Jam-Packed Week Ahead

The week ahead may be among the busiest of the year.  There are important events every day that will shed light on three drivers of the ever-evolving investment climate, slower growth, softer prices, and trade tensions. 

The IMF revised down its forecast for world growth.  Late last week, S&P increased the probability of a US recession in the next 12-months to 15-20% from 10-15%.   Sweden and Switzerland joined Germany, Italy, and Japan to report contracting Q3 GDP. The recent official PMI from China suggests either new efforts to support the economy have not been implemented or are not having an impact (yet). At the end of last week, India reported its growth slowed more than expected in Q3 to 7.1% year-over-year from 8.2% in Q2. 

The US October PCE deflator eased to 2.0%, but the core eased to 1.8%.  More troubling has been the persistent easing of the three-month annualized rate, which can be used to capture the near-term trend.  It fell to 1.2% in October from 1.5% in September.  It was at 2.2% in May.  Germany, France, and Spain reported softer than expected headline November CPI figures, while the core rate unexpectedly fell on the EMU level to 1.0% where it was in January. 

Brent is off 31% over the past two months, and WTI has fallen almost 33%.  Some places in the US were reporting sub-$2 a gallon for gasoline.  This will weigh on headline inflation.  The drop in dramatic fall in oil prices will transfer wealth from oil producers to oil consumers.  In the US, this is good for household consumption but may weigh on capital investment, in which the energy sector has played an outsized role. 

Monday, December 3

• Reaction to the weekend G20 meeting and bilateral meetings

1. Trump and Xi: The US agreed not to escalate change the current tariff schedule for 90 days in exchange for China willingness to boost its imports from the US (without specific targets) immediately, regard fentanyl as a controlled substance (which will allow the possibility for greater control).  Xi also indicated that a new attempt by Qualcomm to buy NXP would find a more receptive Chinese response.  Trade talks will be intensified and if there is no agreement in 90-days the US threat to raise the current 10% tariff on $200 bln of Chinese goods to 25% will be back on the table.  Recall that this was slated for January 1, so the 90-day period may really only be a 60-day delay.  Still, the 90-day negotiating period seems short given the holidays (Xmas, New Years and the Lunar New Year in early February) and the extent of the negotiations needed.     
2. Putin and MBS: Pact reaffirmed, Volumes not discussed, but after being cagey, Russia seemed more willing to consider an output cut.
3. NATFA 2.0:  Signed by the heads of state, but may be challenged in the US Congress next year. The steel and aluminum tariffs are still in place, it will raise the antagonism if not addressed shortly. 

• South Korea final Q3 GDP and November CPI:  The South Korean central bank raised its key rate 25 bp to 1.75% before the weekend.  Korea is expected to confirm the preliminary estimate of 2.0% for Q3 GDP.  It is the weakest in five years.  Headline inflation has risen from 1% in January to2.0% in October, where it is expected to have remained in November.  The rise is largely food and energy.  The core rate finished last year at 1.5% and has fallen to 1.1% in October and may have slipped further in November.  
• Turkey CPI: Inflation may have peaked in October over 25%.  In November, it probably fell closer to 23%.  The central bank will likely be in a hurry to cut rates, but the December 13 meeting may be a too soon.  
• US auto sales: Although auto and light truck sales are likely to decline sequentially, they are expected to remain above the year's average (17.09 mln seasonally adjusted annual rate).  Last year's monthly average was 17.16 mln.  
• Three Fed governors (Clarida, Quarles, and Brainard) and two regional presidents speak (Williams and Kaplan):  Investors will be interested in any insight into estimates of the neutral rate and if there has been a change since September when the median forecast anticipated three hikes in 2019.  

Tuesday, December 4

• Reserve Bank of Australia: There is little doubt that the RBA is on hold.  In fact, it is widely expected to stand pat all of next year.  The Q3 current account will help economists make last minute adjustments to forecasts for Q3 GDP due the following day.  
• UK Parliament begins debate on Withdrawal Bill: There will be five days of debate before a vote in the evening on December 11.  

