News of stronger-than-expected growth in exports and credit in China and some positive earnings reports from US banks helped lift investor sentiment on Friday, ensuring that Wall Street enjoyed a solid end to the week. The S&P500 closed with a 0.7% gain, thus closing above 2900 for the first time since October and less than 1% below the all-time high and the 10Y US Treasury yield climbed 7bps to 2.57% – now 20bps above last month’s low. In currency markets, as usual, the more positive tone resulted in reduced demand for the yen.
The positive tone has continued across most of Asia today with Japan’s TOPIX gaining 1.4% and China’s CSI300 advancing 0.5% despite a notable downwards move towards the end of the session. Markets rose a more subdued 0.2% in Hong Kong and 0.5% in South Korea, while equities Singapore and Australia were little changed. In bond markets the 10-year JGB yield rose 3bps to -0.03% while the 10-year ACGB yield increased 6bps to 1.94%. Looking ahead, with no major economic data releases due in Europe and the US, earnings reports, including Citigroup and Goldman Sachs, will likely set the tone in today’s session.
After a quiet start to the week, the Japanese data flow will pick up tomorrow with the release of the Tertiary Industry Activity Index for February, with expectations for a modest drop in output in the services sector that month after a strong start to the year. On Wednesday, we will receive the merchandise trade balance for March and the final results of the IP report for February. The trade report will be of particular interest, with developments over the first two months of Q1 having raised the likelihood that net exports will make a much-needed positive contribution to GDP growth. That said, Friday’s weak imports figures in China suggest downside risks to Japan’s exports figures. Wednesday will also bring the latest overseas visitors figures, with the quarterly spending numbers also due. The Reuters Tankan for April follows on Thursday, while the national CPI report for March is due on Friday. The other diary entries to note are two reports from the BoJ – the semi-annual Financial System Report (FSR) on Wednesday and the quarterly Senior Loan Officer Survey released on Friday. In the last FSR the BoJ expressed somewhat greater concern about developments in its dashboard of financial stability indicators and these concerns are unlikely to have declined given rising downside risks to the economic outlook. In the bond market the MoF will auction 20-year JGBs tomorrow and enhanced liquidity (maturities 5-15.5 years) and 1-year T-bills on Thursday.
There will be several euro area releases of note this week, including the final estimate of March inflation (Wednesday) and the flash PMIs for April (Thursday). With respect to the former, with the final estimates from Germany, France and Spain last week having aligned with the flash readings, the final euro area inflation data should also match the earlier readings of 1.4%Y/Y for the headline rate (down 0.1ppt from February) and 0.8%Y/Y for the core rate (down 0.2ppt). Wednesday will also bring euro area trade data for February and new car registration figures for March, while euro area construction output numbers will be published tomorrow.
But arguably of most interest this week will be sentiment survey results for April, to be scrutinised for hints of a pickup in economic momentum at the start of the second quarter. While a modest improvement is anticipated in the manufacturing PMI, it seems bound to remain firmly in contractionary territory. And with the services PMI likely to have moved broadly sideways, the composite PMI is expected to be little changed from the 51.6 reading in March, still close to the bottom of the range of recent years but consistent with ongoing expansion nonetheless. Other sentiment indices include Germany’s ZEW survey of financial analysts tomorrow and the Italian consumer and business confidence indicators on Friday. In the bond market, Germany will issue 25Y Bunds on Wednesday.
With the extension to the Article 50 process having removed the pressure to find an urgent solution to the Brexit impasse and the House of Commons on recess for Easter, the main focus this week will shift back to economic data. Admittedly, today will be relatively quiet with only the Rightmove House price index released this morning suggesting that asking prices rose for the fourth consecutive month and by 1.1%M/M in April, the steepest increase in more than year. Nevertheless, the annual pace of growth remained in the negative territory, albeit only marginally at -0.1%Y/Y. The flow of first-tier economic data releases will kick off tomorrow with the latest labour market figures. In January employment increased by 222k3M/3M, the biggest rise in more than three years. But with business sentiment surveys having signalled weakening in labour market conditions in recent months, the February data are likely to show a moderation in jobs growth to around 150k3M/3M. The unemployment rate is expected to remain at 3.9%, but there is a significant risk of a rise of 0.1ppt. Finally, average weekly earnings growth will likely be little changed from January when it posted a rise of 3.4%3M/Y, one of the steepest in recent years.
