Week Ahead – Risk Events & Opps: US CPI & Congress tax gap (long UST), UK CPI & May lead
Week Ahead – Risk Events & Opportunities: US CPI & Congress tax gap (long UST), UK CPI & May leadership gap (short GBP)
US - Congress tax developments and inflation: The two chambers of Congress will begin to attempt to bridge differences in their respective tax plans. Senate begins its mark-up process (Mon), while the House plans to vote on their bill (Thu or Fri). Consensus sees lower US PPI (Tue) and CPI (Wed) – the latter due to falling gas px, though core CPI ex-fuel and food may have picked up. US retail sales (Wed) sees mean-reversion lower after storm-related jump fueled by autos; consensus sees ex-auto and fuel having increased.
Trade idea - Long US Treasury 10s (conditional, at 2.40%+): The mainstream view is that the differences are large between the Senate and House plans. Tough choices will be made as the Senate begins its mark-up process. Just as in the Obamacare repeal attempt, legislation may either live or die in the Senate. Any delay in House plans to vote by the end of this week - or Senate mark-up process - would be read negatively (positive USTs) as the opportunity window for the Senate to pass legislation by Thanksgiving (Thu, 23 Nov) narrows. Downside risks from inflation data (PPI Tue, CPI Wed) - if magnitude from core indicators is large enough - could also support this trade given that a Fed Dec hike is virtually priced-in. An online price gauge from State Street sees downside risks for headline CPI. Activity data (retail sales Wed, IP Thu) could also support lower rates.
Trade idea - Tactical short CAD-USD: Downside risks in Canadian CPI (Fri) could further reduce near-term BOC hike expectations.
Trade idea - Tactical long Gold: The steep technically-driven fall last Fri - after the sale of four million ounces of gold pushed prices down $8 in 15min - provides value to re-engage, particularly in the context of a possible fall in UST 10 yields and renewal of global risk aversion this week.
Visuals: Senate vs House GOP tax bills
UK - Leadership challenges and important data add to volatility: In the UK, domestic politics will be in focus as PM May encounters another round of Tory rebellion chatter just as the EU Withdrawal Bill will be scrutinized in the House of Commons (Tue). Opposition parties and pro-EU members of the ruling Conservatives have put forward dozens of amendments to the text. Moreover, important data on CPI (Tue, cons higher), jobs (Wed) and retails (Thu, cons deceleration) may add to volatility. If CPI gains breach 3.0% yoy, BOE Governor Carney will need to write a letter to the Chancellor of the Exchequer Hammond explaining why. An online price gauge from State Street sees downside risks for headline CPI.
Trade idea - Tactical short GBP into or post-CPI (Tue): Poor (domestic political) sentiment around GBP could see outsized depreciation if UK inflation dump (Tue) disappoints the upside risk seen by consensus:
Ref: CPI mom/yoy (cons 0.2%/3.1%, prior 0.3%/3.0%), core CPI yoy (cons 2.8%, prior 2.7%), Retail px mom/yoy (cons 0.2%/4.1%, prior 0.1%/3.9%), PPI output nsa mom/yoy (cons 0.3%/2.9%, prior 0.2%/3.3%).
Europe - Stronger German data, ECB hosts central bankers, weaker Norway/Sweden data: Consensus sees German data (all Tue) - GDP, final CPI and ZEW survey - stronger, though with less boost from industrial production. ECB conference (Tue) hosts a panel with Yellen, Draghi, Kuroda and Carney (Tue 6pm). ECB Executive Board member Peter Praet chairs the closing policy panel at the ECB conference “At the heart of policy: challenges and opportunities of central bank communication” in Frankfurt. Panelists include BOE chief economist Andy Haldane and Danish Central Bank Governor Lars Rohde. In Scandinavia, Norwegian GDP (Tue) and Swedish CPI (Tue) are both expected by consensus to be slower.
Trade idea - Strategic short NOK-EUR and SEK-EUR
DM Asia-Pac - Japan GDP and Australia jobs/wages: Japan sees machine tool orders (Mon) and GDP (Wed, cons sees weaker). BOJ Gov. Kuroda speaks in an ECB panel (Tue). Australia sees wages (Wed) and jobs (Thu) releases, while New Zealand will see PMI (Fri).
Trade idea - Tactical short AUD-JPY (conditional on global risk sentiment mood): This trade would be attractive on an apparent deterioration in global risk sentiment - for example, coming from US tax disappointment or technical profit-taking. Potential weakness around Aussie jobs/wage data could lead to relative depreciation versus the Yen.
Trade idea - Take profit on short KRW-USD (at 1120+)
EM Asia-Pac - China activity likely mixed: China activity is expected to be mixed - with retails to improve (corroborated by this past weekend's record Singles Day sales) while consensus sees modestly slower FAI/IP). Property prices will also be released (Sat). India CPI (Mon) is expected to rise, but still remain within the RBI's target range. Indonesia will release trade data (Wed) and BI is expected to stay on hold (Thu).
China consumers and financials post-record Singles Day sales and bank/fund management liberalization announced last Fri.
Strategic long Philippines Pcomp: Post-GDP (Thu)
Strategic long Malaysia KLCI: ... on catch-up potential vs regional peers in spite of strong GDP (Thu)
EM EMEA - Policy divergence trade in CZK-HUF, Polish momentum and Turkey's fragility: South Africa retail sales are released Wed. The Egyptian central bank CBE meets on Thu.
Trade idea - Strategic long CZK-HUF: Czech CAB is expected to flip to surplus from deficit (Mon). Strong Czech GDP (Tue) should also confirm CNB bias for further tightening. Hungary GDP (Tue) is seen stronger but this won’t halt the NBH's HUF-depreciation bias, potentially via unconvetional easing.
Trade idea - Strategic long Poland equities, PLN-EUR (entry pre-GDP or post-cabinet reshuffle announcement): Poland GDP (Tue) may soften CPI-based dovishness after last week’s NBP MPC. A cabinet announcement (announced Thu or later) may be less disruptive than expected.
Trade idea - Strategic short TRY: Higher CA deficit (Mon), 12mth expected CPI (Mon), unemployment (Wed) and govt budget deficit (Wed) would reinforce poor fundamentals. Fragile global risk sentiment - amid US tax stimulus delay/disappointment or technical profit-taking - would add a tailwind.
Strategic short ILS-EUR: Israel trade deficit (Mon) could widen while geopolitical risks escalate. CPI seen stronger but - at 0.1% yoy - this is less material.
Strategic short RUB-EUR: Gov. Nabiullina comments on CPI (Tue) could confirm scope for rate cuts. Outsized disinflation lends scope for additional ruble weakness. However, technical resistance is strong at 60 vs USD.
EM Americas - Mexico Nafta talks, Chilean elections: Still-elevated Argentina CPI (Tue) will confirm last week’s surprise BCRA hike. Chile's BCCh meets (Tue) before first-round elections (Sat). In Colombia, GDP should add evidence that growth has bottomed earlier this year but remains weak. Pension reform prospects remain the focus in Brazil, though household demand will also be monitored with retails (Tue). Petrobras releases earnings (Mon). In Mexico, Nafta round 5 talks begin in Mexico City from Wed (15-21 Nov) after negotiations grew more contentious in the previous round 4 with US proposals rejected by Canada and Mexico.
Strategic long Colombia COLCAP equities: ... post-GDP/econ activity (Wed)
Strategic long Peru equities: ... on renewed growth momentum
Strategic long Chile IPSA equities: ... if few signs of exhaustion into Dec elections
Happy trading this week.
CALENDAR: THIS WEEK