At the end of last week, US stocks rose to push the S&P500 up 0.5% to a new high, but US Treasuries made gains too, with 10Y yields down 3bps to 2.50%, while the dollar weakened somewhat. Those moves followed data showing that US GDP growth in Q1 beat expectations at 3.2%Q/Q annualized – to mark one of the strongest quarters of the past few years – but also that final private domestic demand was relatively subdued. Indeed, given the temporary factors that flattered the headline GDP figure, all expectations are that, when the Fed’s policy meeting concludes on Wednesday, the FOMC will be able to maintain its patient stance despite the recent strong performance of US stocks.
Given the market-friendly US backdrop, Asian equity markets have largely started the week on the front foot. Perhaps most notably, having retreated more than 5% last week, China’s CSI300 has rebounded more than 1%, ahead of the resumption of trade talks with the US in Bejing and tomorrow’s manufacturing PMIs. Korea’s KOSPI is also up about 1½% with the Hang Seng up a little less than 1%, but Australia’s ASX bucked the trend, down 0.4%, as ACGB yields edged higher. FX markets have seen limited moves with the yen particularly stable. Of course, Japanese markets are closed for the extended Golden Week, while China will have national holidays from Wednesday to the end of the week.
Moving to Europe, equities are pointing higher this morning while Bunds are a touch weaker and BTPs have made substantive gains this morning (10Y yields down about 5bps to 2.53%) as S&P decided not to downgrade Italy’s sovereign rating following its regular review on Friday evening. Spanish bonds, meanwhile, are little changed after yesterday’s general election saw the ruling Socialists significantly increase their share of the vote while the number of seats taken by the establishment centre-right Partido Popular – previously the largest party in parliament – plummeted. The result still leaves the Socialists and the populist left Podemos still some eleven seats short of a majority in parliament, so explicit and/or tacit support from small regional parties – including Catalan nationalists – or the centre-right Citizens, who appear less inclined to give their backing, will be required before a government can be formed.
Looking ahead, today will bring the Commission’s economic sentiment survey – arguably the most reliable guide to the strength of economic activity in the euro area – and US personal income and spending data, including the associated PCE deflators. Looking further ahead, like the Fed, the BoE (Thursday) will also this week make its latest policy announcement (to be accompanied by its updated Inflation Report forecasts), while there are plenty of top-tier economic data to come, including the first estimates of euro area Q1 GDP (tomorrow), euro area inflation (with national measures tomorrow, with the regional figure on Friday) and US payrolls (also, of course, Friday).
There were no significant surprises from yesterday’s Spanish general election. Against the backdrop of an economy that has seen steady growth and rising employment, and following the implementation of some crowd-pleasing measures (e.g. a sharp increase in the minimum wage and reversal of some welfare reforms), the Socialists (PSOE), who had been ruling in a minority capacity since last summer, saw a big increase in their share of the vote, gaining 38 seats in the 350-seat Parliament to take their total to 123. In contrast, the centre-right establishment Partido Popular (PP) saw its vote collapse, losing more than half of its seats (falling from 137 to just 66). The centre-right Citizens party gained somewhat at PP’s expense, rising to 57 seats, while the anti-austerity populist left Podemos saw its tally decline to 43. The far-right Vox has gained headlines as it won seats for the first time, but coming in fifth with just 24 seats it will not be kingmaker.
Talks to try to form a government will now get underway. But as the Socialists and Podemos are ten seats short of a majority, they will need the support – explicit or tacit – of the small regional parties (including the Catalan nationalists) or centre-right Citizens (who appear far from inclined) to be able to govern. As such, the negotiations are likely to take several weeks – almost certainly until after the European Parliament at end-May – to conclude. Nevertheless, the relatively strong showing from the Socialists (and parties of the left more generally) suggest that Spain might in due course see a somewhat more stable and assertive government than over the past few years.
Data-wise, this week will be a very busy one in the euro area, with key releases including first estimates of Q1 GDP and April inflation. In particular, the first estimates of Q1 GDP in the euro area, France, Italy and Spain are due tomorrow. We expect growth in the euro area and France to remain unchanged from Q4 at 0.2%Q/Q and 0.3%Q/Q respectively, and also anticipate a moderation in growth in Spain of 0.1ppt from Q4 to 0.5%Q/Q – each of these forecasts is a touch softer than the Bloomberg consensus. Our forecast of Italian growth of 0.1%Q/Q – which would take the year-on-year rate into negative territory – matches the consensus. Tomorrow will also bring the flash estimates of April inflation in Germany, France, Italy and Spain, while the equivalent figures for the euro area will be published on Friday. Not least due to the impact of the timing of Easter, we expect euro area headline inflation to rise 0.2ppt to 1.6%Y/Y and the core CPI rate to rise 0.2ppt to 1.0%Y/Y.
