Weekly Analysis 14-18 Nov. 2016

Macro Data and Key Events
Last week saw Republican Candidate Donald Trump win the US 2016 presidential elections. His inauguration as 45th US president will take place on 20 January 2017. In Congress, the Republicans retained the House of Representatives although their majority fell from 59 to 47. In the Senate, they also won majority with 51 seats, in stark contrast to polls suggesting the Democrats would have a majority. However, the lack of a supermajority (60) means the political deadlock that has plagued Washington in recent years is unlikely to fade, making aggressive domestic changes unlikely.
The University of Michigan Index of Consumer Sentiment preliminary release for November rose more than expected to 91.6 from 87.2 against expectations of 87.9. The current conditions index improved to 105.9, up from 103.2, while expectations bounced back to 82.5 from 76.8 (their weakest level since September 2014). The headline number moved to a five month high, however the survey was completed on 6 November, the Sunday before the election, limiting the usefulness of this improved release. Interestingly, long term consumer inflation expectations rebounded from their all-time low of 2.4% yoy to an eight month high of 2.7% yoy.
German factory orders came in weaker-than-expected in September, dipping by 0.6% mom, following a downwardly revised +0.9% mom in the previous month. The weakness was predominantly driven by a sharp drop in capital goods orders (-1.6% mom), particularly from the Eurozone (-6.3% mom). On a trend basis, orders growth remained stagnant, with the 12-month moving average yoy rate having been close to zero since June. Meanwhile, September industrial production (IP) fell -1.8% mom (seasonally adjusted) against expectations for a milder decline of -0.5%. However, this came on the back of an exceptional growth figure for August, which was revised upward to 3.0% mom (from 2.5%), the highest since April 2010. The details showed a negative contribution from all main sectors, with capital goods falling 2.4% mom. On a 12-month moving average basis, IP growth remains flat at around 0.6% yoy, weighed on by stagnant world trade growth.
China’s merchandise trade activity remained soft in October. Exports came in slightly weaker than expected, down 7.3% yoy (consensus at -6.0%) after the 10.0% decline observed in September, as demand for Chinese goods remained weak in Europe and in some parts of Asia, particularly in South Korea and Hong Kong. Meanwhile, imports continued to decline (-1.4% yoy), despite the almost 6% depreciation of the RMB against the USD over the past year. Overall, the trade balance was broadly in line with expectations, at USD49.1 billion, up from USD42.0 billion in September. The export outlook for November remains uncertain given that the new export orders component of the Caixin manufacturing PMI for that month fell below 50. Meanwhile, China’s consumer inflation came in at 2.1%, up from 1.9% in September, in line with expectations, confirming its rebound after the trough observed in August (1.3%). Food prices, up from 3.2% to 3.7%, were the main driver of the headline increase, while non-food prices edged up from 1.6% to 1.7%. More importantly, producer prices accelerated more rapidly than expected, from 0.1% yoy in September to 1.2% in October. Mining prices in particular rose sharply (+7.9% yoy, up from 2.1% in September).
The key US data release this week will be October’s retail sales. The headline release should reflect stronger auto sales (+1.4% mom) and gasoline prices (+1.6% mom), and is thus anticipated to repeat the strong rise seen in September (+0.6%). Importantly for Q4 GDP, the control group (excluding autos, gas and building materials) is forecast to rise at a much firmer pace in October (+0.4%) after a disappointing end to Q3 (0.1% in September). A strong start to Q4 would reassure the market, as at 2.1% qoq annualised, Q3 consumption growth was lower than expected (2.1%) after a strong Q2 (4.3%).
 October’s CPI inflation release is expected to show that prices rose 1.6% yoy, the highest level since October 2014 and up firmly from 1.1% yoy in August. The more stable core measure, excluding food and energy, is expected to remain at 2.2% yoy. In light of the strongest wage growth in seven years, combined with the anticipated forthcoming US fiscal easing, the Fed will be particularly mindful of any unexpected upside price pressure. Importantly, The Fed’s preferred measure of inflation, the personal consumption expenditure (PCE) core price index, is not released until the end of November.
In a housing market data heavy week, October’s housing starts are expected to increase by 10.3% mom (annualised 1,155,000). This follows September’s sharp 9.0% mom drop to 1,047,000, the first time the index has dropped out the 1,100,000-1,210,000 range since March 2015. Over the last year, multi-family home construction has firmed while with single-family home construction remains close to a cycle high. Meanwhile, the November release of the NAHB/Wells Fargo Housing Market Index, which measures homebuilder confidence, is expected to remain at 63 after the dip in October from September’s post crisis high of 65.
This would still be comparatively firm against the 58 level seen between February and May. Positively, October saw a further rise in the future sales component, and although present sales and prospective buyer traffic dipped marginally, they remain very strong. The continued strength of the labour market and high levels of affordability, boosted by close to record low mortgage interest rates, are likely to continue to support the housing market.
Despite a relatively strong Eurozone manufacturing PMI for September, industrial production (IP) in the region is expected to decline by 1.0% mom during the month, reversing some of the strength seen in August (leaving the yoy rate at 0.9%). This has already been observed in Germany’s September IP print, declining 1.8% mom following a 3.0% burst in the prior month. A soft September IP print is likely to see the second estimate of Eurozone GDP unrevised at 0.3% qoq.
Given continuing evidence of robust German economic activity and upbeat financial market conditions, the German ZEW survey prints for November are expected to edge up slightly, with the expectations component anticipated to gain 1.9pts to 8.1. However, uncertainty ahead of the US elections may have weighed on sentiment, potentially disappointing consensus expectations.
