UK hourly earnings data beats expectations; focus turning to Brexit talks and the EU Leader Summit

- Brexit to be a focal point ahead of EU Leader Summit as PM Mayl trying to “solve the unsolvable” with regards to Northern Ireland

- UK Aug Wage data exceeds expectations (Weekly Earnings 3M/Y: 2.7% v 2.6%e)

- German ZEW survey registers a big miss as trade concerns and German coalition woes weight on sentiment

- US companies expected to report on Tuesday (including afterhours) include BlackRock, CSX, Domino’s Pizza, Goldman Sachs, IBM, J&J, Lam Research, Morgan Stanley, Netflix, United Continental, UnitedHealth and WW Grainger

Asia:

- China Sept CPI Y/Y: 2.5% v 2.5%e (7-month high)

- RBA Oct Minutes Uncertain consumption outlook was still important consideration. Data pointed to 'solid' GDP growth in Q3, though likely to moderate from the pace of H1.

- New Zealand Q3 CPI above expectations (Y/Y: 1.9% v 1.7%e)

Europe:

- PM May: Have made progress on Northern Ireland issue; the shape of our exit deal was now clear - comments to Conservative party. A backstop was needed in case of future setup not being ready in time; could not accept a border in the Irish Sea; backstop needed to be temporary. Would expect UK-wide customs arrangement to end by Dec 2021; hopes it doesn't have to be used at all

- Italy PM Conte: cabinet had approved the 2019 budget plan; draft to be sent to the EU Commission. Budget kept the government’s promises while keeping public accounts in order

- Italy Deputy PM Salvini was satisfied with budget and added that it did not raise taxes. Early retirement would create 400K jobs and expected €500M to be saved due to lower migrant spending. Reversing all 2011 pension reforms remained a goal

- Italy Dep PM Di Maio: Citizens income to start in Q1

- Italy Fin Min Tria: Budget reflected approved fiscal targets; we're in continued dialogue with the EU over budget plan. A 2.4% budget deficit was normal for Western countries and reiterated he won't resign after budget is approved

- ECB's De Guindos (Spain): Euro Zone should keep growing above potential. Core inflation was moderate now but likely would likely rise. Tighter labor markets andemergence of wage pressures are expected to continue to bolster underlying inflation

- EU President Tusk letter to EU Council noted that a no deal Brexit was more likely than ever before; Making every effort for an agreement. Brexit was more complicated than expected; EU must prepare for a no-deal scenario

- UK Ministers held meeting to discuss concerns on PM May Brexit plan. Reports circulated that 8 cabinet ministers were worried about the PM’s Chequers plans

 

Macro

(DE) Germany: Import price inflation eased back to 4.8% y/y in August from 5.0% y/y in July. Expectations had been for a further acceleration in the headline rate, but energy prices stabilized, though remains very high due to a 33.2% y/y jump in energy prices. Import prices for consumer goods actually declined as did import prices for agricultural products. The elevated annual rates will likely continue to feed through the product chain.

(US) US: The Treasury posted a $119.1B budget surplus in September up from the $7.9B balance last year. Receipts declined -1.5% y/y, versus -2.2% y/y last year, while spending collapsed -34.1% y/y versus 5.4% y/y a year ago. The huge drop was largely a function of the calendar with September 31 falling on a weekend (pushing October spending into September). It leaves the deficit at $779B compared to the $665.8B shortfall in FY17 - the largest fiscal deficit since 2012. The huge rise in fiscal deficit leading to a similar rise in the US trade deficit.

(UK) United Kingdom: Germany sees no indication of breakdown in Brexit talks according to press reports citing an unnamed German government official as saying that talks are on track to meet the November time frame. Official talks have been put on the backburner, but EU 27 leaders meet for a working dinner tomorrow and for her part U.K. Prime Minister May has accepted an invitation to address the EU-27 leaders at the Article 50 council, although these meetings are never the forum for the real negotiations. Local commentators have suggested though that the public breakdown of talks this week is more than likely due to posturing designed to put Prime Minister May in a better position to push through a deal against the wishes of hardline Brexiteers.

