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PATRIS The Week Ahead - 31 December 2018

31 Dec 2018

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This is an abbreviated version of the PATRIS The Week Ahead report. The publication of the usual format will resume next week.

Key themes for the coming week:

1.The Italian parliament on Saturday passed the government’s 2019 budget (by 327 to 228), ahead of the end-year deadline.

2.The 11-country CPTPP trade deal, a revamped version of the Trans-Pacific Partnership, came into force on Sunday. The US pulled out of the TPP negotiations in 2017.

3.President Donald Trump said that a possible trade deal between the US and China was progressing well. Is this one more sign that the president has now clear incentives to find a solution to the trade war with China?

4.In Brazil, the new president Jair Bolsonaro will be sworn in as of 1st January 2019.

5.Fed Chair Jerome Powell will be interviewed by formers Chairs Janet Yellen and Ben Bernanke at the annual American Economic Association meeting on Friday. We will have other Fed speakers at the AEA conference on Friday and Saturday.

6.The PMI/ISM readings for December, the US jobs report and the Euro Area flash HICP reading for December are the highlights of the data calendar for the coming week.

7.In Mexico, the central bank will publish on Thursday the minutes from the December MPC meeting. At that meeting, the Bank increased the policy rate by 25bps to 8.25%, in an unanimous decision. 

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

The 4Q18 earnings season could be main driver of financial markets over the coming weeks. In the US (for the S&P500 index), according to FactSet, the consensus reduced EPS estimates for 4Q18 by 3.4% since the beginning of the last quarter of 2018. This percentage decline is larger than the 5-year percentage (-3.1%) for a quarter, but smaller than the 10-year average (-4.5%) and the 15-year average (-3.9%) for this period. Meanwhile, of the 105 companies that have issued EPS guidance for 4Q18, 72 have issued negative EPS guidance, or 69% of the total, which is slightly below the 5-year average of 70%.

According to FactSet, the estimated earnings y/y growth for 4Q18 is 12.4%, which would represent the 5th consecutive quarter of double-digit earnings growth for the S&P500 index. The estimated y/y revenue growth for 4Q18 is 6.3%.

For 1Q19, 2Q19, 3Q19 and 4Q19, analysts are projecting y/y earnings growth of 3.5%, 4.1%, 4.6% and 11.8%, respectively (6.5%, 5.2%, 5.1% and 5.9%, for revenue growth, in the same order).

For FY19, analysts are projecting earnings and revenue growth of 7.9% and 5.3%, respectively (vs. 20.3% and 8.9% estimated for 2018, in the same order).

The PMI/ISM readings for December, the US jobs report and the Euro Area flash HICP reading for December are the highlights of the data calendar for the first week of 2019.

In Portugal, INE is scheduled to release December’s business and consumer surveys on Thursday and December’s CPI/HICP flash estimates on Friday. The Bank of Portugal is expected to release data on bank loans to households and non-financial corporations for November on Thursday. 3Q18 net borrowing/net lending of the general government & public debt (EDP approach) will be released on Wednesday.

As illustrated by the following charts, November’s registered unemployment data remain consistent with a healthy labour market in Portugal.

EGB supply this week is expected to come from Spain on Thursday. There are around €30bn of coupons and redemptions that will more than offset the supply expected for the coming week. Greece (Wednesday) and France (Wednesday) are scheduled to sell Treasury Bills. There will be no supply or cashflows in the US during the week.

On central banks, Fed Chair Jerome Powell will be interviewed by formers Chairs Janet Yellen and Ben Bernanke at the annual American Economic Association meeting on Friday. We will also have speeches from Raphael Bostic (Friday and Saturday), John Williams (Saturday) and Mary Daly (Saturday). Powell’s speech, the jobs report and the ISM manufacturing are likely to be key events in assessing the likelihood and timing of further rate hikes in 2019 by the FOMC.

The Federal Reserve Bank of New York’s model that uses the difference between 10-year and 3-month Treasury rates points to a higher probability of recession in the US twelve months ahead, reflecting the flattening of the US Treasury curve during 2018.

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