From Goldman Sachs
They say a week is a long time in politics. Last week, quite frankly, a day seemed a long time with the rapidly unfolding events surrounding the European sovereign situation and the G20 summit generating a lot of market volatility. Greek PM Papandreou survived the vote of confidence on Friday with a majority of three and is now trying to form a government of National Unity. With opposition leader Samaras still calling for elections, this political impasse may well continue for the time being. Greece is widely considered to ‘run out of money’ in mid-December; while this may continue to unnerve the market over the possibility of a hard default, a month is probably an eon in politics and a lot could change very quickly.
The same could be said for developments in Italy. PM Berlusconi remains under pressure and media reports suggest he has lost his parliamentary majority after a party rebellion on Friday. European and international policy makers continue to pressure Italy to undertake the necessary reforms to reduce the country’s debt level. The IMF will step in to monitor Italy’s efforts to implement austerity and growth-boosting measures, but the fund’s offer of a loan was rejected by the prime minister. Relatedly, over the weekend, ECB’s Mersch was quoted as saying that the ECB had debated whether to continue buying Italian debt if a step-up in the reform effort was not forthcoming.
Aside from the politics, European data has been very disappointing. The business surveys have weakened further, as has the trend in German manufacturing orders, driven by a sharp weakness in new orders from outside Euroland. One bright spot comes from the US as the hard data remains more resilient than the soft data suggested it should be. In the latest US Economics Analyst, we revised up our Q4 GDP forecast to 2%qoq ann from 1%qoq. Admittedly, we expect the US economy to slow meaningfully in Q1 of next year, to 0.5%qoq ann, but against expectations of two months ago, which assume the US would be in a recession by this point; this outturn of the data so far is clearly more positive.
With all these conflicting political and macro news, it is no surprise that FX markets remained very range-bound. This is well-illustrated in the performance of last week’s short $/CLP idea. With a strong risk-off tone at the beginning of week, the Peso opened 2.2% weaker from the close of the previous week. But with stabilising risk sentiment, it still managed to rally by about 1% from the week’s open into Friday's close. These moves have been mirrored across asset classes, with correlations particularly strong in European markets (see chart). Risky assets lost sharply at the beginning of the week, reversing the moves from the week before, and stabilising subsequently while the world watched the G20 and Greece.
Source: GS Global ECS Research.
This coming week brings IP for some key Eurozone countries, which is expected to show more softness. The weakness of activity and the deteriorating outlook caused the ECB to cut rates by 25bps last Thursday, and we expect a move of a similar magnitude in December.
With all the negativity surrounding the European situation, it is easy to overlook more optimistic information. This week is set to bring confirmation that China’s inflation is coming down meaningfully. We expect headline CPI for October to soften to 5.6% from 6.1% (consensus expects 5.4%). This decline has been heralded by the decline in food prices since late September. As it became clearer that inflation was set to fall, the Chinese administration introduced targeted easing measures to relieve some of the tensions in the Chinese economy particularly in the SME and railway sectors. In addition, the media reports that credit is likely to be eased in the final two months of the year. These developments are in line with our expectations (see Mike Buchanan’s note) and should help to boost growth back to trend in coming quarters. These easing measures should also help to dispel the hard landing fears prevalent in some parts of the investing community.
Back in early Autumn, when it became clear that China was emerging from its soft patch and evidence emerged that the US economy was not slowing as sharply has expected, it provided a boost for Asian currencies. The same is likely to be true again this time around – we continue to recommend being long SGD and MYR vs USD and EUR. The underperformer was India, given the current account position. This week brings Indian IP, where we expect meagre growth of 3.5%yoy. This is likely to keep the INR the region’s underperformer. Positioning short the INR against the KRW – a relatively risk-neutral idea that we have explored in the past – may therefore be attractive on a one-week horizon. Korean rates are expected to remain on hold this week and given Korea's larger exposure to China, more evidence of slowing China's inflation may give the KRW an additional boost.
Finally, a word about the Yen. Last week saw the third unilateral intervention by the Japanese administration to prevent ongoing Yen strength. As with previous interventions, it came after a notable shift lower in $/JPY. In Friday’s daily, we took a look at the drivers of Yen appreciation and continue to believe that further intervention is likely on any renewed and speedy Yen appreciation.
