Week in Focus – Week Commencing 10th September 2018
Week In Focus:
Sunday: Swedish election
Monday: Japan GDP (Revised), China CPI, Norway CPI, UK Monthly GDP (Jul)
Tuesday: OPEC and non-OPEC technical committee to meet, UK Jobs Data, Germany ZEW Survey
Wednesday: Eurozone Employment, OPEC Monthly Oil Market Report
Thursday: ECB Interest Rate Decision, BoE Interest Rate Decision, CBRT Interest Rate Decision, Australia
Employment Data, US CPI
Friday: Sweden CPI, CBR Rate Decision
Focus in the early stages of this week could centre around the fallout of Sunday’s general election in Sweden. Whilst the centre left and right have minimal policy differences, the disruptive force in Swedish politics has been the meteoric rise of the Sweden Democrats. The success in polling for the Sweden Democrats, allied with the Social Democrats and Moderates polling at record lows, leaves a high possibility for a messy election.
As a note of caution with regards to polling, Nordea highlights that “pollsters are divided on the anticipated support for SD, but two pollsters (Sentio and YouGov) stand out with much bigger anticipated support for SD than the rest of the field”. Nordea explains that “If Sentio and YouGov are ‘on to something’ and SD gets close to 25% of the votes, the election result could have a big impact on markets” However, the true consequences of the election may take a while to filter through to markets (Italy is a good comparison from recent history!) as ING expect the formation of a new government and budget for 2018 “easily taking up the rest of the year”.
GS believes that the market response to the election is likely to be contained, adding that any possible spikes in market prices are unlikely to be persistent.
A full preview of this event can be found via the Research Suite on the RANsquawk website
US CPI AND RETAIL SALES
Analysts expect US headline CPI to rise 0.2% MM, with the YY rate seen easing by 0.1ppts to 2.8%; the core rate is seen unchanged at 2.4% YY. Analysts suggest the data will be driven by a rebound in medical prices, while energy should boost the headline print, with gasoline prices running above their seasonal levels. UBS’s analysts say that US CPI may have peaked in July, and see the YY rate edging lower in the months ahead to 1.8% in February 2019, and also expects the core rate to move up a little through the end of this year.
Retail sales are seen rising 0.5% MM in August. RBC’s analysts note that gasoline prices were firm in the month, and that should help support the data; that said, RBC looks for 0.4% MM growth and 0.5% growth for the control measure (it is in line with the Street), and it says that would be consistent with real consumer spending growth of 3% in Q3. “The higher frequency data have looked firm and do add some modicum of upside risk,” the bank notes, specifically pointing out that chain store sales for the week ending 1 September were up 6.5% YY to a fresh cycle high, adding that such a level has been seen very infrequently historically.
July’s meeting offered very little in the way of fireworks, with next week’s meeting set to be much of the same with the central bank in auto-pilot mode as its QE programme draws to a close. As such, no changes are anticipated to the ECB’s forward guidance other than confirming their previously announced plan to unwind purchases as of next month. Given the lack of success last time around for journalists in attempting to goad President Draghi into shedding more colour on the Bank’s forward guidance on rates, focus instead could fall on the current threats facing the Eurozone economy. The Bank’s narrative on trade will naturally be source of focus for markets, albeit SocGen suggests that “the Governing Council is not expected to have a better picture of the risk of a trade war with the US,” with Morgan Stanley expecting the issue of trade protectionism to be continued to be described as a ‘prominent risk’.
The policy announcement will also be accompanied by the latest round of staff projections in which, RBC suggests that 2018 growth could be marginally lowered to 2.0% from 2.1% after Q2 output came in slightly softer than expected by the ECB (RBC sees 2019 and 2020 growth forecasts unchanged). On the inflation front, RBC looks for little in the way of material changes to forecasts, with oil and FX fluctuations being of a relatively small magnitude across the survey period. Finally, markets will also be looking out for any greater clarity on the Bank’s reinvestment policy after it concludes its net asset purchase programme, however, SocGen “do not see this as a pressing issue” and “see no material policy impact from these decisions”.
The August meeting/QIR release saw the Bank follow up the November 2017 hike with another 25bp of tightening and as such, given the current domestic political climate, could put the Bank on auto-pilot for the coming months. Subsequently consensus looks for an unchanged rate of 0.75% in a unanimous decision. Furthermore, the Bank will likely stick to their ongoing narrative that rates hikes will develop in a ‘gradual and limited’ extent; the next move on rates isn’t fully priced in to the market until 2019. On this matter, RBC “believe the MPC is unlikely to push against the benign market pricing given the potential risks from Brexit that lie ahead”. Further for Brexit, with Parliament having now returned from their summer recess, political headlines have continued to pick-up but with no clear indications as to what a final deal for the UK will look like. However, given suggestions that November might be a more probable time for a UK-EU deal to be announced, the BoE will be offered little opportunity to address the matter at the November QIR and as such, the Bank’s stance on Brexit might not evolve that much over the coming months. In terms of the UK economy, TD Ameritrade see “some risks that economic growth slows in 2018H2 below the Bank of England's August forecast” but ultimately, anticipate very little change to the MPC’s stance this time around and back the consensus that the Bank is in ‘wait and see mode’.
Ahead of Turkey's central bank meeting on Thursday, the CBT has already said it will take measures to adjust its monetary policy stance, and improve price stability, after August CPI data surged to a record high for the month, with the core rate jumping to 17.2%, and PPI rising to 32%. Analysts at Barclays are expecting the central bank to lift its benchmark rate by 300bps to 20.75% (consensus looks for 325bps – the likes of JPMorgan look for 500bps) (and maintain the symmetry of its rate corridor around the 1-week repo rate). Barclays says there are upside risks to its forecast, which would see the CBT overdelivering. "Should the CBT delay the return to a simplified monetary policy framework (ie, continue funding at the o/n lending rate) and hike all policy rates by 150bp instead, markets are likely to be disappointed; still, we think the likelihood of this scenario remains low," Barclays adds.
Russia's central bank is expected to keep rates unchanged at 7.25% at the conclusion of its meeting on Friday. The meeting comes amid political pressure that is seemingly being placed on the central bank; Russian PM Medvedev this week demanded that the central bank cut rates amid the turmoil in EM, a call that analysts at Commerzbank describe as "dangerous sliding tackle," and drew comparisons with Turkey (whose President Erdogan notably called for lower rates, which may have contributed to the EMFX crisis, but definitely contributed to the TRY crisis). The central bank governor Nabiullina leaned against Medvedev's comments, however, stating that there were more factors for keeping rates unchanged rather than cutting; she also noted that there were key factors for raising the key rate, although she did not want to get further drawn into comments ahead of the rate meeting. "The fact that the governor of Bank Rossii Elvira Nabiullina immediately spoke up and confirmed her hawkish approach in a speech prevented anything worse form happening," Commerzbank writes. "In a worst case scenario this could mean that the rouble gets into a TRY-like downward spiral. In the best case scenario the central bank now has to take strong counter-measures to prevent this from happening - with higher interest rates that put more pressure on the Russian economy than would have been necessary without Medvedev’s comments."