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RANsquawk Week In focus, week commencing 9th September 2019

  • MON: Japanese GDP, Germany Trade Balance, UK Industrial & Manufacturing Production, Construction Output, Trade Balance, EZ Sentix Investor Confidence,
  • TUE: Chinese & Norwegian Inflation, Norges Bank Regional Survey, UK Labour Market Report, US NFIB Small Business Optimism, Canadian Housing Starts, Building Permits, US JOLTS
  • WED: Swedish CPI, US PPI, Wholesale Trade Sales, Polish Rate Announcement, OPEC Monthly Report
  • THU: Swedish Unemployment Rate, German CPI (F), JMMC Meeting, EZ Industrial Production, ECB and CBRT Rate Decision, Indian CPI, US CPI,
  • FRI: EZ Trade Balance, Wages, Labour Costs, US Retail Sales, Business Inventories, Uni. Of Michigan, Eurogroup Meeting,

ECB PREVIEW (THU)

September’s ECB meeting marks the end of the tenure for President Mario Draghi, before ex-IMF chief Lagarde takes the helm. At the July meeting, the central bank paved the way for an eventual rate cut by tweaking its forward guidance on rates to include an “or lower” option. Furthermore, the Governing Council tasked relevant committees to examine options, including ways to reinforce forward guidance on policy rates, the design of a tiered rate system, and options for the size and composition of potential new net asset purchases. Expectations for an easing package were later heightened by comments from Finland’s Rehn, who suggested that the bank needs to deliver a “significant and meaningful” easing package this month, adding that it was better to overshoot rather than undershoot on stimulus. Thereafter, “sources” provided more in the way of specifics, stating that policymakers are leaning towards a rate cut and tiering, as well as reinforced guidance. In terms of asset purchases, the sources report also noted that many support QE, but opposition from some northern states complicated discussions, and additionally policymakers believe they have room for around one year of QE, using the flexibility under existing rules, and there was no immediate need to tweak current issuer limits. As such, markets now fully price a 10bps reduction in the deposit rate to -0.5%, with just under a 50% chance of a deeper cut of 20bps; of the 70 economists polled by Reuters, around a quarter look for a 20bps reduction. Elsewhere, the survey noted that almost 90% of respondents expected a resumption of bond purchases at the October meeting, with a touted amount of EUR 30bln per month. In order to mitigate the impact of deeper negative rates on the Eurozone banking sector, around 90% of those surveyed look for some form of rates being tiered. The implementation mechanics are unclear, but HSBC floats the idea of a Swiss-style system where banks no longer have to pay the negative deposit rate on some of their excess reserves (determined by a multiple of their required reserves). Despite, the markedly dovish expectations ahead of next week, it is worth noting some of the hawkish interventions seen in recent weeks, with Klaas Knot from the Netherlands suggesting that there is no need to resume a QE program at present, adding that market expectations for ECB's September meeting are overdone. Furthermore, Germany’s Lautenschlaeger added additional weight to the hawkish argument by stating that it is much too early for a huge package; a viewpoint that was later echoed by newly appointed Müller from Austria. As such, any decision that is made next week, might not necessarily be unanimous, however, ABN AMRO suggests that five-to-six hawks on the Governing Council should not be enough to derail a September easing package. 

US AUGUST CPI (THU):

The Street looks for US CPI to rise by a moderate +0.1% M/M in August (prev. +0.3%), though the Y/Y rate is seen unchanged at 1.8%. Core M/M is seen +0.2%, which should nudge up the core Y/Y by 0.1ppts to 2.3%. Headline inflation growth is likely to be weighed on by the 3.0% fall in gasoline prices. If the core rates of inflation come in, as expected, it would lift the three-month change to a 3.5% annualised rate, UBS says, well above the 1.5% pace in the last four months. Core inflation has firmed above trend recently, and will likely do so again in August due to a rise in apparel prices. UBS says it is the change in the BLS' sampling earlier this year will lead to a large jump in apparel prices for August, as the new items appear to have a different seasonal pattern than the current seasonal factors. But the bank thinks that much of the jump in apparel prices in August should reverse in September. There will also be attention on the impact of US/China trade tariffs on consumer prices - analysts will be watching the household furnishings category, where a large number of consumer items are subject to the initial three tranches tariffs -- the tariffs which kicked in on 1st September are likely to impact apparel, computer equipment and mobile phones in the months ahead, analysts say. Looking ahead, UBS thinks that headline inflation will likely fall off in September.

