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PATRIS The Week Ahead - 10 September 2018

10 Sep 2018


Key themes to watch over the coming week:

1.US Trade Representative Robert Lighthizer visits Brussels for meeting with European Trade Commissioner Cecilia Malmstrom on Monday. This meeting takes place after US President Donald Trump and European Commission President Jean-Claude Juncker reached a truce in late July;

2.European Commission President Jean-Claude Juncker delivers the State of the Union Address on Wednesday;

3.The comment period on the next round of tariffs for $200bn worth of imports from China has ended last week. Focus should be on any new flow on how the US plans to move forward;

4.Activity data in China for August, and CPI, retail sales and industrial production data in the US for August are key highlights for this week’s economic calendar;

5.Standard & Poor’s may review Portugal on Friday (BBB-/Stable);

6.IGCP sells on Wednesday PGBs maturing in October 2023 and October 2028, with an indicative global range amount of €750mn-€1000mn;

7.The outcome of the ECB and BoE September meetings will be announced on Thursday. We will also have MPC meetings in Argentina, Peru, Turkey, and Russia during the week;

8.US Federal Reserve releases its latest Beige Book on Wednesday at 19:00 BST;

9.Update to the Key Risk Events Calendar for the following months.

Next Friday, Moody’s may decide to review the European Union and Poland, while Standard & Poor’s could look to Austria, Cyprus, Denmark, Finland, Luxembourg and Portugal.

S&P affirmed Portugal at BBB-/Stable on 16 March and stressed that the rating on Portugal could be raised if there is a more-rapid progress in external deleveraging and general government debt reduction, as well as further improvements in financial stability.

According to data released by FactSet for the S&P500, with more than 99% having reported earnings numbers for 2Q18, 80% of these companies disclosed EPS above estimate (5% in line and 16% below consensus). During the past 4 quarters, 75% of companies in the S&P500 have reported EPS above the mean estimate on average (70% in the past 20 quarters). Therefore, the percentage of companies that reported EPS above estimates in 2Q18 was above the trailing 1-year and 5-year averages. 2Q18 has the highest percentage of companies reporting EPS above estimate for a quarter since Factset began tracking the data in 3Q08.

Activity data in China for August, and CPI, retail sales and industrial production data in the US for August are key highlights for this week’s economic calendar.

Portugal: INE releases this week international trade statistics for July (Monday) and final inflation data for August (Wednesday). The Bank of Portugal discloses on Tuesday data on banking loans and deposits, loans to households and non-financial corporations.

China: In the coming week, we have a number of key releases in China, including inflation (due on Monday), credit and money data (8-15 September) and activity data (to be released on Friday) for August.

Official PMIs were slightly higher in August than in July, although below the levels seen at the end of last year.

Eurozone: Eurostat releases on Wednesday industrial production data for July in the Euro area, following disappointing prints in Germany and Spain last week (industrial production surprised on the upside in France). On Tuesday, Eurostat releases the 2Q18 employment report, with an update to wage gains in the region.

UK: We will have this week the release of monthly GDP data for July, construction and manufacturing output, as well as the index of services for July (all due on Monday). The labour market data for the three months to July will be disclosed on Tuesday.

US: This week’s main focus should be the release of CPI inflation for August on Thursday. We will also get July retail sales and industrial production on Friday.

The Fed continues to say that there is no evidence of overheating, given the modest wage growth. However, the August print for average hourly earnings delivered on Friday a new expansion high at 2.9%y/y (or 2.8%y/y for production and non-supervisory workers), while the U-6 measure of broad underemployment dropped to a new cycle-low of 7.4%. The share of unemployed who were job leavers stood at 14.0% in August, the highest reading since 2000, which indicates increasing confidence in the labour market.

Elsewhere, the series for temporary help services, usually used as a leading indicator for nonfarm payrolls, have recently stabilised, after recovering from the lows recorded in 2016.