Wednesday, December 5

• Reserve Bank of India: Monetary policy is on hold with the repo rate at 6.5%.  It is near twice the October CPI of 3.3%, meaning that real rates are high.  The recovery of the rupee appears linked to the drop in oil prices.     
• UK Parliament continues to debate Withdrawal Bill
• Bank of Canada: After lifting the overnight rate to 1.75% in October, the Bank of Canada was widely expected to be on hold at its next meet.  The central bank will likely be disappointed and surprised by the pre-weekend news that the real final demand contracted in Q3.  The implied yield on the March 2019 BA futures fell from 2.55% at the end of October to 2.39% at the end of November.  The chances of a January hike has fallen from almost 85% to just below 60%.  It still, arguably, rich.  
• ADP US private sector jobs estimate: This private sector data is fairly good at estimating the private sector payroll growth estimated by the government.  The ADP estimate averaged 185.4k last year while the government's estimate after revisions is 180k.  This year ADP has averaged 204.4k, while the official estimate is 206k.  
• Powell scheduled to testify before Joint Economic Committee of Congress before President Trump declared a day of mourning for the passing of former President George H. Bush.  Despite the seemingly dramatic response to Powell's comments last week, we do not think he intended to reflect a change in his thinking or policy.  The central bank's flexibility, data dependency, and even a pause next year could be deduced from two known facts--that there will be a press conference after every meeting in 2019 and the median official forecast was for three hikes in 2019 after four (likely) in 2018. 
• EIA estimate of crude oil inventories: Oil stocks rose last week by nearly six times more than expected last week and has risen for the past ten weeks. US production is at record highs and is expected to increase even further next year as new projects come online. The price of shale from the Permian Basin is seen near $42 a barrel, and $40 from the Bakken Field.  Technological improvements allow for productivity advances and lower break-evens.  The sector is leveraged (high fixed costs), and there is pressure to produce even if at a loss.  

Thursday, December 6

• China's Reserves (if not, then on the following day): Reserves have fallen for three-months through October and likely fell in November as the PBOC sought to prevent further market pressure that was weakening the yuan.  Typically, but not always, when China's reserves fall, their dollar holdings are drawn down. China's reserves finished last year near $3.14 trillion and were about $3.05 trillion in October.  
• OPEC+ meet in Vienna: A short-term agreement is likely, and prices of seemed to be stabilizing at the end of November.  Output cuts of more than 1.0-1.5 mln barrels may be necessary to meet market expectations.  The agreement will have to be reviewed next year when the US exemptions for Iranian purchases expire.  
• German factory orders: After unexpectedly contracting in Q3, the investors and policymakers are particularly sensitive to the high-frequency German data.  The flash manufacturing PMI for November disappointed (falling to 51.6 from 52.2) and October factory orders are expected to have slipped after posting back-to-back gains in August and September.  Factory orders have fallen in six of the first nine months of the year. 
• UK Parliament continues to debate Withdrawal Bill
• US October trade balance: The advance report of the merchandise balance showed the second consecutive record shortfall.  Import growth was strong, and with inventories rising, it supports the narrative that links the increased shipments to trying to beat the tariffs, which would imply payback of some sort next year.  The best thing for US exports is stronger world demand. 

Friday, December 7

• German industrial production: Average monthly growth industrial output this year has been flat compared to 0.5% in 2017.  
• CDU conference (two-day) will replace Merkel as head of the party: The immediate market implications may not be great, but the changes that this signifies will have a lasting impact for Germany and Europe.  
• US employment data: Barring a significant surprise, the focus will be on average hourly earnings that reached a cyclical high of 3.1% in October.  The base effect is tough as in November 2017, there was a 0.3% increase.  Some economists seem to be pinning their hopes on Amazon's pay increase to have lifted the November increase to 0.4%.  
• Canada employment data: Through October, full-time employment growth has averaged about a third (~11.4k)of what it was in the same period last year.  Average hourly pay for permanent workers had fallen since May when it reached 3.93%.  In October, it stood at 1.87% and is likely to have slipped further in November.    
• Mexico CPI:  Consumer inflation peaked at the end of last year near 6.8% and has been trending lower most of this year.  It is expected to have fallen from 4.9% in October to 4.6% in November.  However, falling inflation is unlikely to steady the central bank's hand.  It is likely to ratchet up rates (to 8.25%) for the fourth time this year.  Its concern is the uncertainty surrounding the new government that was sworn on December 1. 
• Rating agencies reviews

1. Germany, DBRS AAA stable
2. UK, Moody's  Aa2 (AA) stable
3. ESM/EFSF, Fitch AAA stable
4. Iceland, Fitch, and S&P A stable, but a chance of upgrade outlook 

• Risk of partial closure of US government: Congress needs to pass budget authorizations for several government departments, and unless there is $15 bln authorization for the wall for the Mexican border, President Trump has threatened to force a shutdown of those departments.  

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