15.09 Weekly Viewpoint : United States. Weather alert: the hurricanes have hit, now the impact on macro data.

United States. The quiet after the storm (the hurricanes, in fact) will be accompanied by high data volatility between 3Q and 4Q…….


Typically, hurricanes (Katrina in 2005, Sandy in 2012) affect growth in the same quarter as the event (decline in demand and employment), and drive it in the following quarter, at a faster pace than before the event, without altering the trends. The recent hurricanes could slow GDP growth in 3Q by around one tenth, and strengthen it by a couple of tenths in 4Q. The effects on monthly data are already on their way. With respect to monthly activity data, for a couple of months job claims (already on a sharp uptrend) should increase, as opposed to a drop in employment levels, auto sales (and, to a lesser extent, consumption), and consumer confidence.

The negative effect on business surveys and industrial output should be visible on September data, and disappear already the following month, thanks to the reconstruction process. The main effects on inflation data will be tied to the energy component (Texas) and food prices (Florida), with a temporary rise also in business sectors involved in the reconstruction process.

The total or partial shutdown of many oil refineries has resulted in an increase in gasoline prices (+14% compared to the pre-Harvey level), which will translate into higher inflation in the autumn. According to the EIA, the rise in the price of gasoline will peak in September (effect on CPI of around 0.5pp), and gradually ease back in the following months towards spring levels.

The result will be a lack of trustworthiness of the data released in the autumn, with the likely return to the previous trends starting at the beginning of 2018. 

Euro area. This week, the President of the EU Commission, Juncker, has laid out an ambitious plan for the future of the European Union. The real debate will begin after German elections.

This week, in the annual State of the Union speech before the European Parliament, the President of the EU Commission, Jean-Claude Juncker, laid out the priorities for next year and in the run-up to the European Parliament elections in 2019. Juncker touched on some of the themes raised by Coeuré (ECB Board member) in a speech delivered on 12 September.

The solid euro area growth phase creates an opportunity to relaunch the political dialogue on the reforms needed to complete the architecture of the monetary union, after years in which ECB policies have been the main source of support for the euro area economy. However, the ECB has already started normalising unconventional policies and chiefly QE purchases, albeit very slowly.  

Juncker presented some ambitious priorities, such as: the transformation of the ESM into a European Monetary Fund (EMF), the creation of a European Finance minister, who would ideally act also as European Commissioner for Economic and Monetary Affairs, and the establishment of a euro area Budget. Macron’s victory at the French presidential elections has made possible a reconsideration of the Franco-German axis and has created the conditions for talks to resume fruitfully on the reform process.

The role Germany will play following the elections will be crucial. Angela Merkel will almost certainly be re-elected for a fourth mandate, although the coalition partner she will inevitably have to govern with will also hold weight in terms of the prospect of reforming the Union. Merkel recently expressed a favourable view on establishing a budget of limited size for the area euro, in response to Macron’s proposals; the CDU has always supported the idea of transforming the ESM into a European Monetary Fund (EMF), which could manage future crises more independently than the EU Commission and national governments.

Should the current government coalition with the SPD be confirmed, the prospects for the reform process would be brighter, given the Social Democrats’ greater openness on European issues. By contrast, if Merkel is obliged to form a government alliance with the FDP, as was the case in 2009-2013, the reform process could prove more difficult, as the FPD liberals openly oppose outright monetary transactions, are in favour of market-based solutions to debt crises, and strongly support the strict application of Stability Pact rules, with a strengthening of the no-bailout clause. While relaunching the reform process is urgent business, there is no guarantee that significant progress will be made during the next legislature.

Analyst Certification

The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports

Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld