UK retail sales disappoint as shoppers buy less food

Notes/Observations

- UK Sept retail sales miss expectations as shoppers buy less food; registered its biggest drop since March

Asia:

- Japan Sept Trade Balance: +¥139.6B v -¥45.1Be; Adj Trade Balance: -¥238.9B v -¥333.4Be. Exports y/y: -1.2% v 2.1%e (1st decline in 22-months as trade war fears mount)

-Australia Sept Employment Change: 5.6K V +15.0KE (2nd month of growth); Unemployment Rate: 5.0% V 5.3%E (lowest level since 2012)

- Bank of Korea (BOK) leaves 7-Day Repo Rate unchanged at 1.50% (as expected). Reiterated to keep policy accomodative, to see if more adjustment in policy needed. Decision was not unanimous, 2 dissenters called for rate hike (prior decision 1 dissenter)

- Bank of Japan (BoJ) Gov Kuroda: Expect CPI to pick up towards 2% target, core currently ~1%; reiterated will keep rates very low for an extended period

Europe:

- EU leaders decide to shelve plans for Brexit summit in November until ‘decisive progress’ is made

- EU Parliament president Tajani: EU wanted a Brexit deal but not at any price; EU Parliament supported extending transition to 3 years; tone of May's deal was positive but the content had not changed

- PM May reportedly considering extending the Brexit transition period. Said to have conceded yesterday in a presentation to EU leaders that the UK might need to remain tied to EU rules and laws for an additional year after Brexit to find an Irish border compromise

- ECB's Weidmann (Germany): inflation outlook was by and large in line with goal; EU commission was correct to criticize Italian budget plan. Policy normalization to place a heavy burden on highly indebted countries

Americas:

-Treasury Semi-annual Currency Report: Refrains from naming China as currency manipulator (as expected); keeps same six countries on FX watch list. China's lack of currency transparency is a particular concern; Treasury will monitor yuan depreciation. Dollar strength and yuan decline could widen imbalances. Estimated that Chinese Central Bank's direct currency intervention has been limited this year

- FOMC Meeting Minutes from Sept 26th meeting: Generally anticipated further gradual rate increases. Estimate of neutral rate will be only one of many factors to consider in future policy . Almost all policymakers considered it appropriate to remove reference in statement to monetary policy being accommodative

 

Macro

(UK) United Kingdom: The EU 27 leaders cancelled the November summit on lack of progress in talks. PM May's 15 minute speech didn't really contain anything new so it came as sufficient progress in the talks to schedule a November meeting that would have been designed to sign a deal. Both sides remain far away from an agreement and an extended transition period has once again been mooted to give both sides more time to come to a solution on the Irish border issue. Whether PM May will be willing to get backing for an extended transition period remains to be seen.

(US) United States: The FOMC minutes underscored the gradual nature of the policy path for the medium term. There was a wide-ranging discussion of the risks going forward, however, and whether the funds rate might have to be pushed above the neutral rate, but the estimate of that level would be only one factor in the decision making process. Implied rates are still pricing a December rate hike, continuing the string of quarterly moves, with high probability off two more 25bp hikes in Q1 and Q2 of 2019.

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx600 +0.2% at 364.3, FTSE +0.2% at 7069, DAX +0.3% at 11748, CAC-40 +0.2% at 5157, IBEX-35 -0.2% at 8980, FTSE MIB -0.1% at 19430, SMI +0.5% at 8797, S&P 500 Futures -0.3%]

 

Market Focal Points/Key Themes:

Equities

European Indices trade higher across the board rebounding from yesterdays losses despite weakness in Asia overnight and US futures. Sterling remains steady despite a weaker September retail sales number.
In a busy day for corporate earnings the Swiss SMI outperforms after large caps Novartis and Nestle reported positive results. French Supermarket giant Carrefour was a notable riser after inline results and progress in their cost cutting plan with Air France also outperforming after reportedly making progress with union on wage negotiations.
Elsewhere HeidelbergerCement trades lower after cutting its outlook; SAP in Germany moves lower after missing estimates. On the M&A front Novartis announced the acquisition of Endocyte in a $2.1B deal.
Looking ahead to the US morning notable earners include Travelers, Blackstone and Danaher among others.

- Consumer discretionary: Unilever PLC [UNA.NL] -1% (earnings), Nestle SA [NESN.CH] +0.3% (earnings), Swatch [UHR.CH] -2%, Richemont SA [CFR.CH] -2% (Swiss watch exports data), Pernod-Ricard SA [RI.FR] +0.8% (earnings), Carrefour [CA.FR] +7% (earnings), Publicis Groupe [PUB.FR] +6% (earnings), Inficon Holding AG [IFCN.CH] +2.5% (earnings), Air France-KLM [AF.FR] +5.5% (said to make wage proposal to unions on Oct 19), Autoneum Holding [AUTN.CH] -6% (outlook cut), Duni AB [DUNI.SE] -3.5% (earnings; announces program to strengthen margins), Casino Guichard-Perrachon SA [CO.FR] +1.0% (to sell additional Monoprix assets)

- Financials: Swiss Re [SREN.CH] +1.0% (announces claims larger than expected), Flow Traders [FLOW.NL] +1% (earnings)

- Healthcare: Novartis [NOVN.CH] +1.5% (earnings; acquisition of Endocyte)

- Industrials: Thales [HO.FR] +1.5% (earnings), Yara International [YAR.NO] -3% (earnings; outlook cut), HeidelbergCement [HEI.DE] -9.5% (profit warning), ABB Ltd [ABBN.CH] +0.5% (said to consider divesting power grid unit)

- Technology: Avast [AVST.UK] +1.5% (earnings), SAP [SAP.DE] -3.5% (earnings), Temenos Group [TEMN.CH] +8% (earnings; outlook raised)

- Telecom: Ericsson [ERICB.SE] +3.5% (earnings), Tele2 [TEL2B.SE] +7% (earnings; outlook raised)

 

Speakers

- ECB's Rehn (Finland) reiterated view that markets appear to be reading ECB's guidance correctly; saw 1st rate hike in Q4 2019 if economic outlook held up. Risks to global growth outlook were mostly political. Stimulus paid for by debt will not solve Italy's problems

- UK PM May: Have made good progress on future partnership but issues remained on the Irish backstop. Option to extend implementation period for a few months but this was not expected to be used. Expected implementation period to end at the end of 2020

- UK Govt official Lidington (de facto Dep PM): Longer Brexit transition could help the deal and help address the Irish border issue. No detail proposal on extending the transition period

- Italy PM Conte: Discussed budget with German Chancellor Merkel; agreed to have constructive dialogue

- Italy League party official Borghi (budget committee): Budget plan has no intention to damage the banks

- Spain Econ Min Calvino: Fiscal discipline unchanged; sees 2018 GDP at 2.6%, 2019 at 2.3%

- Norway Central Bank (Norges) Q3 Lending Survey: Credit demand from both households and non-financial enterprises was broadly unchanged in 2018

- Russia Central Bank (CBR) Gov Nabiullina restarting FX purchases depends only on volatility

- German Association of Chambers of Trade and Industry (DIHK) cut itss 2018 GDP growth forecast from 2.2% to 1.8% citing uncertainty on trade disputes and Brexit. Forecasted 2019 GDP at 1.7%

- Turkey Fin Min Albayrak: Domestic economy has stabilized

- Mexico Central Bank: Rising energy prices could fan inflation

- Bank of Japan (BOJ) Regional Report cut the assessment of 2 of 9 regions mostly due to impact of natural disasters; maintained assessment for 7 of 9 regions unchanged

- China Commerce Ministry official: Trade war impact on domestic companies was limited; risks were controllable. Hoped that the US dropped its protectionism

 

Currencies

- USD held onto the recent gains at 1-week highs as the EU session began in the aftermath of the FOMC minutes which helped the 10-year yields did climb 3.5bps into the close on Wed. The greenback saw initial strength ebb away as the session wore on

- EUR/USD moved back above the 1.15 level in quiet trade. The session saw a lot of EU criticism on the Italian budget (EU’s Tajani, ECB’s Rehn and Dutch PM among them)

- GBP/USD moved back above the 1,31 handle and remained there despite the miss in retail sales data for Sept.

- The CNY currency (Yuan) was weaker after the US Treasury decided that China was not a forex manipulator at this time. PBoC set the reference rate for USD-CNY higher, at 6.9275, up markedly from 6.9103 yesterday.

 

Fixed Income

- Bund Futures trades at 158.98 up 5 ticks as German 10-year bond yield climbs above 0.47%. A downside break of 157.25 sees 155.69 initially. To the upside 158.50 remains initial resistance.

- Gilt futures trades at 120.85 down 2ticks following the move in Treasuries. Continued support at 120.50, with a continued move higher targeting 123.93 then 124.00.

- Thursday's liquidity report showed Wedneday's excess liquidity fell from €1.889T to €1.881T. Use of the marginal lending facility stayed fell from €56M to €20M.

