Trade talk dominates

Emily Nicol
Chris Scicluna

Overview:
Weekend suggestions of progress on the US-China trade front – including new Chinese guidelines calling for enhanced action to tackle intellectual property violations and a Chinese media report that the two parties are close to a first-phase deal – have provided a boost to equity markets at the start of the week with most Asian indices higher. So, for example, China’s CSI300 closed up 0.7%. And while the weekend’s local elections in Hong Kong saw pro-democracy parties win a landslide victory, the Hang Seng is currently up almost 1½%. While Japan and South Korea continued to snipe at each other following the latter’s decision on Friday not to quit the GSOMIA military intelligence pact, an agreement that the leaders of the two countries should hold a summit next month to try further to diffuse the spat which has seriously harmed bilateral trade added to the more positive mood surrounding geopolitics. Japan’s Topix rose 0.7% while Korea’s KOSPI closed up 1.0%.

Despite the better tone to equities, however, bond markets have been quiet at the start of the week perhaps reflecting the absence of significant new macroeconomic data. Yields on USTs have edged up only marginally in Asian time (10Y yields up about 1bp to around 1.78%, back to the top of Friday’s range. And JGBs closed little changed on the day (10Y yields close to -0.10%). Like USTs, euro area govvies have opened only a touch weaker. Having depreciated at the end of last week as the flash PMIs raised the likelihood of a contraction in UK GDP in Q4, sterling has edged only slightly higher after yesterday’s release of the Conservative manifesto suggested the strong likelihood of minimal change to tax, spending, and other economic policies – except Brexit – over the coming Parliament, assuming (as the polls now clearly imply) that the Tories win a comfortable majority.

Looking ahead, this morning’s German ifo survey results will be watched closely after Friday’s PMIs suggested no new momentum in the euro area economy in Q4. Speeches later on by ECB Chief Economist Lane and Fed Chair Powell might also be of note. Over the remainder of the week, the dataflow includes Japanese post-tax-hike retail sales and IP releases, November flash inflation numbers from the euro area and Tokyo, and – ahead of the Thanksgiving Holiday and Black Friday – US trade and durable goods order figures.

Japan:
The main Japanese economic releases, which include October’s retail sales figures on Thursday, will come at the back end of the week. Like last week’s department store sales, these are expected to show a notable pull-back in spending at the start of Q4 to leave sales down more than 4%Y/Y. Friday will also bring IP figures for October, which are similarly forecast to show that output declined that month. Against the backdrop of weakening demand, the latest labour market figures might also report a further slowdown in employment growth at the start of Q4. And consumer confidence is likely to remain downbeat too, with November’s survey results due on Friday. The end of the week will also bring the latest Tokyo CPI figures for November, which seem bound to further illustrate the subdued inflationary environment. In the markets, the MoF will conduct a 40Y JGB auction on Tuesday and a 2Y JGB auction on Thursday.

Euro area:
Following Friday’s downbeat flash PMIs, this week should be a relatively busy one for euro area economic releases, including the Commission’s latest consumer and business sentiment surveys (Thursday) and flash inflation estimate (Friday) for November. In particular, the Commission’s economic sentiment indicator (ESI) – which arguably provides the most reliable guide to euro area GDP growth – is expected to have edged slightly higher in November on the back of modest improvements in consumer and business sentiment alike. But this would still leave the ESI at its second-lowest reading since early 2015 and consistent with slowing economic momentum in the fourth quarter.

In terms of prices, according to the flash estimate headline inflation is also expected to have ticked slightly higher in November to 0.9%Y/Y from October’s near-three-year low of 0.7%Y/Y. While this will in part reflect a softer pace of decline in energy inflation, we also anticipate a modest increase in core inflation, by 0.1ppt to a seven-month high of 1.2%Y/Y, nevertheless still consistent with very subdued underlying price pressures. Friday will also bring the euro unemployment figures for October.

At the country level, the first half of the week will be dominated by national sentiment indicators, including the German Ifo business survey (today), German GfK consumer confidence index (tomorrow) and the French INSEE consumer and Italian ISTAT consumer and business monitors (Wednesday). Meanwhile, the back end of the week will bring flash inflation estimates from Germany and Spain (Thursday), and France and Italy (Friday). Friday will also bring the latest German labour market and retail sales figures, along with French consumer spending data. Elsewhere, ECB Chief Economist Lane is scheduled to speak in London this evening with a focus on the yield curve. In the markets, Germany will sell 5Y Bunds on Wednesday, while Italy will sell bonds tomorrow and on Thursday.

UK:
While politics will continue to dominate the UK news flow this week, the data calendar will be book-ended by sentiment surveys for November. First up today will be the CBI distributive trades monitor, which is expected to show that the headline retail sales index remained firmly in negative territory for the fifth consecutive month (unchanged at -10), suggesting that sales volumes remained poor for the time of the year. This would be consistent with ongoing subdued consumer confidence, with the GfK’s latest household survey (Friday) expected to show that the headline index (-14) remained at the bottom of the recent range. Friday will also bring the Bank of England’s latest lending figures for October. In addition, Thursday will see the Society of Motor Manufacturers and Traders publish car production figures for October, which are likely to report a further decline in output compared with a year earlier as several manufacturers temporarily closed factories for a few days that month as part of preparations for a no-deal Brexit. In the markets, the DMO will sell 5Y Gilts tomorrow.

US:
In the US, ahead of Thursday’s Thanksgiving holiday, the first half of this week will provide several releases of note. Of particular interest tomorrow will be October’s advance goods trade and inventories reports, followed on Wednesday by durable goods orders and personal spending and income data for the same month. That day will also bring revised Q3 GDP figures, which are expected to confirm the initial estimate that growth slowed to 1.9%Q/Q annualised from 2.0%Q/Q ann. in Q2.

Sentiment surveys due this week will include the Chicago Fed’s national activity index (today), Conference Board consumer confidence indicators (tomorrow) and the Chicago PMI (Wednesday). Tomorrow will also bring several housing market indicators, while the Fed’s latest Beige Book will be published on Wednesday. In the markets, the Treasury will sell 2Y notes today, 2Y floating-rate and 5Y fixed-rate bonds tomorrow and 7Y notes on Wednesday.

Australia:
Ahead of the release Q3 GDP at the start of December, the main economic focus this week will be Q3 figures for construction work done (Wednesday) and private capex (Thursday). Expectations are for a further decline in construction completed, for the fifth consecutive quarter, while private capex is expected to have moved sideways following two consecutive contractions. Finally, on Friday, private sector credit figures for October will provide a update on demand for household lending at the start of the fourth quarter. Also of note, tomorrow will see RBA Governor Lowe give a speech on unconventional monetary policy and Deputy Governor Debelle give a keynote address on employment and wages.

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