12 Dec 2016

The week ahead: Monday 5 December 2016

Philip Shaw

Chief Economist

Next week will open in the wake of two weekend votes which could provide an important steer on the direction of political momentum in Europe ahead of a year of key European elections.

On Sunday Italy votes on its constitutional reform referendum; polling has pointed firmly to a ‘no’ vote which could push PM Matteo Renzi into resigning. Our detailed thoughts on the ramifications of such a vote are published in our note (please click here), including on possible implications for Monte Dei Paschi Di Siena’s capital raise. The Austrian Presidential race re-run due the same day could also be significant because the far-right candidate Norbert Hofer came a close second in the initial vote. Earlier this year Mr Hofer suggested he would like Austria to hold an EU referendum ‘if the EU failed to refocus on its original role as an economic and trade alliance within a year’. Most recently though Mr Hofer has been more guarded in what he might press for (the President’s role is largely ceremonial), admitting that it would currently be damaging for Austria to leave the EU.

The focus on the Eurozone will continue through the week with Euro area finance ministers meeting Monday to discuss Greece’s second review (of its third bailout) with the aim of signing off on Greece’s next aid tranche. Later in the week the ECB gathers for a crunch meeting, with the Governing Council likely to decide on whether to extend the QE programme’s €80bn per month purchases beyond March; we forecast an extension through to September 2017 as detailed in our preview below. The ECB will also publish updated economic forecasts.

Domestically, politics can also be expected to take centre stage with the British Supreme Court hearing the government’s appeal against the recent High Court ruling that would see the government having to seek parliamentary approval to trigger Brexit and invoke Article 50. If the Supreme Court upholds the decision, preventing the use of Royal Prerogative in this case, there is a risk that the start of the Brexit process could slip back from the planned March 2017 date. Currently the government maintains that it still thinks it could hit this date however. Note that the outcome of the 5-8 December hearing is not likely to come until January and that this could well be one of many legal discussions on Brexit over coming months. Indeed, it has been reported in the last week that there may be an upcoming legal debate on whether, when the UK leaves the EU, it automatically leaves the European Economic Area.

Over in the US, the focus is likely to be on the final run of pre-FOMC meeting economic data. Following the non-farm payrolls numbers at the end of this week, next week we will see the ISM for the non-manufacturing sector released; the data will pick-up some of the post-election period after Donald Trump’s victory. Other US economic releases due include preliminary consumer confidence for December (Michigan), the Fed’s Labor Market Conditions index for November and October’s factory orders. It would take a big downside surprise now to stop a 14 December Fed hike.

Wrapping up globally, note there are two major central bank announcements expected. Both Australia’s Reserve Bank and the Bank of Canada are expected to remain on hold, at 1.50% and 0.50% respectively. On the data front, from China we have the monthly trade and CPI numbers due out (November) whilst from Japan we will see ‘final’ Q3 GDP, initially estimated at +0.5% q/q. VC

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The week ahead: Monday 5 December 2016