- Corporate issuance saw Tesco and Zurich to the primary market

 

Economic Data:

- (NL) Netherlands Sept Unemployment Rate: 3.7% v 3.9% prior

- (DE) Germany Sept Wholesale Price Index M/M: 0.4% v 0.3% prior; Y/Y: 3.5% v 3.8% prior

- (CH) Swiss Sept Trade Balance (CHF): 2.4B v 2.1B prior, Real Exports M/M: -0.8% v -0.3% prior, Real Imports M/M: -0.4% v -2.5% prior, Swiss Watch Exports Y/Y: -6.9% v +5.6% prior

- (CN) China Sept Foreign Direct Investment (FDI) Y/Y +8.0% v 1.9% prior

- (SE) Sweden Sept Unemployment Rate: 6.0% v 6.0%e; Unemployment Rate (Seasonally Adj): 6.5% v 6.5%e

- (UK) Sept Retail Sales (Ex Auto) Fuel M/M: -0.8% v -0.4%e; Y/Y: 3.2% v 3.8%e

- (UK) Sept Retail Sales (Including Auto Fuel) M/M: -0.8% v -0.4%e; Y/Y: 3.0% v 3.6%e

- (ZA) South Africa Aug Total Mining Production M/M: -1.2% v +0.5%e; Y/Y: -9.1% v -4.0%e

 

Fixed Income Issuance

- (ES) Spain Debt Agency (Tesoro) sold total €4.491B vs.€4.0-5.0B indicated range in 2023, 2028, 2032 and 2046 Bonds

- Sold €1.53B in 0.35% July 2023 SPGB; Avg yield: 0.613% v 0.410% prior; Bid-to-cover: 1.78x v 1.70x prior

- Sold €1.31B in 1.40% July 2028 SPGB; Avg yield: 1.644% v 1.540% prior, Bid-to-cover: 2.08x v 2.38x prior

- Sold €0.63B in 5.75% July 2032 SPGB; Avg Yield: 1.959% v 1.943% prior; Bid-to-cover: 1.46x v 1.56x prior

- Sold €1.03B in 2.90% Oct 2046 SPGB; Avg Yield: 2.677% v 2.691% prior; Bid-to-cover: 1.43x v 1.40x prior

- (FR) France Debt Agency (AFT) sold total €7.999B vs. €7.0-8.0B indicated range in 2021, 2024 and 2025 bonds

- Sold €2.95B in 0.00% Feb 2021 Oat; Avg Yield: -0.42% v -0.37% prior; Bid-to-cover: 2.36x v 3.19x prior

- Sold €3.291B in 0.00% Mar 2024 Oat; Avg Yield 0.16% v 0.14% prior; Bid-to-cover: 1.81x v 2.17x prior

- Sold €1.758B in 1.00% Nov 2025 Oat; Avg Yield: 0.39% v 0.46% prior; Bid-to-cover: 1.81x v 1.99x prior

 

Looking Ahead

- (SA) Saudi Arabia Aug Oil Production: No est v 10.288M bpd prior

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 12-Month bills

-05:50 (FR) France Debt Agency (AFT) to sell €1.25-1.75B in Inflation-linked 2021, 2027 and 2047 bonds (Oatei)

- 06:00 (PT) Portugal Sept PPI M/M: No est v 0.2% prior; Y/Y: No est v 4.6% prior

-06:00 (RO) Romania to sell Bonds

- 06:45 (US) Daily Libor Fixing ]

- 07:00 (AT) ECB's Nowotny (Austria)

- 07:30 (TR) Turkey Oct Central Bank TCMB Survey of Expectations

- 08:05 (UK) Baltic Dry Bulk Index

- 08:30 (US) Oct Philadelphia Fed Business Outlook: 20.0e v 22.9 prior

- 08:30 (US) Initial Jobless Claims: 212Ke v 214K prior; Continuing Claims: 1.67Me v 1.660M prior

- 08:30 (US) Weekly USDA Net Export Sales

- 08:30 (CA) Canada Sept ADP Payrolls Report: No est v 13.6K prior

- 08:30 (US) Fed's Bullard (dove, non-voter) speaks to Economic Club of Memphis

- 09:00 (RU) Russia Gold and Forex Reserve w/e Oct 12th: No est v $459.2B prior

- 10:00 (US) Sept Leading Index: 0.5%e v 0.4% prior

- 10:00 (MX) Mexico Central Bank (Banxico) Oct Minutes

- 10:30 (US) Weekly EIA Natural Gas Inventories

- 11:00 (CO) Colombia Aug Trade Balance: -$0.8Be v -$0.6B prior

- 11:00 (US) Treasury announcement for new 2-year FRN to be issued on Oct 24th

- 12:15 (US) Fed's Quarles (voter) in NY

-13:00 (US) Treasury to sell 30-Year TIPS Reopening

- 17:00 (CL) Chile Central Bank (BCCH) Interest Rate Decision: Expected to raise Overnight Rate Target by 25bps to 2.75%