US AUGUST RETAIL SALES (FRI):

Headline retail sales are expected to rise by +0.3% M/M in August, against July's +0.7% M/M. Core Retail Sales expected at +0.3% M/M, cooling from a prior +1.0% pace; the retail control measure is seen rising +0.4% M/M versus 1.0% in July. As with the inflation data, the fall in gasoline prices is likely to contribute to a softer pace of retail sales growth, analysts say. "Beneath the surface, the control metric (ex-autos, gasoline, and building permits) should also slow a bit from the very heady pace of the last few months," RBC says, and is in line with consensus in expecting a deceleration to +0.4% M/M. "While aggregate wage growth remains relatively robust, sentiment has taken a slight leg down on the heels of the worsening trade backdrop," the bank writes, "more generally, increasing trade tensions and subsequent financial market volatility remain risks to the consumer outlook near-term." The bank argues that households tend to be more concerned about the labour market than the daily gyrations of the S&P 500, but RBC says it is still obvious that trade skirmishes have had notable effects on sentiment. "The US household remains quite healthy at present with de-levered balance sheets, elevated savings, rising wages, a tight labor market, and confidence that is still near all-time highs," RBC writes, "With the industrial side of the economy having softened and near recession, it remains critical to keep this sector on track."

BREXIT:

This week saw an explosive return from the Parliamentary summer break as lawmakers battled to take control of the Brexit process. It was a tough week for recently appointed PM Johnson who was subject to a string of defeats in Parliament whereby MPs passed the bill to delay Brexit, while UK PM Johnson's bid to call an election was also defeated with 298 votes in favour vs. 56 against which fell short of the two-thirds majority or 434 votes required for a snap election. Should Boris Johnson be required to travel to Brussels to seek an extension to Article 50, the battle over the timing of an almost inevitable general election will likely intensify. Given that PM Johnson proclaimed that he would rather “die in a ditch” than delay Brexit, and as has been evident throughout the week, the PM’s preferred approach would be to seek an election immediately with the aim of voters heading to the polls on October 15th. An election on this date would come ahead of the 17th–18th European Council meeting and allow the Conservatives an opportunity to reverse the Brexit delay bill after receiving a fresh mandate from the UK electorate. This outcome would give Boris Johnson a limited time to negotiate a deal with the EU and a particularly narrow window for UK lawmakers to pass the necessary legislation, failure to do so would likely lead to a no deal exit given Johnson’s “do or die approach”. With the risks surrounding Boris’ approach, opposition forces look set to try and delay the timing of an election in order to ensure that an extension to Article 50 is secured first. Reports on Friday suggested that the Labour Party will seek to delay an election until November after party leader Corbyn was warned he would lose if it were to be held sooner, according to recent polling data. One potential spanner in the works for Corbyn could have come from the SNP, however, Corbyn was able to broker a deal with SNP leader Blackford to ensure an election didn’t take place before October 19th. As such, Monday will see another Parliamentary showdown with Johnson set to table another motion to once again try and force a general election, however, given the lack of majority for the Conservative Party (post-mass expulsions this week), Johnson faces an uphill battle to pass such a motion. With this in mind, Johnson could thereafter attempt to pass a one-line bill along the lines of “Notwithstanding the FTPA, we will hold a general election on (insert) date”, a bill that would only require a simple majority to be passed. However, the bill would be amendable and thus could once again scupper any plans Johnson has for an early election. Another route the PM could take may be to call a no confidence vote in himself; although, again, the opposition would likely not bite, with Labour Leader Corbyn already vowing not to fall into any “traps”. Trying to provide a roadmap for events in Westminster has been particularly difficult even on a particularly short-term basis and therefore much of the above could be subject to change by Monday, especially given the explosive nature of weekend press in the UK. Ultimately, the key battleground in the Brexit process appears to be control over the timing of a general election, however, even the outcome of a general election remains a mystery given the unprecedented nature of the current political environment in the UK.

