28 Nov 2016

The week ahead: Monday 28 November 2016

Philip Shaw

Chief Economist

Following a period of political surprises, with the UK vote to leave the European Union and Donald Trump’s election win this month, European politics is set to take centre stage next week. Sunday 4 December is the date for the Italian Constitutional Referendum and the Austrian Presidential runoff.

For markets the major concern will be the Italian referendum, where the 8% lead for the ‘No’ vote, and speculation that PM Renzi will step down if he loses, has led to the yield premium of 10 year Italian bonds over Bunds rising to 180bps. Whilst the Austrian Presidential race may garner less attention than Italian events, the prospect of right-wing candidate Norbert Horfer becoming President may provide a reminder of the mood music of European citizens ahead of the more important French and Dutch elections in the spring.

Market attention will also be focused on Vienna and the OPEC meeting on Wednesday. Oil markets have been particularly volatile in recent weeks amid reports and speculation over a potential output cut and as such either a deal or no deal will likely drive large price movements.

On the data front, as usual the first Friday of the month will bring the US non-farm payrolls report. We suspect that November’s numbers will deliver a robust 175k jobs gain, an outturn which should all but confirm a 14 December Federal Reserve rate hike. Whilst markets certainly believe that a hike is on the way with Fed Funds futures pricing in a 94% probability of a 25bp hike, the bigger question is on the degree of tightening next year and beyond. Other US data points to watch out for will be Q3 GDP (2nd estimate), Conference Board consumer confidence, PCE inflation and the ISM index.

Domestically there will be some focus on UK banks during the week with the BoE set to publish the results from its 2016 stress test on Wednesday alongside the BoE’s Financial Stability Report and associated press conference (07:30). Thursday will also see the first publication of the lending and usage data under the BoE’s new Term Funding Scheme (TFS) for Q3. To date the latest weekly data shows that banks have borrowed £2.135bn under the TFS, so there may be some interest in the individual bank breakdown that will become available. A number of important economic releases are also due during the week which should provide a further insight into the post-referendum landscape. Highlights include the manufacturing PMI, where we anticipate a small rise to 54.5, mortgage lending data, GfK consumer confidence and Nationwide house prices.

Chinese data may also help shape market sentiment during the week with both official and Caixin November PMI data due on Thursday, which may provide further signs of stabilised growth in H2.

From the eurozone November ‘flash’ CPI data will be a key release ahead of the ECB meeting on the 8 December. ECB President Draghi will also be speaking twice during the week and any hints on policy will be eagerly watched for. Indeed, we remain of the view that the ECB will announce a 6 month extension of QE. RD