing on a case to determine whether the UK is legally able to revoke Article 50 unilaterally. While at this point the scenario of revoking Article 50 is only a theoretical consideration, if and when the UK Parliament votes against May’s deal, the ability of the UK to unilaterally decide to halt the Brexit process could have a significant bearing on the political debate regarding the remaining options. Meanwhile, the news flow from the BoE will also be Brexit-related. On Wednesday the central bank will release its Financial Stability Report and bank stress test results. In response to the request from the Treasury Select Committee, they will also publish an analysis of how the draft Brexit Withdrawal Agreement will affect the Bank’s ability to deliver its monetary and financial stability objectives. And Thursday will see it publish an assessment of the macroeconomic impact of the Brexit deal – expect it to suggest a modest acceleration in GDP, thanks particularly to a pickup in business investment on the back of the greater near-term certainty afforded by the transition period post-March 2019, but an implied step up in monetary tightening due to the increase in domestically-generated inflation that would arise from the stronger growth.    

Data-wise, the coming week brings a few interesting, albeit hardly top-tier, UK releases. With the latest indicators signaling further weakening in the housing market, on Thursday the BoE lending figures will probably show that mortgage lending growth eased in October. We will get an early insight into how lending changed that month today when UK Finance releases its figures from the major High Street banks. Tomorrow the CBI Distributive Trades survey is due. And at the end of the week we will receive the GfK consumer sentiment survey, expected to show a further drop in its headline index from -10 to -11, which would be the lowest level this year. 

US:
Turning to the US, it’s set to be a slow start to the week for new economic data with just the Dallas Fed’s manufacturing survey for November today, followed by the Conference Board’s consumer survey for November and FHFA and S&P/CoreLogic house price measures for September tomorrow. On Wednesday, we will receive a second reading on Q3 GDP growth (initial estimate 3.5%Q/Q ann.), together with advance trade and inventory reports for October, new home sales for the same month, and the Richmond Fed’s manufacturing survey for November. On Thursday, most interest will centre on the personal income and spending report for October, including the release of the Fed’s key inflation metric – the core PCE deflator. In particular, solid readings for both income and spending look to be on the cards. But while higher energy prices will boost the headline PCE deflator, the CPI report points to a subdued increase on the core measure. Thursday also brings pending home sales data for October and the release of the minutes from this month’s FOMC meeting. The week’s data diary concludes on Friday with the release of the Chicago PMI for November. In addition, several Fed policymakers will be speaking publicly including Vice Chair Clarida tomorrow and Chair Powell on Wednesday. In the bond market, a busy week for Treasury issuance includes auctions for 2-year notes today, 5-year notes tomorrow and 2-year FRN’s and 7-year notes on Wednesday.

China:
There were no major economic reports released in China today. Indeed, aside from tomorrow’s data on industrial profits, the diary is bare until Friday when we will receive the official PMI reports for November. According to Bloomberg’s survey, the market is hopeful that the closely-watched manufacturing PMI will remain steady at last month’s more than two-year low of 50.2. Of course, the US-China trade dispute will remain the key focus this week as investors await a scheduled meeting between President Trump and President Xi on the side lines of the G-20 leaders’ summit in Buenos Aires.

Australia:
There were no major economic reports released in Australia today. Over the remainder of the week the main focus will be the Q3 construction and CAPEX reports, released on Wednesday and Thursday respectively. These reports will cast further light on activity ahead of the Q3 national accounts (released 5 December), while the forward-looking intentions section of the CAPEX survey will also provide information on prospects for the coming year. This week’s data flow will conclude on Friday with the release of the RBA’s money and credit aggregates for October. Speaking in Sydney today, RBA Assistant Governor Christopher Kent attributed a slowdown in housing credit growth over the past year or so as being due to both a tightening in the supply of credit and weaker demand for credit. Kent also noted that competition for new loans remains strong, so that interest rates for new loans – while up modestly of late due to higher funding costs – are still well below the average rates for existing loans.

New Zealand:
The main focus in New Zealand today was the official retail sales report for Q3, representing the first of the major partial indicators to be released ahead of next month’s national accounts. Unfortunately, in contrast to the robust picture suggested by the monthly indicator of non-cash spending, this survey reported the volume of retail spending was unchanged during the quarter – a far cry from market expectations of a 1.0%Q/Q gain – following unrevised growth of 1.1%Q/Q in Q2. A 2.3%Q/Q decline in spending on autos was a significant drag on aggregate spending in Q3. Excluding autos and fuel, the measure of core spending rose 0.4%Q/Q and was up 3.7%Y/Y (total spending rose 2.7%Y/Y). In nominal terms retail spending did lift 0.6%Q/Q in Q3, but all of that growth was attributable to a 7.0%Q/Q rise in spending on fuel (in part due to higher taxes). All up, this report adds to the likelihood that GDP growth in Q3 will be markedly weaker than the surprisingly robust 1.0%Q/Q growth reported in Q2. 

Looking out over the remainder of the week, a key focus in New Zealand will be the release of the RBNZ’s semi-annual Financial Stability Report on Wednesday, which may see the RBNZ announce a further mild easing of LVR restrictions on residential mortgage lending (as occurred at the same time last year). On the data front we will receive the October merchandise trade report tomorrow, followed by the November ANZ Business Outlook Survey on Thursday. This week’s diary concludes on Friday with the release of the ANZ-Roy Morgan consumer confidence survey for November and the building consents report for October.

 

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