Latam: In Brazil, both Ibope and Datafolha should release during the week poll results for the October presidential election. The survey results will show the effect of one week of TV and radio campaigning. The May retail sales report is out on Thursday. In Mexico, focus should continue to be on the NAFTA talks, as negotiations continue between the US and Canada. On the data front, this week shows the release of the auto sector report on Monday. On the same day, we will get also the wage report for August. The July industrial activity report will be disclosed on Tuesday. During the week, data on formal job creation will be released. In Argentina, the ongoing negotiations with the IMF should remain at centre stage. The August inflation report will be released on Thursday. Data will likely reveal an acceleration of inflation driven by the sharp ARS weakness. In Colombia, manufacturing production and retail numbers for July will both be released on Friday. The debate around the tax reform will also continue during the week. In Chile, the central bank will publish its monthly survey of expectations on Tuesday, which will likely show consensus rate expectations to be revised up.

On central banks, the ECB will announce the outcome of the September monetary policy meeting on Thursday at 12:45 BST. Mario Draghi’s press conference starts 45 minutes later. No changes to ECB policy rates or forward guidance are expected at this week’s meeting.

Focus should be on the updated staff macroeconomic projections, namely on any changes to growth and inflation forecasts, as well as on the balance of risks for the economic outlook, given mixed economic data in the region, increasing concerns around EM growth and continued focus on trade policy (although the threat of US tariffs on cars has been postponed).

2018 and 2019 GDP growth could be revised down but changes to the inflation forecasts are likely to be modest. Focus should be on any changes to 2020 core inflation forecast. With tapering scheduled for 4Q18 and purchases set to end at the end of the year, the message is likely to balanced, reflecting signs that wage growth has stepped up but also downside risks to the economy following the slowdown in the pace of growth recorded in 1H18.

The Bank of England announces the outcome the September monetary policy meeting on the same day at 12:00 BST. Market consensus does not see any change in monetary policy, after the BoE’s unanimous decision last month to increase the Bank rate by 25bps. Focus should be on the published minutes and on any references to BREXIT in MPC discussions. The next Inflation Report will be released on 1 November, after the EU Summit scheduled to 17-18 October. The BoE will probably remain on hold until it gets more clarity on BREXIT.

Besides the UK and the Euro area, we will have MPC meetings in Argentina (Tuesday), Peru (Thursday), Turkey (Thursday), where the Bank has already communicated that monetary policy will be adjusted, due to significant risks to price stability, and Russia (Friday). Market expectations should be on whether Turkish President Recep Tayyip Erdogan's pressure continues to affect any decision by the central bank.

In Argentina, the central bank is expected to leave the 7-day Leliq policy rate unchanged at 60%, given the challenging inflation backdrop due to pass-through from the sharp ARS depreciation and administered price increases. Inflation expectations continue to deteriorate, as confirmed by the August central bank monthly survey. On the extraordinary MPC meeting that took place on 30 August, the 7-day Leliq policy rate was raised to 60% from 45%, while the Bank said that the current policy rate will not be changed until at least December. In Peru, at the August meeting, the MPC left the policy rate unchanged at 2.75%. The PEN weakness represents a source of upside inflation risks.

BoE Governor Mark Carney will give the Whitaker lecture on Friday. In the US, Fedspeak will include comments from Raphael Bostic (on Monday and on Thursday), James Bullard (Wednesday), Lael Brainard (Wednesday), Eric Rosengren (Friday) and Charles Evans (Friday).

EGB supply this week is expected from the Netherlands (DSL 4% January 2037, on Tuesday, for an amount of €0.75bn-€1.25bn), Germany (Bund 1.25% August 2048, on Wednesday, for an amount of €1bn), Ireland (Thursday), Italy (Thursday) and Portugal.

In Portugal, the IGCP is going to auction PGBs 4.95% 25 October 2023 and 2.125% 17 October 2028 on Wednesday, with an indicative global range amount of €750mn-€1000mn.

Meanwhile, the US Treasury will issue c.$73bn across the 3-year (new, $35bn on Tuesday), 10-year (re-opening, $23.0bn on Wednesday), and 30-year (re-opening, $15.0bn on Thursday) sectors this week. There are $25bn of coupons and redemptions to offset partially the new supply.

The flight to quality namely due to EM turmoil, trade tensions, uncertainty around US mid-term elections and the late-in-cycle US economy has limited increases in the term premium at the long-end of the US yield curve.

Nonetheless, the potential for inflation to continue to surprise on the upside (as seen by the higher-than-expected data on average hourly earnings for August released last Friday) remains a risk for US Treasuries, while the FOMC remains focused on the US economy and keeps raising interest rates.

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