(UK) United Kingdom: August 3M average weekly earnings increased 2.7% y/y and 3.1% in ex-bonus and with-bonus respectively. The with-bonus figure was the best print since January 2009. The jobless rate remained unchanged at the 43-year low rate of 4.0%. The rise in wages will be seen by the BOE as justification for its gradual tightening bias.

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx600 +0.4% at 361, FTSE -0.2% at 7012, DAX +0.2% at 11638, CAC-40 +0.1% at 5099, IBEX-35 +0.9% at 9004, FTSE MIB +1.1% at 19500, SMI +0.3% at 8678, S&P 500 Futures +0.3%]

 

Market Focal Points/Key Themes:

Equities

European Indices trade mostly higher across the board with the Italian Ftse MIB outperforming following the submission of its draft budget, while the FTSE underperforms on Brexit uncertainty.
On the corporate front shares of Volkswagen fades the initial spike lower to trade higher after Audi receives €800M fine by the EU and subsequently cuts outlook; BATs trades lower on cutting its Rev forecast; Tomtom reverses earlier gains on losing its contract with Volvo putting pressure on ability to achieve raised guidance. Elsewhere Talanx falls on cutting its outlook, with Merlin Entertainment another notable faller after its trading update. To the upside Ferrovial is higher on M&A talk, Bellway, Meggitt and Merck are higher on trading updates.
Looking ahead notable earners include DOW Components Goldman Sachs and Johnson and Johnson, as well as Morgan Stanley and United Health among others.

- Consumer discretionary: British American Tobacco [BATS.UK] -1.5% (provides guidance before investor meeting), Merlin Entertainments PLC [MERL.UK] -6.5% (trading update), TomTom [TOM2.NL] -14% (earnings; raises guidance)

- Energy: Enagas [ENG.ES] +2% (earnings), Drax Group Plc [DRX.UK] +4% (acquisition)

- Financials: Talanx Group [TLX.DE] -5.7% (outlook cut), Bellway PLC [BWY.UK] +1% (earnings; dividend boost),

- Healthcare: AstraZeneca Plc [AZN.UK] +0.5% (FDA mutual designation for company and Merck & Co.), Merck KGaA [MRK.DE] +1% (affirms outlook ahead of capital market day)

- Industrials: Volvo AB [VOLVA.SE] -5.5% (engine issue detected), Meggitt Plc [MGGT.UK] +6% (trading update), Kion Group [KGX.DE] +9% (analyst action), NCC AB [NCCB.SE] -6.5% (preliminary earnings), Ferrovial [FER.ES] +4.5% (confirms exploring sale of Services division), Meyer Burger Technology [MBTN.CH] +3.5% (transformation program), Conzzeta AG [CON.CH] +1% (earnings)

- Utilities: Iberdola [IBE.ES] +0.5% (acquisition)

 

Speakers

- Italy Govt confirmed its 2018 GDP growth at 1.2% via its formal budget plan noting that employment trends in H1 2018 remained positive. Confirmed 2019 budget deficit to GDP ratio at 2.4% and forecasted debt-to-GDP to decline to 126.7% in 202. Asked EU for budget flexibility due to the Genoa bridge tragedy

- Italy Dep PM Di Maio: Situation in Italian bond yield spread seen as temporary

- Italy PM Conte commented in his Parliament ahead of EU Leader Summit that Italy’s 2019 budget plan was aimed at reducing the economic gap with the rest of Europe. A Brexit agreement must assured the rights of EU citizens in UK. Reiterated govt commitment to complete economic and banking union

- Senior EU official: Juncker to brief the 27 EU Leaders on the readiness for a 'no-deal' scenario at the Wed Summit dinner. Plan Brexit talks with UK PM May before EU Leader Summit dinner. Leader Summit to plan how to pursue the Brexit talks; a special Brexit Summit in November was NOT a given

- Eurogroup chief Centeno: Italy did not represent risks; region was too resilient to be disrupted by one budget

- Germany Bundesbank Beerman saw no Euro threat from Italy government

- Germany Dep Foreign Min Roth: EU had limited room for maneuver, needed to protect Ireland from a hard border. Germany was preparing for the worst but hoping for the best in Brexit negotiations. Understood that it was hard for PM May to get Parliamentary majority for Brexit deal.

