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Dentalfloss · Dec 3, 2018

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Dentalfloss · Dec 3, 2018

The Day & Week Ahead - Preview:

- The final month of 2018 kicks off with the usual familiar feel to the first week of the month's data schedule, featuring Manufacturing (today) and Services (Wednesday) PMIs, US & Canadian labour data, US Auto Sales, Japanese Wages and German Orders, with Japan's Q4 capital Spending and Australian Q3 GDP the other major items. In event terms it will be a case of digesting the very conditionally positive outcome of the G-20 meeting, and awaiting the much anticipated OPEC+ meeting on Thursday, while the Brexit drums will roll all week ahead of the 11 December UK parliament 'meaningful vote' (even if one has to assume that any outcome to that vote will be anything but the 'final solution'). On the central bank front, there is an abundance of Fed, ECB and BOE speakers, including Powell and Carney testimony, and the Fed's Beige Book, along with the wholly unsurprising expectation that Australia's RBA will again keep rates unchanged (and signal no change in the foreseeable future) as well as expected no changes from Canada's BoC and India's RBI. In political terms, Poland (rather ironically perhaps) hosts the 2019 Global Climate Change conference, while Germany's CDU holds the vote to decide on who will take over as party leader from Angela Merkel. Some thoughts on Merkel's legacy can be found in the latest edition of "The Ghost In the Machine", along with many other great read articles: https://www.admisi.com/customer-services/the-ghost-in-the-machine . The govt bond auction schedule has the UK selling 2024 & 2049 conventional Gilts in what is a typical move to soak up December 7 coupon and redemption flows, while France and Spain hold multi-maturity auctions.

- Statistically, PMIs/ISMs from around the world are expected to underline that outside of the US, the Manufacturing sector continues to see headwinds from trade tension related headwinds, above all in the Eurozone and Asia (the UK reading being of interest after an expected jump in the CBI Industrial Trends survey's Orders measure), but that Services activity remains overall relatively robust. German Factory Orders are seen falling 0.5% m/m after two months of modest recovery, though Industrial Production is forecast to post another very modest 0.3% m/m rise (following September's 0.2%). In Japan, Monday's Q3 Capital Spending (exp. at 8.5% y/y vs. Q2 12.8% will dictate the direction of any revisions to the natural disaster predicated -0.3% q/q Q3 GDP contraction, while Labour Cash Earnings (wages) are seen edging up to 1.0% y/y from 0.8% in nominal terms, but little changed and contracting 0.5% y/y in real terms (Sept -0.6% y/y), with Household Spending predicted to echo Retail Sales and rebound to +1.1% y/y following the disaster related fall of 1.6% y/y. As for the US labour data, another very solid (though probably agnostic) 200K gain is expected for Non-farm (and indeed Private) Payrolls, with the Unemployment Rate unchanged at its cyclical low of 3.7%, with the all-important Average Hourly Earnings forecast at 0.3% m/m for an unchanged 3.1% y/y. However with the Fed's key policy thinker - NY Fed's Williams clearly switching attention back to the inflation outlook and how the Fed might fine tune its policy approach, with his speech on Friday - the data points and perhaps even the Fed's Beige Book may be little more than ephemera.

- Australia's RBA has been emphatic in leaning against any market speculation that a rate hike is on the cards anytime soon, and this week's Q2 GDP (expected 0.6% q/q 3.3% y/y vs. Q2 0.9% / 3.4%), while certainly not poor overall, will likely underline that domestic demand is rather fragile, with few if any signs of any form of inflationary pressures, even if some abeyance in US/China trade tensions may a modest uplift going forward. As for the Bank of Canada, no change is expected at this week's meeting, but it is expected that its updated forecast and accompanying monetary policy update will leave the door for a further hike in February firmly open. A firmer INR, sharply lower oil prices, and a generally weaker inflation trend and the prospect of further state spending cuts, not to mention the obvious bottlenecks in terms of credit availability, and the slightly disappointing Q3 GDP data are likely to offer Indian's RBI a solid rationale for keeping rates on hold when it meets this week. Elsewhere there is an abundance of Fed and ECB speakers, though Powell's testimony on the economic outlook and monetary policy will be the most closely watched item, as much for the near term rate outlook, as well as Williams' comments on Friday that the Fed needs to rethink and adapt its approach to inflation targeting.

- Politically the ostensible easing of US/China trade tensions returns the focus in the US to the Mueller probe into Russia's alleged meddling in the 2016 elections, and the Trump teams alleged link to Russia, along with the risk of another govt shutdown as Trump pushes for the next round of spending to include his pet US/Mexico border project, even if he has signalled a willingness to sign a 2 week extension to this week's deadline. In the UK, the immediate challenge for the government ahead of next week's 'meaningful vote' on the UK/EU Brexit agreement is the move to force the publication of all the legal advice on that deal, which serves to underline the extent and depth of the current UK constitutional crisis. In Germany, the CDU will vote on who is to take over as party leader from Merkel, with Kramp-Karrenbauer (aka Merkel 2.0) seen well ahead of both Merz and Spahn, and Italy's budget confrontation with the EU will obviously also remain 'front and centre'.

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MARC OSTWALD
Global Strategist & Chief Economist

ADM Investor Services International Limited