Advance Look At This Week's Key Event: Is Europe's Latest Velvet Revolution Credible?
From Goldman Sachs
Last week was another milestone in terms of escalating sovereign tensions in the Eurozone. For several days it was not clear who would lead the next Greek government. Similar uncertainty regarding the future of the Italian government triggered a severe BTP sell-off, which then led to a clearinghouse margin call for Italian debt.
But as so often in Europe, looking down the abyss led to a last-minute policy response. Greek and Italy will now both be led by national unity governments under Lucas Papademos and Mario Monti, respectively. Both governments also seem to enjoy broad support to push through urgent reforms – at least for now.
There are still many questions, including the increasing debate about the constitutional set-up of the Eurozone and a possible Treaty change in the future. Moreover, it is possible that even these new governments in Greece and Italy will struggle to push their reform agendas through. But it will take some time before we know. And until then, it is quite likely that sovereign risk premia decline – at least temporarily. Following this logic, we initiated a long EUR/$ recommendation on Friday at a level of 1.3710 for a quick bounce to our initial target of 1.40.
We also added a long RUB/HUF recommendation last week. This was partly driven by the continued upward drift in oil prices, which should boost the Ruble. At the same time, balance sheet pressures for many Eurozone banks potentially creates external funding challenges for countries in the European periphery, like Hungary, with substantial external debt roll-over needs.
Looking ahead in the upcoming week, markets will likely scrutinise the first steps of the new Greek and Italian governments. The appointment of key cabinet positions will be of relevance to establish credibility. However, it may be a bit too early for the first concrete policy steps.
Beyond politics, three themes dominate the data schedule. First, there is a raft of Q3 GDP releases in Europe (Germany, France, Eurozone, Hungary, Poland, Czech Republic). The numbers will likely still be mixed with more uniform weakness expected in the Q4 numbers. Second, we will see the beginning of the monthly survey season with the US Empire and Philly Fed releases. Finally, there is a raft of Fed speakers scheduled to talk about the economy and Fed policy.
Less thematic but also relevant are retail sales numbers in the UK and the US. Of course, we will have a look at the monthly TIC numbers to gauge the capital flow pressures for the Dollar.
Finally, as our weekly idea, we would be short $/MXN, as we think broader Dollar weakness may be more pronounced in a week where a raft of Fed speeches will likely emphasise the dovish outlook for US monetary policy. Declining fiscal risk premia in the Eurozone, combined with high cross asset correlations, could push the Dollar lower as well. At the same time, stabilising oil prices will probably boost the Mexican terms of trade. Last week’s short INR/KRW idea returned about +0.8% partly helped by the weak Indian industrial production numbers, which we had highlighted as important.
Monday 14 November
Japan GDP (Q3): Output is likely to show a notable rebound on the back of the post-earthquake rebuilding effort. Consensus expects +1.5% qoq after -0.5% qoq in Q2.
Eurozone Industrial Production (Sep): Following weak national IP numbers in a number of countries, Eurozone IP will likely drop by about -2.3% mom, according to consensus.
Polish GDP (Q3): Consensus expects a contraction of -0.7% qoq after a flat reading of 0.0% in the second quarter.
Also interesting: Indian wholesale prices (Oct); New Zealand retail sales (Q3).
Tuesday 15 November
UK CPI (Oct): With the BOE still in QE easing mode and inflation running at 5% and above, it is always interesting to see if there is any sign of abating price pressures. Consensus expects a reading of +5.1% yoy after +5.2% yoy in September.
German, French, Eurozone GDP (Q3): There will be a raft of Eurozone GDP data covering the third quarter, though higher frequency data suggest that most of the recent slowing in activity data will only be reflected in the next GDP release. For Q3, consensus expects the following qoq non-annualised numbers: France +0.4%, Germany +0.5%, Euro Area +0.2%.
Fed Speeches: With the rising focus on the Fed policy options going forward, Chicago Fed President Evans’ speech on the Dual Mandate may be interesting. Evans is also scheduled to appear on CNBC, while Fed’s Bullard, Williams, and Fisher will all make public appearances.
US Retail Sales (Oct): After a strong reading last month, consensus expects some slowing to +0.3% mom after +1.1% in September.
Also interesting: US Empire survey, Polish GDP.
Wednesday 16 November
Eurozone CPI (Oct): Despite the elevated readings in CPI in recent months and consensus expectations that the October number will again come in at +3.0% yoy, the focus is probably slipping away from inflation fears. With more fiscal contraction and slower growth in many Eurozone countries, inflationary pressures will likely abate over the medium term. Only a substantially higher reading than expected would change market expectations of further ECB rate cuts to 1.00%.
UK Labour Market Data (Oct): Consensus expects a slight increase in the unemployment rate to 5.2% from 5.1%.
US CPI (Oct): Market expectations are for a stabilisation in core and headline inflation pressures. The expected small uptick in the year core reading to 2.1% from 2.0% yoy will likely be offset by a decline in the headline component to 3.7% from 3.9%.
US TIC Flows (Sep): More than the headline number, the composition of TIC flows will be important. With risk aversion still very high during September, we would expect more inflows into USTs, but at the same time small net outflows in all other categories.
US Industrial Production (Oct): Consensus expects a small improvement to +0.4% from +0.2% mom in September, and a small increase in capacity utilisation.
Also interesting: BOE Inflation Report, Fed speeches from Lacker, Rosengreen.
Thursday 17 November
Indian Wholesale Prices (weekly): With clear signs of slowing economic activity in India but still-high inflation rates, it will be interesting to see how higher frequency indicators of India inflation evolve.
UK Retail Sales (Oct): Consensus expects a notable slowing in UK retail sales growth to -0.3% mom (ex auto fuel) from +0.7% in September.
US Philly Fed Survey (Nov): With the Empire earlier this week and the Philly fed index, the monthly survey season starts again. Consensus expectations are for a stable reading of +9 from 8.7 in October.
US Jobless Claims (weekly): After better readings in recent weeks, there will be some focus on whether US activity is starting to accelerate further.
Hungary GDP (Q3): Consensus expects notable slowing to +0.7% from 1.5% qoq in Q2. Industrial production will be released as well.
Also interesting: Czech GDP (Q3), US housing starts, Fed Speech by Dudley, RBA Minutes.
Friday 18 November
Canada Consumer Prices (Oct): Consensus expects consumer prices to drop notably to +2.7% yoy from 3.2% in September, while mom core readings are also expected to decline, to +0.1% from +0.5%.
More Fed Speeches: After a week full of public appearances by Fed officials, Friday will see the second appearance this week by Dudley (on the economy), as well as Fisher and Williams.
Also interesting: Philippines Balance of Payments, Chile GDP (Q3).
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