- Spain Economic Min Calvino: Budget agreement with Podemos party could be the basis for a consensus

- European Research Group (ERG) said to have told Cabinet to push PM May to drop the Chequers plan (**Note: ERG is a part publicly funded, single issue (hard Brexit), research support group for the United Kingdom's Conservative Party)

- Hungary Central Bank (MNB) Gov Matolcsy: Central bank reviewed its gold strategy; to raise gold reserves 10-fold to 31.5M tons. Move intended to improve safety of reserves and mitigate risks

- Hungary Central Bank's Nagy: Gold purchase had a neutral effect on monetary policy

- BOJ Gov Kuroda: Globalization effects on prices differed depending on economy. Inflation trends mainly driven by domestic factors

- Philippines Central Bank (BSP) Board Member Medalla: There is good chance CPI could still quicken in Q4 but central bank could pause policy on signs m/m CPI was abating (**Note: Philippines Sept CPI reading of 6.7% was the highest annual pace in 9 years)

- OPEC Sec Gen Barkindo reiterated view that oil market is currently adequately supplied; sees potential for an imbalance in 2019 due to larger growth in supply

 

Currencies

- USD was slightly weaker in a quiet session but holding within recent range. Participants awaited the Treasury’s semi-annual currency report that was expected this week.

- EUR/USD steady bu holding below the 1.16 handle. German ZEW survey registered a big miss as trade concerns and German coalition woes weight on sentiment.

- The GBP/USD was higher by 0.3% as UK/EU official remained optimistic that a Brexit deal would occur. Some analysts did note that the markets seemed to be underpricing the risk of a near-term political crisis. Better Weekly Earnings data helped to push GBP/USD back above the 1.32 level. The key resistance area remains the 1.36 area (some 400 pips away).

 

Fixed Income

- Bund Futures trades at 158.41 down 16 ticks as the Italian/German 10-year bond yield gap tightens. A downside break of 157.25 sees 155.69 initially. To the upside 158.50 remains initial resistance.

- Gilt futures trades at 120.67 down 7 ticks following the move in Treasuries. Continued support at 120.50, with a continued move higher targeting 123.93 then 124.00.

- Tuesday's liquidity report showed Monday's excess liquidity fell from €1.906T to €1.905T. Use of the marginal lending facility stayed rose from €50M to €59M.

- Corporate issuance saw 4 issuers raise $10.3B in the primary market

 

Economic Data:

- (DE) Germany Aug Import Price Index M/M: 0.0% v 0.0%e; Y/Y: 4.8% v 5.2%e

- (NO) Norway Q3 House Price Index Q/Q: 0.4 v 2.1% prior

- (FI) Finland Aug GDP Indicator WDA Y/Y: 2.3 v 1.7% prior

- (CZ) Czech Sept PPI Industrial M/M: 0.3% v 0.2%e; Y/Y: 3.2% v 3.1%e

- (CZ) Czech Aug Export Price Index Y/Y: 1.6% v 1.8% prior; Import Price Index Y/Y: 2.9% v 2.5% prior

- (TR) Turkey Aug Industrial Production M/M: -1.1% v -2.4%e; Y/Y: 1.7% v 1.0%e

- (PL) Poland Sept Employment M/M: -0.1% v -0.1%e; Y/Y: 3.2% v 3.4%e

- (PL) Poland Sept Average Gross Wages M/M: -0.6% v -0.2%e; Y/Y: 6.7% v 7.1%e

- (IT) Italy Aug Industrial Sales M/M: +1.2 v -0.9% prior; Y/Y: 3.2% v 3.1% prior

- (IT) Italy Aug Industrial Orders M/M: +4.9 v -2.2% prior; Y/Y: 0.9% v 2.8% prior

- (UK) Sept Jobless Claims Change: +18.5K v +14.2K prior; Claimant Count Rate: 2.6% v 2.6% prior

- (UK) Aug Average Weekly Earnings 3M/Y: 2.7% v 2.6%e; Weekly Earnings (ex Bonus) 3M/Y: 3.1% v 2.9%e

- (UK) Aug ILO Unemployment Rate: 4.0% v 4.0%e, Employment Change 3M/3M: -5K v +15Ke