Monday 7 November
- Taiwan CPI (Oct): Consensus is expecting a slight softening in HCPI to 1.32% from 1.35%.
- Taiwan Exports (Oct): Consensus is expecting a sharp decline in year-on-year growth to 5.4% from 9.9%. We expect a weaker print of 4.8%yoy.
- Indonesia GDP (Q3 2012): Consensus expects a slight rise in GDP to 6.6%yoy from 6.5% previously. We expect a print of 6.3%yoy.
- Swiss CPI (Oct): Headline CPI is expected to soften to 0.2% from 0.5% previously.
- German IP (Sep): Consensus expects a drop of -0.9%mom after -1.0%mom the previous month.
- US Senior Loan Officers Survey: This is an important gauge of whether the turmoil in financial markets is likely to affect credit availability to US households and small businesses going forward.
- Also of interest: Norwegian IP (Sep), Eurozone retail sales (Sep).
Tuesday 8 November
- Germany Exports (Sep): Exports are expected to fall -0.8%mom after 3.5% previously.
- UK (IP): Consensus expects IP to rise by 0.1%mom after 0.2% previously.
- Also of interest: Australian NAB Business Confidence (Oct), Australia trade balance (Sep)
Wednesday 9 November
- China IP (Oct): Consensus expects IP to soften to 13.4%yoy. We expect a print of 13.5%yoy from 13.8%yoy.
- China CPI (Oct): Consensus expects CPI to soften to 5.4%yoy from 6.1%yoy. We expect a print of 5.6%.
- China FAI (Oct): Consensus expects FAI to be basically unchanged at 24.7% from 24.9%yoy previously. We expect a print of
- China Retail sales (Oct): Consensus expects retail sales to be basically unchanged at 17.6% from 17.7%yoy previously. We expect a print of 17.5%yoy.
- Also of interest: Australia Westpac Consumer confidence (Nov), Japan current account (Sep), Riksbank minutes, Sweden IP.
Thursday 10 November
- Australia Labour Market Data (Oct): Consensus expects a rise in employment of 10k and a rise in the unemployment rate to 5.3% from 5.2% previously. We expect a decline of 5k and for unemployment to rise to 5.4%.
- China Trade Balance (Oct): Consensus expects exports to rise by 16.2%yoy after 17.1% previously. Imports are expected to rise by
- 23%yoy from 20.9% previously. Consensus expects the overall trade balance to rise to $26.05bn from $14.51bn previously. We expect a much weaker rise in exports of 13%yoy and import growth of 19%yoy. These expectations translate into a trade surplus of $23.7bn.
- Indonesia Monetary Policy Meeting: Consensus expects rates to remain unchanged at 6.5%. We expect a 25bps cut. The tone of the accompanying statement is expected to be dovish.
- France IP (Sep): Consensus expects IP to fall by 0.7%mom after 0.5% previously
- Italian IP (Sep): Consensus expects IP to fall by 3%mom after 4.3% previously.
- UK Monetary Policy Meeting: Rates and asset purchase target are expected to remain unchanged.
- US Trade Balance (Oct): We and consensus expect the trade deficit to widen to $46bn from a deficit of $45.6bn previously.
- Also of interest: Japanese machinery orders (Sep), Malaysia IP (Sep), Sweden CPI (Oct), Norway CPI (Oct), US claims,
Friday 11 November
- Korea Monetary Policy Meeting: Rates are expected to remain unchanged at 3.25% by both us and consensus.
- Malaysia Monetary Policy Meeting: Rates are expected to remain unchanged at 3% by both us and consensus.
- China Money and Credit Growth (Oct): M2 is expected to rise by 13%yoy by consensus, same as last month. We expect a rise of only 12.6%. New loans are expected to rise by RMB500bn by consensus, up from RMB470bn the previous month.
- India IP (Sep): We expect a reading of 3.5%yoy after 4.1% previously.
- Univ. of Mich Consumer Confidence: Consensus expects the preliminary reading to inch up to 61.5 from 60.9.