Morning comment: RBA on rates, ECJ on Brexit

Chris Scicluna
Mantas Vanagas

Wall Street enjoyed a solid rally yesterday with the S&P500 eventually closing up 1.1%, paced by a strong rise in energy stocks – a consequence of the Saudi-Russia deal to work together this week to manage supply – and supported by the weekend’s de-escalation of trade tensions between the US and China. However, an initial bounce in US Treasury yields failed to stick, with the 10-year yield eventually falling to a new 3-month low of 2.97%. Amongst the Fedspeak, Vice Chair Richard Clarida added to last week’s more dovish tone, telling Bloomberg Television that “…we are in a world where central banks, including the Fed, are focused on keeping inflation away from disinflation,”

The rally on Wall Street was, however, a little less enthusiastic than had been indicated by futures markets early in the day. And so with the focus turning to the opaque nature of China’s weekend commitments, many Asian equity markets have walked back some of yesterday’s gains, with worse in Japan. The exception was in China, where the CSI300 closed up 0.2% and the CNY strengthened for a second day.  But markets in Hong Kong and Taiwan fell 0.2% and 0.5% respectively. And the 7-day rally in Japan ended abruptly with the TOPIX falling 2.4% on broad-based losses, in part reflecting the impact of a renewed firming of the yen. As the RBA left monetary policy and its main guidance unchanged, Australia’s ASX200 fell 1% despite solid reading for net exports and government spending ahead of tomorrow’s GDP report (detail below). 

The soft market tone has inevitably carried across to Europe this morning, with equity futures down, core euro area government bonds and Gilts higher and BTPs underperforming. Meanwhile, sterling has been given a modest boost from the ECJ’s ruling that the UK could, if it so decided, legally revoke its Article 50 notice unilaterally to pull the plug on the Brexit process. Looking ahead to the rest of the day, with no show-stopping data on the docket either in Europe or the US, dysfunctional politics in the UK, Italy and France might be expected to dominate attention beyond the market movements.     

Euro area:
Politics and fiscal policy remains the principle focus in the euro area. There were no surprises from last night’s meeting of the Eurogroup with euro area finance ministers giving the European Commission their backing in the dispute with Italy’s government over its budget plans, calling for Rome to take the necessary measures to be compliant with the EU rules. But senior Italian Government members are set to meet again today to revisit their plans with only modest amendments likely. While the ruling party leaders Di Maio and Salvini seem open to trimming back the deficit target from the originally proposed 2.4% of GDP, reports suggest that the revised figure will unlikely be below 2% of GDP when the new plans are submitted for a vote in the Lower House, probably to be held tomorrow. So, the revised budget seems likely to remain consistent with a structural deterioration in the public finances and will not pass muster with either the Commission or Eurogroup.

Fiscal policy is also in the spotlight in France, with Finance Minister Le Maire reportedly having caved in to the demands of the ‘gilets jaunes’ protesters and  agreeing to suspend plans to hike fuel taxes. While the government has suggested that public expenditure savings could be found to fill the resulting budgetary gap, France could also risk compatibility with the EU rules. 

It should be a relatively quiet day for euro area economic data, with just the release of PPI figures for October and Greece’s Q3 GDP data.

Another day of Brexit skirmishing will see the House of Commons vote on a motion finding the Government in contempt of Parliament  for refusing to publish the full legal advice on the EU-UK agreement received from the Attorney General Geoffrey Cox. That vote could well see the hammy Cox suspended from Parliament for next week’s meaningful vote on the Brexit deal, debate on which is also set to kick off later today. Meanwhile, following the release last week of the Government and BoE assessments of the economic impact of Brexit, Treasury Select Committee hearings scrutinising their work could be of interest too. But there’s already been substantive Brexit news this morning, with the European Court of Justice issuing a preliminary opinion to state that, if the UK so wishes, it could unilaterally decide to revoke its Article 50 notice to pull the plug on the Brexit process. The final ruling in the case will come at a later date, but seems likely only to pad out this initial opinion. The decision would seem to grant the UK Parliament with further ammunition should it wish to avoid a ‘no deal’ Brexit. While we think it would be unlikely to go down this route – a second referendum would be far more likely to find a majority in the House of Commons – the ECJ’s opinion has given sterling an initial ½-point boost.

Data-wise, following yesterday’s better manufacturing PMIs – with demand in the sector seemingly boosted by precautionary stock-building in the face of ‘no deal’ Brexit risks – today brings the equivalent survey from the construction sector. The BRC Retail Sales monitor, released overnight, suggested that in November nominal retail sales growth moderated to 0.5%Y/Y, down 0.8ppt from October, representing the weakest since the Easter-distorted reading from April and significantly below the average of the past twelve months. Indeed, like-for-like sales reportedly fell by 0.5%Y/Y, the third negative reading this year. On a three month basis, total sales rose only 0.8%3M/Y, with food sales growth declining to 1.8%3M/Y and non-food sales unchanged from a year ago. Notably, Black Friday discounting apparently failed to give an additional boost. Overall, the survey suggested that, in aggregate, retailers are struggling in the face of subdued real income growth and a drop in consumer confidence to the lowest levels this year.

Another reasonably busy day in Australia saw the release of the outcome of the RBA’s December Board meeting, together with a number of economic reports. Beginning with the RBA, as widely expected, once again the Bank retained the cash rate at 1.5%. And the concluding paragraph of the post-meeting statement, which summarises the Bank’s stance, was yet again completely unchanged from that issued previously. Amongst other things, that paragraph continues to observe that: “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” In other words, while the Bank continues to expect that its next move will be a policy tightening, that tightening remains some distance away – probably late next year at the earliest, subject to a material lift in wage growth occurring over the coming year. On that score today RBA’s statement did note that “The stronger labour market has led to some pick-up in wages growth, which is a welcome development.” Looking ahead, the statement continued with the forecast that “The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.” The remainder of the statement was little changed from that issued last month, with the Australian economy still said to be “performing well”.

Turning to the data flow, ahead of tomorrow’s GDP report, the ABS reported a current account deficit of AUD10.7bn in Q3. This was slightly wider than market expectations but still narrower than the AUD12.1bn deficit recorded in Q2 (which was revised down from AUD13.5bn previously). As usual the overall deficit was driven by a large deficit on primary income, which widened to AUD16.9bn from AUD15.7bn in Q2. By contrast, the surplus on goods and services widened to AUD6.6bn in Q3 from AUD3.9bn previously. As far as implications for tomorrow’s GDP report are concerned, the ABS reported that net export volumes have made a positive contribution to GDP growth of 0.4ppts – 0.1ppts above market expectations. Meanwhile, separately the ABS also reported today that real general government consumption spending rose a further 0.5%Q/Q in Q3, which will make a positive contribution of 0.1ppt to GDP growth. Moreover, total real public investment spending rose a strong 3.4%Q/Q in Q3, which will make an additional positive contribution to GDP growth of 0.2ppts. Today’s reports provide some offset to Monday’s slightly weaker-than-expected inventory and income data, suggesting that market expectations for GDP growth are probably still near the 0.6%Q/Q and 3.3%Y/Y depicted in the latest Bloomberg survey.

In other news, the weekly ANZ-Roy Morgan index rose 0.9pts to 119.5 last week, thus remaining slightly above the average reading for the survey. Respondents were actually slightly less optimistic about the economic outlook but considerably more positive about recent developments in their own financial situation (lower fuel prices are likely part of the explanation).


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