- (EU) Euro Zone Aug Trade Balance (seasonally Adj): €16.6B v €14.7Be; Trade Balance NSA (unadj): €11.7B v €17.6B prior

- (DE) Germany Oct ZEW Current Situation: 70.1 v 74.4e; Expectations Survey: -24.7 v -12.0e

- (EU) Euro Zone Oct ZEW Expectations Survey: -19.4 v -7.2 prior

- (IT) Italy Sept Final CPI (includes tobacco) M/M: -0.5% v -0.4% prelim; Y/Y: 1.4% v 1.5% prelim

- (IT) Italy Sept Final CPI EU Harmonized M/M: 1.7% v 1.8% prelim; Y/Y: 1.5% v 1.6% prelim, CPI FOI Index Ex Tobacco: 102.4 v 102.9 prior

 

Fixed Income Issuance

- (ES) Spain Debt Agency (Tesoro) sold total €2.67B vs. €2.0-3.0B indicated range in 3-month and 9-month Bills

- (ZA) South Africa sold total ZAR2.4B vs. ZAR2.4B indicated in 2032, 2035 and 2044 bonds

- (CH) Switzerland sold CHF549.9M in 3-month Bills; Yield: -0.884% v -0.868% prior

 

Looking Ahead

- 05.30 (UK) Weekly John Lewis LFL sales data

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO)

- 05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills

- 05:30 (DE) Germany to sell €4.0B in 0% Sept 2020 Schatz

- 06:00 (IL) Israel Q2 Final GDP Annualized (3rd reading): No est v 1.8% prelim

- 06:00 (IT) Italy Aug Total Trade Balance: No est v €5.7B prior; Trade Balance EU: No est v €2.7B prior

- 06:00 (FI) Finland to sell €1.0B in 0.50% Sept 2028 RFGB bond

- 06:30 (EU) ESM to sell €2.0B in 6-month bills; Avg Yield: % v -0.501% prior; Bid-to-cover: x v 2.0x prior (Sept 18th 2018)

- 06:45 (US) Daily Libor Fixing

- 07:45 (US) Weekly Goldman Economist Chain Store Sales

- 08:00 (PL) Poland Sept CPI Core M/M: 0.0%e v 0.1% prior; Y/Y: 0.8%e v 0.9% prior

- 08:00 (HU) Hungary Central Bank (MNB) Interest Rate Decision: Expected to leave Base Rate unchanged at 0.90%

- 08:00 (BR) Brazil Aug IBGE Services Sector Volume Y/Y: +0.25e v -0.3% prior

- 08:05 (UK) Baltic Dry Bulk Index

- 08:30 (CA) Canada Aug Int'l Securities Transactions (CAD): No est v 12.7B prior

- 08:55 (US) Weekly Redbook Sales

- 09:00 (EU) Weekly ECB Forex Reserves

- 09:00 (HU) Hungary Central Bank (MNB) Gov Matolcsy to hold his post rate decision statement

- 09:00 (IT) Italy PM Conte speaks in Parliament ahead of EU Leader Summit

- 09:00 (RU) Russia announces weekly OFZ bond auction (held on Wed)

- 09:15 (US) Sept Industrial Production M/M: 0.2%e v 0.4% prior; Capacity Utilization: 78.2%e v 78.1% prior, Manufacturing Production: 0.2%e v 0.2% prior

- 09:30 (NZ) Fonterra Global Dairy Trade Auction: Dairy Trade price index

- 10:00 (US) Oct NAHB Housing Market Index: 67e v 67 prior

- 10:00 (US) Aug JOLTS Job Openings: 6.900Me v 6.939M prior

- 10:30 (CA) Canada to sell in 3-month, 6-month and 12-month bills

- 11:30 (US) Treasury to sell 4-Week and 8-Week Bills

- 16:00 (US) Aug Total Net TIC Flows: $60.3Be v $52.2b prior; Net Long-term TIC Flows: No est v $74.8B prior

- 16:15 (US) Fed’s Daly (voter)

- 16:30 (US) Weekly API Oil Inventories

- (CO) Colombia Sept Consumer Confidence: 6.2e v 4.7 prior