The Week Ahead - Preview: 05 to 09 November 2018
The US mid-term elections will probably be the most closely watched event in the week ahead, and is accompanied by a modest US data schedule, a no press conference Fed meeting and another raft of earnings (see calendar section). The UK, Eurozone and Japan have a much busier data schedule including provisional UK Q3 GDP, German and Japanese Orders, Chinese trade and inflation, as well as plenty of European & Asian earnings. Brexit negotiations, US China trade tensions, the ongoing saga around the Italian budget, the re-imposition of sanctions on Iran as of Monday, and a three way meeting between Macron, Trump and Putin will provide the political mood music. The US tops the govt auction schedule with a total of $180 Bln of T-bills and $83 Bln of coupons (3, 10 & 30-yr), while the Eurozone sees ca. EUR 17 Bln total of bond auctions from Germany, France and Spain, but unlike October which saw EUR 108 Bln of redemption money, there are no major redemptions in November until the final week of the month.
- Polls appear to suggest that the Democrats will take control of the US House of Representatives, while the Republicans are expected to hold onto the Senate, but with a lot of first time voters (not just youngsters, but also previously unregistered), whose intentions pollsters struggle to capture, surprises are more than possible. The key battlegrounds that will likely offer a reasonably early signal about whether there is going to be a 'blue wave' (i.e. a swing to the Democrats) are seen in Kentucky's 6th district, Florida, North Carolina, New York's 22nd District and all of the seats in suburban Philadelphia. According to some surveys, many fund managers do not see the mid-term elections as a major event, but that might well prove to be rather too complacent, above all given that the 'i' word (impeachment) could become an issue if the Democrats were to achieve substantial gains in the House. An eye also needs to be kept on German politics, with both of the grand coalition parties holding major conferences this week, with the CDU girding itself for the start of December vote on who will succeed Merkel as party leader (Friedrich Merz is emerging as the front runner, with Schaeuble endorsing him on Friday). Meanwhile the SPD will commence another debate on whether it should remain in the grand coalition, after the recent drubbing in the Bavarian and Hesse state elections.
- Services PMIs & Non-Manufacturing ISM dominate the start of the week, with the US ISM seen mirroring the Manufacturing survey with a substantial back from 61.6 to a still robust 59.0, while the UK Services is also seen following the Manufacturing PMI lower to 53.3 from 53.9, despite the unexpected pick-up in the Construction PMI. China's Caixin Services PMI is seen modestly lower at 52.8, in line with the official NBS reading. Eurozone PMIs are expected to confirm the weaker than expected 'flash' prints.
- US PPI is the only first division item of data in the US, though if forecasts of 0.3% m/m for an unchanged 2.6% y/y headline and 0.2% m/m 2.4% y/y (vs prior 2.5%) on core PPI are correct, then this is not likely to be a market mover, with JOLTS Job Openings seen close to August's all t-ime record (7.136 Mln) and provisional Michigan Sentiment the only other items of note.
While the usual caveat that all UK data is effectively totally subordinate to Brexit developments, there will still be some sensitivity to the raft of activity data that is on hand. Q3 GDP is forecast to be a very 'perky' 0.6% q/q, which would push the y/y rate back up to 1.5%, i.e. the BoE's assumed potential rate of growth for the UK. However, as we have stressed, the story for the UK economy in Q3 was a strong start that had fizzled out almost completely by the end of the quarter, indeed monthly GDP and the Index of Services for September are seen at just 0.1% m/m after flat readings in August. Q3 Business Investment is very unsurprisingly forecast to have been unchanged q/q, which would be an improvement on Q2@s -0.7%. Having fallen 0.2% m/m and 0.7% m/m respectively in August, Manufacturing Output and Construction Output are forecast to eke out gains of 0.1% m/m in September, while the BRC's like for like Retail Sales is expected to rebound modestly to +0.5% y/y after falling 0.2% in September. The RICS House Price Balance is not seen offering any comfort for the housing sector with an unchanged -2, though still above April's low of -8. As for Trade, a very modestly wider Visible deficit of £-11.4 Bln is forecast, with the total balance also seen slightly wider at £-1.5 Bln, though for Q3 as a whole Net Exports are projected to have made a solid contribution to Q3 GDP (Exports +2.8% q/q, Imports 0.6% q/q), though this follows a substantial drag in Q2.
Elsewhere the 2.0% m/m rebound in German Factory Orders in August, having fallen in 6 of the prior 7 months is expected to have been nothing more than a blip, with September expected to post a modest 0.5% m/m drop, with the accompanying erosion of Order Backlogs through this year, above all in Capital Goods, expected to weigh on Industrial Production that is seen down 0.1% m/m after falling 0.3% m/m in August. All of which suggests that Q3 GDP due on 14 November will be little better than 0.2% q/q, and leaves a lot of questions around the Bundesbank's assertion that the summer slowdown was transitory and primarily concentrated in the Auto sector and its long supply chain. Trade data are projected to show exports eking out another modest gain of 0.3% m/m, with Imports rebounding 0.8% m/m after sliding 2.4% in August. The concern that the Eurozone's so-called engine of growth is stalling will as such remain. Over in Japan, the super volatile Machinery Orders is expected to post a sharp 9.0% m/m decline, but this follows gains of 11.0% and 6.8% m/m in July & August, and still indicating a solid profile to Business CapEx for Q3. The other item of note in Japan will be Labour Cash Earnings (wages) which are forecast to post a 1.1% y/y rise in nominal terms (vs. Aug 0.8%), but remain in negative territory in real terms at -0.3% vs. August -0.7%. Japan also has its Economy Watchers (services) survey, while Australia looks to Housing Finance, and next Thursday sees Chinese trade data, while China's CPI and PPI are due on Friday. Indonesia publishes Q3 GDP on Monday, and Norway has its CPI and PPI data.
- On the central bank front, the Fed is seen on hold at this meeting, and will likely offer a strong hint that rates will rise again in December, though there are many market participants wondering if the recent tightening of financial conditions may, if sustained, prompt the Fed to pause in the not too distant future. It will likely remain upbeat on the economy and the labour market, and sanguine on the inflation outlook; the question is then whether it offers comment on trade tensions and international developments, which the FOMC statements have largely eschewed. The RBA and RBNZ also meet this week with both expected to hold rates at 1.50% and 1.75% respectively, and both will be updating their outlooks. The RBA will stick with a very neutral policy outlook, stressing that while growth has been solid, the inflation outlook remains subdued, wage growth weak and underline the continued sensitivity to the weakening housing market. The RBNZ shifted to a neutral stance in August, suggesting that the next move could be up or down, and while Q2 GDP picked up, much of that was down to government spending, and was still below the RBNZ's assumption that the potential growth rate is just above 3.0%; NZ inflation is around the 2.0% midpoint of its target range, and wage growth (also due this week) remain tepid in real terms. The fact that the NZ economy is very heavily exposed to demand from China, and by extension to the continued China/US trade tensions, the RBNZ will doubtless stick to its neutral outlook. Malaysia's BNM also meets this week, and is expected to keep rates on hold at 3.25%. There is a long list of ECB speakers, including Coeure and Praet, the BoJ publishes September meeting minutes, and the summary of opinions from the October meeting.
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MARC OSTWALD
Global Strategist & Chief Economist
ADM Investor Services International Limited