Trading with point and figure

DOW
data from 6th OCTOBER


dhbs4h.gif
 
- Eurozone CPI prints, preliminary Spanish, French, Austrian, Belgian
and US GDP dominate schedule; US ECI and EC confidence surveys also
due; Bank Rossi seen on hold; ECB speak via Coeure

- French CPI misses as Fresh Food price dive offsets energy base effects

- Spanish CPI jumps as energy base effects kick on

- German CPI: Saxony CPI tops national forecast, expected to move higher

- French GDP: misses forecasts, composition rather ugly

- US GDP: consensus modestly above Atlanta/NY Fed measures, inventories
and business investment the wildcards, Final Domestic Sales seen steady,
Net Exports to offer modest boost; ECI also due, wages key

- Charts: UK, US, German yields, US HY Bond ETF, JPM EMBI spread, French,
Spanish & German CPI

..........................................................................

********************
** EVENTS PREVIEW **
********************

While there is some ECB speak via the ever thoughtful Mr Coeure, and there are further corporate earnings reports, the day belongs to the various inflation and provisional Q3 GDP readings from Japan, Eurozone and the USA, which will render items such as the monthly EC Eurozone Confidence surveys as little more than statistical roadkill. Initially there are the as expected, and very weak inflation data from Japan to digest, which will however not force the BoJ's hand to take further policy action when it meets on Monday, with the BoJ in the run up to the meeting having been at pains to ensure that its target and timelines are all very loose. Russia's Bank Rossi is expected to keep its main policy rate on hold at 10.0% until Q1 2017, and to offer a clear signal on that at today's meeting. In its assessment on risks to the economic outlook, it will doubtless continue to cast doubt on the durability / sustainability of the oil price rally, per se implying the RUB rally, relative strength may be transitory and thus suggesting that the fall in CPI may also be, notwithstanding persistent economic weakness. How government bond yields respond to today's run of data will clearly be critical for many asset classes. It can certainly be observed that just as they were led down in the wake of the Brexit vote 'sock' by Gilts, they are now being led back up by Gilts, aided and abetted by the upward creep in Treasury yields as a December Fed rate hike is seen as increasingly likely. The problem has been that the aggressive BoE easing was seen as underpinning a further extended period of central bank largesse, compounded by doubts about whether the FOMC really will tighten policy again. Unfortunately the obvious upward pressure on inflation from higher oil prices, and the fact that neither the ECB nor the BoJ have really playing ball anymore, has upended many of those underlying assumptions. The more so given that the BoE's easing bias now looks to be on rather thin ice, in light of the inflation pressures from GBP, and more specifically by the preliminary Q3 GDP surprise yesterday. The more worrying part is that credit spreads still look rather too resilient in the face of the upward shift in government bond yields, though yesterday's price action suggested some breaches in that damn may be materializing.

** Eurozone - October national CPI readings / prov. Q3 GDP **
- Today's CPI data from France, Spain and Germany are all expected to see y/y rates pick-up modestly to levels, which would remain low, and certainly well below the ECB's target of just below 2.0%. But, equally and thanks to energy price base effects would continue to signal a clear and quite rapid uptrend, which leaves real yield in 10 year terms looking increasingly skinny, the more so given incoming data in the Eurozone has on balance been posting upside surprises. To be sure, the ECB has made it very clear that without a corresponding upward shift in underlying or core CPI trends, for which it sees no evidence currently, it will need to retain an easing bias, and the pointers on that will need to be closely watched between now and December. It should be added that after a protracted period of flat or negative food prices (evident in the below forecast French HICP, while Spanish CPI surged to a 3 year high at 0.5% y/y from Flat in September), which have to some extent offset the adverse base effects in energy, any shift higher could exacerbate that energy price effect, and this also requires close attention. France, Spain, Austria and Belgium will also provide preliminary Q3 GDP readings, which saw a disappointing rebound in France at 0.2% q/q, above all given a hefty 0.6 ppts contribution from Inventories, a 0.5 ppt deduction from Net Exports, and at best marginal growth in Gross Fixed Capital Formation and Private Consumption (both 0.1%); a downward revision to Q1 to 0.6%, with Q2 confirmed at -0.1% did not enhance the picture. Spanish GDP met forecasts and remains robust, but marginally lower at 0.7% q/q vs. Q2's 0.8%. Unfortunately without preliminary German GDP, which is due on the 15th November along with Eurozone, this will only be a partial picture, though the preliminary Austrian (edging higher to 0.4% q/q) and Belgian GDP readings due today may offer some clues in terms of upside/downside risks.

** U.S.A. - Q3 advance GDP / ECI **
- US Q3 GDP is forecast to rise 2.5% SAAR, which is a little more optimistic than the Atlanta Fed's GDPnow estimate (https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1) at 2.1%, and the NY Fed's GDP 'nowcast' estimate of 2.2% (with Q4 currently projected at just 1.4%). This week's run of US monthly data has only offered one significant data point to jar the consensus, namely the advance Goods Trade Balance, which suggests that overall Trade should add roughly 0.1 ppts to Q3 GDP, against prior expectations of a deduction of 0.1 ppts. Personal Consumption is seen slowing from a stellar but unsustainable 4.3% SAAR pace in Q2 to 2.6%, while final Domestic Sales are seen unchanged vs Q2 at 2.5%. The big wildcards, which will as ever be subject to substantial revision will be inventories, which are seen marginally positive in terms of contribution (after deducting for 5 consecutive quarters), and business investment, which is likely to be a drag yet again, above all in terms of investment in equipment and structures, but not as large as in preceding quarters. Housing Investment is also expected to contract sharply, with the Atlanta Fed model envisaging a large 8.5% drop, but with Housing Investment constituting little more than 1 pct of overall GDP, the impact at a headline level will likely be small. Both the GDP and core PCE deflators are seen slowing, to 1.4% and 1.6% from 2.3% and 1.8% respectively in Q2, which implies nominal GDP may be rather less impressive. With many of the FOMC's doves arguing that there is still some slack in the labour market, some attention also needs to paid to the Employment Cost Index, which is projected to be unchanged vs. Q1 and Q2 at 0.6% q/q, with the focus on the balance between compensation (wages) and benefit cost growth.

from Marc Ostwald
 
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