- Digest OPEC production cap agreement, awaiting a further deluge of
central bank speakers, Spanish & German inflation, UK credit
aggregates, US final Q2 GDP, Goods Trade Balance, Claims and Pending
Home Sales; Czech, Mexico & Taiwan rate decisions; Italy BTP sale
- OPEC: deal primarily aimed at avoiding renewed downward spiral, rather
than offering justification for a substantial rally
- UK M4, Mortgage and Credit: annual pace of credit growth likely to
remain unsustainable
- US Goods Trade Balance: seen widening after better than expected July,
hefty seasonal adjustment heightens risk of an outlier
- Mexico rates: Banxico facing a tricky dilemma
..........................................................................
********************
** EVENTS PREVIEW **
********************
So you thought there could not be more central bank speakers than we have already had this week? Well you would be wrong, today is peak (mis-)"guidance" day, and to accompany that run of Fed and ECB speakers, there are rate decisions in Taiwan (-12.5 bps?), Czech Republic (no changes) and most interestingly Mexico (+25/50 bps?). Statistically Spanish and German CPI follow the Japanese Retail Sales, the UK has its monetary / lending aggregates, the European Commission publishes its Confidence surveys, while the US sees the Aug Advance Goods Trade Balance, final Q2 GDP, Wholesale Inventories and Pending Home Sales. The latter busy run may need to spring some surprises as markets hunker down for quarter end, and ponder what lies ahead in Q4, with oil price gyrations and Europe's banking woes continuing to cast a long shadow. Italy is the only major country to sell debt today with 5 & 10-yr BTPs and 7-yr CCTs. There is of course the OPEC 'production deal' to digest, which it has to be said looks to be of the 'we must agree something, however vague and lacking in specific detail', with the fear that downward seasonal pressures would send oil prices into a renewed downward spiral the clear motivating factor. Outside of a vague 32.5-33.0 Mln output cap (a cut of 500K to 1 Mln bbls from current levels), there is little more detail, with the specifics to be fleshed out between now and the November 30 meeting. Only then would other producers (primarily Russia) become involved, and it has to be added that while output data will be closely monitored, it should be borne in mind that production will be falling in coming months due to seasonal factors, with Saudi output needing to be dropping close to 10.0 Mln to suggest that a real effort is being made to dampen output. Throw in the likelihood that output in countries such as Libya, Iraq and Nigeria, which remains well below potential due to outages and conflicts, will likely rise, and that US shale producers will be quick to jump on any substantive rise in oil prices, and the conclusion for the time being has to be that this agreement is more a case of putting a floor under oil prices, rather than the prompt for a major rally. As has been well documented, the key issue remains demand, which has proven to be substantially weaker than expected, and this at the end of the day will be the ultimate arbiter of when the oil market gets into balance. Perhaps the more important issue is not oil in any case, after both parts of the US Congress voted to shoot down President Obama's veto of a bill allowing relatives of the victims of the Sept. 11 attacks to sue Saudi Arabia, which takes US/Saudi relations to a new low, and which the Saudi government has said would likely prompt a major divestment from US assets among other things. In terms of the UK credit and monetary aggregates, the key aspect will be the y/y pace of credit growth, which at 10.1% y/y in July continues to be far too rapid, when wage growth remains subdued at 2.3% y/y.
** Germany / Spain - September CPI **
- As recent PPI data from many Eurozone countries have highlighted, the base effects from last year's sharp energy prices falls are starting to exercise considerable upward pressure, which will persist well into the new year. These are also expected to continue to exercise some still quite gentle, but very clear upward pressures on CPI with Spanish CPI forecast to rise to 0.2% y/y from -0.3%, German CPI 0.5% y/y from 0.3% and tomorrow's Eurozone CPI to 0.4% y/y from 0.2%. While anything lower than expected may lead to some market chatter about more measures from the ECB, it ought to be crystal clear that ECB speakers are actively leaning against any such speculation, and placing a lot of emphasis on governments needing to 'step up to the plate', as well as the risks of a protracted period of low rates, and unconventional policy measures. German Unemployment is again expected to edge down modestly (-5K) , but for the Unemployment Rate to remain at 6.1% for a fifth consecutive month.
** U.S.A. - Final Q2 GDP, Goods Trade Balance & Pending Home Sales **
- While US Q2 GDP is rather historical, it is nevertheless expected to be shaded higher to 1.3% from 1.1%, paced by strength in Personal Consumption at 4.4% SAAR, while the Atlanta Fed's Q3 GDPNow estimate shaded lower yesterday to 2.8% SAAR, following a downward revision to real equipment spending to just 0.8% after yesterday's Durables, though the headwinds from Housing Investment estimated at -8.1% (thanks to the recent Housing Starts) are anticipated to be the main drag currently. Trade on the other hand is expected to make a marginally positive contribution, though today's Advance Goods Trade Balance could change that. A relatively sharp widening to $-62.3 Bln from July's $-58.8 Bln is expected, though there is a high chance of a surprise given the very hefty seasonal adjustment for August makes forecasting particularly tough, and the pattern of the past 2 years has been very erratic, with an 8.6% m/m widening seen in August 2015 deficit, while August 2015 saw a 0.9% m/m narrowing. As for Pending Home Sales, these are seen unchanged on the month, following a 1.3% m/m increase in July, though solid readings on the NAHB's Housing Market Index would tend to suggest some upside risk, notwithstanding the setback in Existing Home Sales, which look to be more a function of low levels of inventories, and which in turn are spurring stronger demand for New Homes. Weekly Jobless Claims continue to underline the tightness of the labour market as evidenced by a 252K reading last week, which left the 4-week average at 258.5K, comfortably close to 43-year lows, and the latter in turn predicates a consensus forecast of 260K.
** Mexico - Banco de Mexico rate decision **
- As has been more than amply demonstrated, the Mexican Peso (see chart) has been the markets' pressure valve for fears about Trump winning the presidency, the so-called 'Trumpometer', and thus prompting a sharp reversal of a steep recent decline following Monday's presidential debate. This leaves the local central bank with a large dilemma, and indeed means that markets are divided between a 25 bps and a 50 bps rate hike from the current 4.25%. The central bank needs to balance the cumulative upward pressures from the MXN fall this year, against an economy where growth has proven to be rather weaker than expected, and the need to have ammunition in its policy locker, if Mr Trump wins and the likelihood that this would precipitate a further sharp fall in the MXN. Equally, if Mrs Clinton were to win, they would not want to have to substantially reverse the policy tightening (which cumulatively already amounts to 125 bps), given the likelihood that the MXN could easily rally to 16.00 vs the USD, which is closer to fair value. Per se a 25 bps rate hike seems a possible compromise option.
from Marc Ostwald