CBRT PREVIEW (THU):

The CBRT is widely expected to cut its policy rate at its 12th September meeting, although the magnitude of the cut remains unclear. Turkish data has been on the rosier side, of late, with the latest CPI data continuing to normalise (15.01% in August versus 25.24% through the recent crisis), while GDP contracted less on a Y/Y basis in Q2. Turkish President Erdogan has also recently said that policy rates will continue to fall, citing the improvement in inflation. Meanwhile, the TRY has kept a sub-6.00 level against the USD, and remains at levels seen heading into the July meeting. On the geopolitical front, the Turkish economy does not seem to be facing near-term threats regarding US sanctions after US President shifted the US’ redlines on the Russian S-400 missile purchase issue to “the activation of” rather than “the delivery”. Analysts at ING forecast that the central bank will cut rates by 175bps to 18%, citing a faster than expected recovery in inflation outlook. That said, the bank says that a deeper move in its key rate would not be unprecedented, given July’s 425bps cut (against the median view for a 250bps reduction). Although markets are priced for an aggressive rate cut, desks have warned that the Central Bank may move cautiously ahead, as inflation expectations are not totally anchored; add to that the global economic uncertainty. ING argues that the CBRT should conduct a relatively measured move compared with July, “so as to maintain a reasonable real rate to cushion local and global uncertainties.”

APPLE EVENT (TUE):

Tech giant Apple (AAPL) is expected to launch new iPhones at its event on Tuesday, including iPhone 11 (5.8 inch OLED), 11 Pro (6.5 inch OLED) and 11R (6.1 inch LCD). The phones will likely see processors upgraded, while the OLED versions are expected to feature a triple lens camera (the LCD version will have a two-lens); wireless charging is also expected to feature, while 3D Touch may be replaced by haptic feedback. "While some investors may consider the set of new features to be lacklustre, we point out that our research on Apple's iPhone installed base and on-going global survey suggests that there could be 200mln really old iPhones still in use (iPhone 6, or earlier)," BofAML said, "these old phones would be candidates for upgrade and we continue to look at FY2020 as a 'Trade-in' iPhone cycle vs. FY2021, which should be a '5G driven cycle'." BofAML continues to model 185mln, 190mlnm and 220mln iPhone sales in FY 2019, 2020 and 2021 respectively. The key factor to watch, Bank of America says, is how Apple prices the new iPhones - that will determine the success. "Apple saw meaningful elasticity of demand in China when it lowered the price of iPhone XR, and we expect Apple to potentially lower pricing of some models. New US tariffs on China-made cell phones and laptops were delayed to 15th December and we expect Apple to not raise prices related to tariffs, just yet." Elsewhere, the bank will be on the lookout for a new Apple watch, which may have sleep-monitoring sensors, and also new titanium casings. There is also a possibility of a new 16-inch MacBook Pro launch, and also keep an ear out for details on new Apple services, like Apple TV+, and Apple Arcade. "Apple stock has typically traded up into such launch events, pulled back slightly after the event, and then recovered 60 days post the event," the bank observes; BofAML reiterated its 'buy' rating on Apple this week, on growing iOS installed base, and new Services and products to come.

OPEC JMMC MEETING (THU):

The Joint Ministerial Monitoring Committee (JMMC) will convene on the 12th September in Abu Dhabi, with participants on the lookout for any clues as to how far key oil players are willing to go to stabilise oil prices. The energy market has declined since the last OPEC+ meeting as it continued to be weighed on by trade concerns after US and China upped the ante with fresh tariffs on each other’s goods, including a 5% Chinese levy on US crude. Desks note that while the oil producers have little control on trade currents, sentiment could be influenced by clear forward guidance on production policy, the synchrony between OPEC and Russia and the cartel’s independence from US President Trump. Given Russia’s commitment to the OPEC+ deal, Energy Minister Novak stated that Moscow’s September crude production would decline from August levels of 11.29mln BPD, which was 104k BPD over its limit under the OPEC accord, in turn raising some speculation if the world’s second largest producer would deviate further towards its production limit in an ominous signal to future supply cuts. That said, Saudi Arabia’s stance will carry the most gravitas given that (aside from being a major oil producer) the Kingdom will bear the brunt of any adjustment, especially given the incentive for a successful Aramco IPO. It’s worth keeping in mind that production policy will not be set by the JMMC next week, the next official policy review will take place as OPEC and non-OPEC members convene in December.

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