UK CPI inflation is anticipated to tick up again in October, by 0.1ppts to 1.1% yoy, mainly reflecting base effects stemming from the fall in petrol prices seen in October 2015. Meanwhile, the ILO Unemployment rate for the three months to September is expected to remain at 4.9%, where it has been since May. Jobless claims and claimant count prints for October are also expected to hold steady, reflecting the hitherto robust post-‘Brexit’ vote UK economy. Finally, retail sales (excluding auto fuel) for October are expected to rise slightly (+0.4% mom) following two months of no growth, as underlying fundamentals remain supportive (a strong labour market, subdued inflation and low borrowing costs). This should push the annual growth rate to 5.4%.
Emerging markets/Japan
Japan’s Q3 GDP growth is expected to have stabilized at a relatively low level (0.8% qoq annualized, slightly up from 0.7% observed in Q2). The Bank of Japan’s personal consumption index (a reliable proxy for household consumption) fell 0.7% qoq annualized in Q3, suggesting the main support may have come from public spending (after the government presented its fiscal stimulus package in early August) and private non-residential investment (after its unexpected decline in Q2). Overall, even at 0.8%, GDP growth would remain slightly higher than potential (generally estimated around 0.5%), which would help close the output gap next year or in 2018.
After the modest slowdown observed in September, China’s industrial production for October is likely to confirm the stabilization of the economy, at 6.2% yoy (after 6.1% in September). The manufacturing PMI surveys for October showed a rebound in activity but weak exports and the ongoing reduction of overcapacity in sectors like steelmaking and coal could prove a constraint. Retail sales growth for October are expected to steady, at 10.7% yoy, with car sales remaining supported by tax incentives until year-end.
India’s CPI inflation for October is expected to come in slightly lower than in September, at 4.2% yoy (4.3% previously) as the normalization of monsoon rainfall at the end of the season may have eased food price inflation. As inflation remains below 5%, the Reserve Bank of India may consider another 25bp rate cut before the end of fiscal year (end-March 2017).
Following the US election result and the associated increased Mexican Peso volatility the Bank of Mexico are widely expected to raise interest rates by 25bps from 4.75%. The sharp rise post-election rise in the MXN is likely to have stoked the Banxico’s concern around increased inflation pass through, which so far has been mild. Earlier this month inflation rose above the central bank’s 3% target for the first time since April 2015 (3.06% yoy), which also increases the pressure.
Market Moves
Global equities lifted by sharp US reflationary expectations boost
In a week shortened by the Veteran’s day holiday, US equities started last week higher on easing concerns over the outcome of the US elections. Although a Trump presidency defied many opinion polls, risk appetite remained intact post-election due to optimism following his more conciliatory acceptance speech, and hopes for more business-friendly policies. These include fiscal easing via infrastructure spending and tax cuts, and less regulatory burden in the financial sector. Overall, the S&P 500 ended higher (+3.8%) with banking stocks outperforming amid a steepening yield curve. The Dow Jones Industrial Average reached 18,848 on Friday, a fresh all-time high.
Similarly, last week saw European equities reversing the previous week’s heavy losses following optimism over the US growth outlook. The regional Euro Stoxx 50 rebounded (+2.6%), with strong gains in financials and materials shares with the latter further boosted by higher metal prices. Other markets also performed well, such as Germany’s DAX (+4.0%) and France’s CAC (+2.6%), while heavy losses in telecom, IT and utilities sectors pushed Spain’s IBEX lower (-1.7%).
Asian stocks saw differing fortunes following the election of Donald Trump as the new US President, having campaigned on renegotiating US trade agreements (negative for a region exposed to global trade) and on boosting infrastructure spending to support growth. In Japan, the depreciation of the yen benefited the Nikkei (+2.8%). Gains in China’s Shanghai Composite (+2.3%) came as recently announced property curbs increased capital flows into the equity market, benefitting in particular commodity producers. Elsewhere, most markets remained in a +/-1% range, with the exception of India (Sensex down 1.7%) and Taiwan (Taiex down 1.2%).
Global bond yields surged on US reflation expectations
US Treasuries fell (yields rose) last week as the surprise Trump US election victory, which saw an initial short lived bout of risk aversion, was replaced by a focus on the possibility of expansionary US fiscal policy, boosting government deficits and inflation. This saw the 10 year inflation surge to its highest level since July 2015. Overall, 10-year Treasury yields gained 37bps to 2.15%, whilst a smaller 14bps gain in 2-year yields saw a significant steepening of the yield curve.
Following Tuesday’s US election results, increased expectations of looser US fiscal policy and the potential for higher global inflation due to greater US protectionism weighed on most European government bonds. Italian 10-year bond yields widened by 27bps to 2.02% ahead of the Italian referendum on constitutional reforms in December. German and French 10-year yields rose 17bps and 28bps, closing at 0.31% and 0.74% respectively, while Spanish yields gained 20bps, ending at 1.47%. Bucking the trend was Greece, as the market welcomed the prior week’s cabinet reshuffle by Prime Minister Tsipras in an attempt to speed up reforms.
Oil prices hit by continuing scepticism over OPEC production agreement
Oil prices remained on a declining trend last week amid US dollar strength and continuing scepticism over OPEC’s ability to organize production cuts at its 30 November meeting in Vienna. Oversupply fears also weighed on sentiment as the International Energy Agency monthly report showed OPEC production reaching an all-time high of 33.83 million barrels per day in October. Overall, WTI fell (-1.5% to USD43.4), as did Brent crude (-1.8% to USD44.8 per barrel).
In volatile trading, a stronger US dollar also weighed on gold prices last week (-5.9% to USD1,228). The non-yield generating asset was also hit by the expectation of higher US interest rates over the medium-term on the back of Trump’s likely reflationary economic and fiscal policy agenda.
Regards All.

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