Morning comment: Brexit diplomacy, UK retail & Aussie home loans

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
A quiet day for global economic news yesterday saw the S&P500 close up just 0.1%, erasing the modest losses that had been recorded early in the session on trading volumes that were well below average. US Treasuries (with 10Y yields merely edging up to about 2.51%) and the US dollar were similarly little changed. And so, with the news flow remaining very light through Asia, unsurprisingly markets in the region have also largely traded quietly today. With little excitement in FI or FX, equity markets have seen a mix of modest gains and losses, with bourses up in mainland China, Taiwan and Hong Kong by between ¼ to ½%, and little changed in Japan (the TOPIX falling 0.1% while the Nikkei rose 0.2%).

There appeared to be little market reaction in Asia to the Trump administration’s announcement of a list of EU products that would be the subject of potential new US tariffs if WTO-inconsistent EU subsidies to Airbus are not removed. But, perhaps inevitably, equity futures are pointing lower in Europe and the US while euro area govvies have opened higher across the board. A relatively quiet day lies in store for economic news ahead of what will prove a busy Wednesday (which will bring top-tier US and UK data, the latest ECB policy announcement and key EU summit on Brexit).

UK:
Ahead of tomorrow evening’s special EU summit, a flurry of activity today should move the UK closer to securing agreement to an extension of the Article 50 deadline beyond this Friday. Among other things, Theresa May will today fly to Berlin and Paris for meetings with Merkel (who is likely to be supportive) and Macron (who will be more sceptical) to try to persuade them to support her request for a delay to 30 June. In addition, a Government delegation led by effective deputy PM Lidington should meet with some of the Labour leadership to discuss an offer of a Brexit compromise. And with the Cooper-Letwin Bill having received royal assent last night, MPs will vote on the duration of the Article 50 extension that Theresa May should be willing to accept on Wednesday, with her requested delay to 30 June likely to be judged too short. Of course, it will be up to the EU leaders tomorrow to agree the precise length of the extension as well as conditions to ensure that the extra time is not wasted and also to bind the UK to its legal obligation to maintain ‘sincere cooperation’ with the EU for as long as it remains a member.

Data-wise, official figures suggested that the retail sector in the UK had a better start to the year with the average level of sales in the first two months of 2019 up by 1.0% compared to Q4. But today’s BRC Retail Sales Monitor suggested a significant weakening in sales March, with nominal spending down by 0.5%Y/Y, the biggest drop in eleven months. On a like-for-like basis, the survey reported an even steeper decline of 1.1%Y/Y. While some product categories such as clothing saw decent demand, overall, consumers were quite cautious and stayed away from big-ticket items. Food sales were also down compared to a year ago. It’s worth noting these figures for March might be distorted by the timing of Easter holidays, which came around three weeks earlier last year. So, we might still expect the annual pace of growth to rise somewhat in April, although Brexit uncertainty and ongoing weakness in consumer sentiment suggests that rebound might be relatively modest.

Euro area:
It should be another relatively quiet day for euro area economic data today, with just Italian retail sales figures for February due for release. Ahead of tomorrow’s ECB policy announcement, more unattributed insights might emerge from Frankfurt although yesterday’s report from Bloomberg – that the Governing Council will be in no hurry to consider refinements to its negative rate policy framework, despite Draghi’s comments a fortnight ago raising the prospect of future action to mitigate the negative side-effects if necessary – suggest that Draghi’s press conference tomorrow will have little new to offer. Supply-wise, finally, Germany will sell 2030 index-linked bonds.

US:
In the US, today will bring the NFIB small business optimism survey for March, alongside JOLTS job openings figures for February. In the markets, the Treasury will sell 3Y notes.

Australia:
In a quiet day for economic news the ABS reported that the value of home loan approvals rebounded 2.6%M/M in February but nonetheless remained down 15.7%Y/Y. New lending (i.e. net of refinancing) by owner-occupiers increased 3.4%M/M but was still down 13.9%Y/Y. By contrast, new lending to investors rose just 0.9%M/M and was down 29.1%Y/Y. In other news, ahead of tomorrow’s monthly Westpac consumer confidence reading, the weekly ANZ-Roy Morgan consumer confidence index fell 1.5pts to 113.2 last week, thus moving slightly below its long-term average. This movement was driven by an unusually sharp decline in the index measuring respondents’ perception of whether it is a good time to buy a major household item – oddly, one that occurred despite a modest improvement in perceptions about the economic and financial outlook.

New Zealand:
The ANZ ‘Truckometer’– a measure of traffic flows that is correlated with overall economic activity – indicated a decline in activity in March. Specifically, the heavy traffic index fell 2.0%M/M, lowering annual growth to 2.1%Y/Y. The less volatile 3-month average rose 4.2%Y/Y, reflecting a strong start to the quarter.

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