On Wednesday, we will receive the March inflation figures. The CPI rate ticked higher in February to 1.9%Y/Y, but that increase was driven solely by higher energy prices as the core inflation rate decreased by 0.1ppt to 1.8%Y/Y. We expect that both the headline and the core rates will have remained unchanged. The holiday-shortened week will end on Thursday with the release of retail sales data. The figures in January and February suggested that the retail sector had a strong start to the year with the average level of sales in these two months up by 1.0% compared to Q4. But, in line with the downbeat sentiment surveys from this sector seen recently, we expect the March figures to be much weaker, showing a monthly drop in the volume of sales. Thursday will also bring the Bank of England’s latest quarterly credit conditions survey. Supply-wise, tomorrow the DMO will issue £2.25bn of 2037 Gilts.
In the US, the data flow will begin later today with the NY Fed’s manufacturing survey for April, followed by the IP report for March and NAHB housing index for April tomorrow. On Wednesday the trade report and wholesale inventory data for February will be released. Further light on Q1 GDP growth will be cast by Thursday’s retail sales data for March, while the preliminary PMI readings and Philadelphia Fed manufacturing survey for April are also released that day, as are the Conference Board’s leading index for March and the business inventory report for February. The data flow will conclude on Friday with the housing starts and building permit reports for March. This week will also bring a small number of speeches from FOMC members and the release of the Fed’s latest Beige Book, concluding the Fed’s communication ahead of the monetary policy meeting on 1 May. The US corporate earnings season also heats up, with 9% of the S&P500 companies due to report their results. In the bond market the US Treasury will auction 5Y TIPS on Thursday.
There were no economic reports released in China today. But back on Friday, just after we sent out our morning note, the release of the money and credit aggregates for March continued the run of indicators pointing to stronger activity at the end of Q1. Specifically, aggregate financing increased CNY2.86tn in March – CNY1.0tn above market expectations. This brings total financing over Q1 to CNY8.2tn – a whopping CNY2.3tn greater than that seen in Q118 and suggesting that the degree of monetary loosening is greater than official commentary by policymakers had indicated. New bank loans rose CNY1.69tn in March and M3 growth picked up 0.6ppts to 8.6%Y/Y – both results also stronger than market expectations.
Looking ahead to the remainder of the week, the focus will be Wednesday’s release of the national accounts for Q1, alongside the usual array of monthly activity indicators for March. Despite the recent flow of more positive monthly releases, according to Bloomberg’s survey the median analyst expects China’s GDP growth to have slowed just 0.1ppt to 6.3%Y/Y, which would be the softest year-on-year reading since the quarterly series began in the early 1990s, although quarterly growth is pegged at ‘just’ 1.4%Q/Q. Reflecting the tone of other indicators, growth rates for IP, retail sales and capex are forecast to have firmed somewhat in March. The only other data released in China this week is tomorrow’s update on developments in house prices during March.
There were also no economic reports released in Australia today. Over the remainder of the holiday-shortened week the key focus will be Thursday’s Labour Force report for March, especially with last week’s FSR emphasising that the RBA views developments in the labour market as key to both the outlook for the housing market and monetary policy. According to Bloomberg’s survey the median analyst expects a trend-like 15k increase in unemployment but a 0.1ppt increase in the unemployment rate to 5.0%. The only other diary entries this week are tomorrow’s release of the minutes of this month’s RBA Board meeting and Thursday’s quarterly NAB business survey.
The only economic report released in New Zealand today was the service sector PMI for March. Disappointingly, the headline index fell 0.7pt to a 9-month low of 52.9. Within the detail the activity index fell 0.9pts to 52.5 and the employment index fell 0.9pts to 50.9. Most disappointingly of all, the new orders index fell 4.3pts to a 54.9, marking the weakest reading since September 2012.
Looking out over the remainder of the week the single focus for investors will be Wednesday’s CPI report for Q1 – one of the last important economic releases ahead of the RBNZ’s next monetary policy review on 8 May. According to Bloomberg’s survey the median analyst expects the headline CPI to have increased 0.3%Q/Q – 0.1ppt firmer than the RBNZ had projected in the last Monetary Policy Statement in February – although annual inflation is still expected to have declined 0.2ppts to 1.7%Y/Y. More important than the headline reading will be developments in the various measures of domestic and core inflation. The 30% trimmed mean sat at 2.0%Y/Y in Q4 but the RBNZ’s favoured ‘sectoral factor model’ estimate of core inflation was just 1.7%Y/Y – still below the midpoint of the Bank’s 1-3% inflation target range.