Morning comment: Chinese trade, EA IP & RBA FSR

Chris Scicluna
Emily Nicol
Mantas Vanagas

Another quiet day on Wall Street Yesterday saw the S&P500 close unchanged with trading volumes barely above the previous day’s low for the year. The economic news flow was again light, leaving investors awaiting direction from the onslaught of corporate earnings reports which will begin in earnest today with news from major banks JP Morgan and Wells Fargo. Treasury yields nudged a little higher, with the 10Y yield bumping up against 2.50%. The US dollar was somewhat firmer, but those gains were erased early in today’s Asian session.

In Asia, markets have also struggled for direction today with a mix of gains and losses recorded across the region in the absence of significant economic news through most of the day. While Japan’s TOPIX was little changed, the Nikkei 225 was up 0.7% against the backdrop of a weakening in the Yen through 111.8/$. Equity markets moved higher in Australia (+0.9%) and South Korea (+0.4%). But despite support very late in the session from China’s latest trade data, which reported much larger-than-expected growth in exports last month (see detail below), equities are on track for modest declines in mainland China and Hong Kong. In bond markets, yields were little changed in Japan, up modestly in Australia (where the RBA flagged issues related to consumer indebtedness in its latest Financial Stability Review) but down a fraction in New Zealand (soft domestic data contributed to New Zealand’s outperformance).

Given the flow of softer Chinese economic data since the start of the year, there was much focus on today’s China trade report, published within the past hour. And consistent with the more positive manufacturing PMI that month, the improvement in the trade surplus massively exceeded expectations, widening to $32.6bn from $4.1bn previously. The pickup in part reflected much stronger exports in March, up 14.2%Y/Y in dollar terms (and an even more impressive 21.3%Y/Y in yuan terms). In contrast, imports posted the fourth consecutive year-on-year decline, and by a steeper 7.6%Y/Y (down 1.8%Y/Y in yuan terms). Of course, Chinese figures at this time of the year are often distorted by the timing of the Lunar New Year. So, when looking at the first quarter as a whole, the improvement was somewhat less impressive. For example, the trade surplus narrowed to $71.5bn in Q1 from $131.7bn in Q4 (although it was almost twice the size of the surplus this time last year), while exports were up just 1.4%3M/Y compared with a near-4%3M/Y increase in Q4, and the softest quarterly increase since Q416. Meanwhile, imports were down almost 5%3M/Y following a rise of 4 ½%3M/Y in Q4 and the first quarterly decline since Q316. So, on balance, ahead of next week’s Q1 GDP release, today’s figures suggest that net trade might well have provided modest support to growth in Q1 having subtracted from growth in each quarter of 2018.

Euro area:
The data focus in the euro area focus today will be IP figures for February. While French and Italian IP figures released earlier this week revealed stronger-than-expected growth, the equivalent German and Spanish figures were more downbeat. So, we might well see a modest contraction in the euro area figure for February, of 0.1%M/M. Nevertheless, coming on the back of a solid increase in January (1.4%M/M), on average in the first two months of Q1 industrial output will still be higher than the average in Q4, albeit likely by less than ½%. This morning also brought final Spanish CPI figures for March, which confirmed the preliminary estimate showing the headline harmonised inflation rate rising 0.2ppt to 1.3%Y/Y. On the national measure, headline CPI also rose 0.2ppt to 1.3%Y/Y, while core CPI moved sideways at just 0.7%Y/Y.

In the US, today’s data highlight will be the preliminary University of Michigan’s consumer confidence survey for April. While the headline sentiment index in March had fully reversed the sharp decline in January, the recent performance of equity markets might well prompt a further modest improvement this month. Today’s dataflow will also bring import and export price indices for March.

Today the RBA released its semi-annual Financial Stability Review (FSR), providing the usual stocktake of how the Bank is viewing risks to the Australia’s financial system. By way of background the Bank noted a weaker global outlook with risks of a sharper downturn than that presently forecast. Domestically, in line with the analysis contained in the Bank’s most recent Statement on Monetary Policy, the Bank acknowledged that domestic economic growth had also eased over the review period, while the housing market had remained weak. Domestic economic conditions continue to be viewed by the RBA as “broadly supportive of financial stability”, although the continued weakening of housing market conditions mean that risks to the household sector are viewed as greater than they were at the time of the previous FSR.

At least at present, the Bank takes some comfort that measures of financial stress among households are “generally low”. And the Bank considers that households remain well placed to service their debt given low unemployment, low interest rates and improvements to lending standards. However, while the prevalence of negative housing equity is currently low (about 2¾% of mortgages by value), the Bank acknowledges that a substantially larger fall in house prices than that which has occurred so far would erode households’ housing equity, increasing the risk of costly defaults for lenders if unemployment were to rise. So from the perspective of achieving both its monetary policy and financial stability goals, developments in the labour market will continue to be monitored very closely by the RBA.

New Zealand:
The focus in New Zealand today was on the release of the Electronic Card Transactions survey for March – a timely indicator of retail spending based on payments processed electronically. Total retail spending fell a disappointing 0.3%M/M, with growth in February also revised down 0.3ppts to 0.6%M/M. Core retail spending – which excludes spending on autos and fuel – fell 0.2% M/M following a downwardly-revised 0.7%M/M increase in February. Despite the soft end to the month – probably not helped by difficulties adjusting for the lateness of Easter this year – total spending rose 0.7%Q/Q in Q1 while core spending increased a much stronger 1.7%Q/Q (reduced spending on fuel, thanks to lower prices, helped lift spending across other categories).

In other disappointing news, REINZ reported that the number of home sales declined 12.9%Y/Y, representing a deterioration from 9.5%Y/Y decline in February – somewhat surprising given the record low mortgage rates now on offer and the RBNZ’s macro-prudential easing at the beginning of this year. In a similar vein, New Zealand’s manufacturing PMI fell 1.5pts to an 8-month low of 51.9 in March. Within the detail the production index fell 2.2pts to 51.4 and the new orders index fell 1.9pts to 52.5, but the employment index rebounded 1.1pts to 51.9 from February’s 6-month low. Finally, preliminary data pointed to a very large net long-term migrant inflow of 6,570 people in February, but this data needs to be treated with considerable caution in light of changes to how this data is compiled. Meanwhile the number of visitor arrivals fell 1.3%Y/Y in February, with the decline more than explained by a sharp fall in the number of arrivals from China (down 26.2%Y/Y).

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