A Look At The Key European Auctions, Pardon Global Events, In The Coming Week
Goldman's one stop summary of the past week and the week that comes.
The Week in Review
The past few days have been notable for the Euro zone crisis, which so far has engulfed mainly periphery countries, spreading to Germany – the core of the core – where a weak bond auction sent 10-year Bund yields 30 bps higher on the week (Figure 1). That said, the periphery also suffered, with Italian and Spanish 10-year yields closing the week at 7.3% and 6.7%, respectively. The sell-off there gathered pace after a meeting between Chancellor Merkel, President Sarkozy, and Prime Minister Monti on Thursday, which poured cold water on Germany embracing a greater role for the ECB in fighting the crisis and put the emphasis ahead on Treaty changes to improve fiscal surveillance and – in the case of persistent violators of budget targets – measures to discipline countries. Proposals for a Treaty change are being worked on in the run-up to the Dec. 9 EU summit, and a working dinner for EU leaders has been scheduled for Dec. 8 to discuss these.
With press reports (Reuters, Dow Jones) that Greece is seeking even greater haircuts from private bond holders, reports of disagreement among Euro zone governments over private sector involvement in the ESM, and S&P cutting the credit rating for Belgium, EUR/$ ended the week at 1.3240, down almost three big figures for the week and close to its lows in early October. However, our broad trade-weighted EUR index was down only 0.2% on the week. As such, the EUR/USD drop was very much in line with the sell-off in other high-beta FX and does not point to significant EUR underperformance. The stand-out trend for the week was USD strength, ironic given that the Super Committee failed to reach agreement on deficit reduction, with our trade-weighted USD index rising 1.8%. We see this rise very much as a symptom of risk reduction rather than genuine USD strength. The September TIC data illustrate this (Table 1), showing that – outside of foreign flows into US Treasuries (Column A), a symptom of risk reduction – private (i.e., non-official) foreign flows into US assets remain very weak (Column K), leaving the private basic balance (Column L) in very negative territory. This supports our continued view for broad USD weakness ahead, which drives our medium- and longer-term FX forecasts.
Looking at individual currencies, the worst FX performers this past week were BRL against USD (down 5.6%), followed by ZAR (down 4%) and MXN (down 3.5%), indicating that the overriding theme was once again cyclical currencies selling off (Figure 2). At the same time, a key theme that we have been emphasizing – weakness in CE-3 currencies on the back of weakening Euro zone growth and mounting bank funding issues – returned to the fore, with CZK weakening 2.3% against EUR, PLN down 2.6%, and HUF – weighed on by a rating downgrade of Hungary by Moody's – weaker by 3.3% against EUR. Last Sunday's weekly idea short $/JPY, was motivated by the view that risk aversion would indeed increase this week, but JPY failed to benefit, leaving our idea 1.2% in the red.
Source: Haver Analytics
The Week Ahead
The week ahead brings key cyclical data in the form of the global PMIs and the all-important non-farm payrolls report for the US. For China's official PMI we are looking for a flat reading, while consensus is looking for slight moderation below the 50 threshold. Our forecasts for both the ISM and non-farm payrolls are below consensus, though – given the volatility of both numbers – not significantly so. The week brings central bank meetings in Hungary, Israel, the Philippines, and Thailand.
In terms of FX, with European bank funding stress continuing to become more acute – EUR/$ 3-month cross-currency basis has now moved out to 146 bps (Figure 3) – heavy bond issuance by the likes of Belgium, Italy, Spain, and France this week, and Euro zone growth weakening sharply, we think CE-3 FX will remain under pressure. We maintain our tactical recommendation to be long RUB/HUF with a target of 8.00. Our Sunday trade idea for the upcoming week is to be long EUR/CZK. Although CZK has less exposure to rollover risk than its CE-3 neighbors (see here), it has a large export exposure to Western Europe and has sold off relatively less than its peers.
Monday 28 November
- Israel Central Bank Meeting: Consensus is looking for a 25 bps hike from 2.75% to 3.00%.
- Belgium and Italy Bond Auctions
- United States New Home Sales (Oct): We forecast a flat reading, above consensus
Tuesday 29 November
- Italy Bond Auction
- Hungary Central Bank Meeting: Consensus is looking for a 25 bps hike to 6.25% from 6.00% currently.
- United States S&P/Case Shiller Home Price Index (Sep): We forecast a rise of 0.2% mom, above consensus of 0.1% mom.
- Eurogroup/Ecofin Meeting: European finance minsters will meet on Tuesday and Wednesday to debate changes to the EFSF, including plans to increase the leverage of the EFSF.
Wednesday 30 November
- India GDP (Q3): We expect GDP growth for 2QFY12 to come in at 6.8% yoy, in line with consensus, on account of a normal monsoon but poor industry and services sector growth. All coincident indicators of growth are suggesting a slowdown. For FY12, we are expecting GDP to grow at 7.0%.
- Korea Industrial Production (Oct): We expect industrial production to slow down further in October on weak global growth momentum. Consensus expects industrial production to slow to 5.1% yoy from 6.8% yoy in September.
- Thailand Central Bank Meeting: Consensus expects a 50 bps cut to 3.00%.
- United States Chicago PMI (Nov): We are looking for a reading of 56.0 versus consensus of 58.5 and an October reading of 58.4.
Thursday 1 December
- Global PMIs (Nov): We expect the official PMI for China to be flat versus consensus, which is looking for slight moderation to 49.8 from 50.4 in October. There is no strong seasonal bias this month in our experience. Underlying sequential activity growth probably was largely unchanged as a result of the offsetting forces of stronger domestic demand growth and slowing exports growth. Euro zone PMIs have been released in their preliminary form last week and showed continued weakness in manufacturing but surprising strength in services.
- Korea CPI (Nov): November CPI is expected to rebound to above 4% yoy due to a strong base effect. However, the scheduled revision of CPI baskets could reduce the level of inflation retroactively. Consensus is looking for a reading of 4.4% yoy, up from 3.9% yoy in October.
- Indonesia CPI (Nov): We expect further moderation in inflation to 4.1% yoy from 4.42% yoy in October.
- Philippines Central Bank Meeting: We expect Bangko Sentral ng Pilipinas to keep the policy rate on hold in the next policy meeting, consistent with the Bloomberg consensus forecast.
France and Spain Bond Auctions
- United States ISM (Nov): Regional surveys sent mixed signals on the state of manufacturing activity in November. We expect the ISM manufacturing index to remain broadly unchanged. Consensus is looking for a reading of 51.5, up slightly from 50.8 in October.
Friday 2 December
- United States Non-Farm Payrolls (Nov): We forecast that non-farm payroll employment rose by 100,000 in November, relative to consensus of 120,000. The slight pickup from a gain of 80,000 in October mainly reflects the continued decline in initial unemployment claims
And from Zero Hedge, here again is the breakdown of the key European bond auctions through the end of the year. Italy has two in the next two days. Good luck.