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The week ahead

By David Morrison  |  16/10/2018 14:19

Upcoming data releases, US earnings so far and the EU Summit

US and European equities stormed higher in early trade on Tuesday. The S&P500 reversed all the previous session’s losses ahead of the open. Fears of a more protracted sell-off ebbed as Goldman Sachs, Morgan Stanley and Johnson & Johnson all posted better-than-expected third quarter results. Netflix is due to report after tonight’s close.

US Retail Sales weak

Yesterday saw US Core Retail Sales (excluding autos) fall 0.1% last month on expectations of a +0.4% rise. The main culprit for the miss was a sharp decline in restaurant spending, suggesting that US consumers are curbing their discretionary spending.

Sentiment sours across Euro zone

This morning brought the release of ZEW Economic Sentiment surveys from the Euro zone and Germany. Both plunged, with the Euro zone’s ZEW falling 19.4 against an expected decline of 9.2. the German ZEW was even worse coming in at -24.7 versus -12.3 expected, both well down on the -10.6 reading last month.

Wages pick up

Meanwhile, UK unemployment came in at +4.0% as expected, and continues hold steady at a 40-year low. Wage growth picked up faster than expected. Average Earnings rose 2.7% for the comparable three-month period a year ago. This helps to make tomorrow’s UK inflation data more interesting than usual as Headline CPI is expected to slip to +2.6% year-on-year, down from +2.7% last month. If so, that will mean that UK worker compensation is beating inflation, at least where CPI components are concerned. House price inflation remains another matter, even given the fall in prices over the last couple of years. The news helped to support sterling which had already pushed higher on Tuesday morning. This followed comments from German EU minister Michael Roth who said that “we will get the Brexit deal, but we must protect EU interests.”

EU Summit

Tomorrow sees the first day of the two-day EU summit. This should be dominated by Brexit negotiations, but no doubt Italy’s controversial budget proposals will also be discussed. Earlier today, European Commission President Jean-Claude Junker told reporters that if the EU accepted Italy’s budget, this would be tantamount to inviting a widespread revolt against the EU. The new socialist Spanish government also wants to end austerity and ramp up deficit spending. Italian bonds and equities have bounced sharply today after the budget proposal was approved by the Italian parliament. But getting full approval from the European Commission will be a different matter, so caution is justified.

FOMC minutes

Tomorrow sees the release of minutes from the last Fed meeting. These will be important given last week’s spike in US Treasury yields which many believe was linked to the US growth outlook rather than any expectation that inflation is set to pick up sharply. Last month the Fed hiked rates by another 25 basis points and signalled a further 100 basis points to come between now and the end of next year. The FOMC’s Summary of Economic Projections was also considered hawkish, so it will be important to see what emphasis the Fed puts on its expectations for future inflation and growth.

More data

Thursday brings day two of the EU Summit with UK Retail Sales released in the morning. These are expected to dip to -0.3% from +0.3% previously. On Friday there is a stack of important Chinese data including third quarter GDP, Fixed Asset Investment, Industrial Production and Retail Sales. GDP is expected to slow slightly to +6.6% from +6.7% compared to the same quarter last year. Also, Bank of England Governor Mark Carney will speak from New York at 4:30 pm.

Other issues

Aside from all this, investors will be keeping an ear out for any developments on the US/China trade dispute, the fall-out over Saudi Arabia’s involvement in the disappearance/murder of Jamal Khashoggi and any further moves in US bond yields.
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