Other data due this week include the European Commission’s economic sentiment survey indices, due later today. The headline euro area ESI has declined in each of the past nine months, and given the drop in the flash consumer confidence index and further weakening in German and French manufacturing sentiment indices, another decline – which wold be consistent with the drop in the flash euro area composite PMI – is possible in April. Euro area bank lending data are also due today, with German labour market and consumer confidence indices published alongside the aforementioned GDP and inflation figures tomorrow. Wednesday will be a national holiday in several member states, but ECB Vice President Luis De Guindos will speak publicly in London that day. Thursday, meanwhile, brings the final estimates of the April manufacturing PMIs for the euro area and member states. In the bond markets, finally, tomorrow will see Germany sell 2Y Schatz and Italy sell 5Y and 10Y BTPs.
Politics will no doubt continue to dominate headlines in the UK, with Thursday’s local elections likely to inflict losses for the Conservative party as the Brexit debacle persists. And that will no doubt provide further impetus for the more hardline Brexiteer Tory MPs in their bid to remove Theresa May as party leader – something that the results of the European Parliament elections later next month might well help to crystallise. In the meantime, of course, the PM will be desperate to try to get a Brexit deal through Parliament to try to avoid the ignominy of those European elections. And so – while unlikely given the current impasse between the Government and Labour leadership in their negotiations – there remains the possibility that she might yet submit her Withdrawal Agreement Bill – the national legislation required to implement Brexit – to Parliament this week in an attempt to make progress.
Beyond the politics, but also of market importance, Thursday will bring the announcement by the BoE of its latest monetary policy decision and publication of its May Inflation Report. Admittedly, we expect no changes to policy, with Bank Rate set to be left at 0.75%. And the MPC’s forward guidance is also likely to remain little changed, continuing to suggest that monetary policy tightening will be required if the economy evolves in line with the BoE expectations. In the last Inflation Report, conditioned on slightly less than two full 25bp increases in Bank Rate over the forecast horizon, the BoE expected inflation to eventually settle slightly above its 2% target. Since then, in line with the global trend, market expectations for monetary policy have shifted downwards. And so the new set of projections should be based on barely more than one rate hike over the horizon, which will probably leave the MPC’s CPI forecast above-target in coming years. This suggests that the tone of MPC communication might be slightly on the hawkish side in order to align market expectations with its own thinking.
In terms of the outlook for growth, in March the MPC acknowledged that the economic dataflow had been mixed, but also revised up its Q1 GDP forecast to 0.3%Q/Q. We are slightly less optimistic about the pace of expansion last quarter. However, with stockpiling ahead of a possible no-deal Brexit having boosted activity in the manufacturing sector, a reading in line with BoE expectations is not impossible. Of course, the MPC’s assessment of the economic effects of Brexit uncertainty will be in the limelight too. Having previously conditioned its projections on the assumption of smooth adjustment to the average of a range of possible outcomes, given the extension to Article 50 until the end of October, the MPC might provide a bit more colour on how the Brexit process will affect the economy in coming quarters.
The other most notable item in this week’s UK economic data calendar is the release of the April PMIs, with the manufacturing, construction and services surveys due on Wednesday, Thursday and Friday respectively. In March, the PMIs suggested that the economy was stable but subdued, with the composite index falling to 50.0, the lowest level since the Brexit referendum. Given that companies should now have finished stockpiling and other Brexit preparations, and that political uncertainty remains very high, we would not be surprised to see the composite PMI dip into contractionary territory. The GfK consumer confidence survey, out tomorrow, will also be notable. Consumer sentiment has been low but stable in recent months, and we are likely to see that it continued following that trend this month. The BoE lending data due on Wednesday will be worth watching too.
This week will be extremely busy for US economic news, highlighted by Wednesday’s FOMC meeting and Friday’s April employment report. Regarding the former, there is virtually no prospect of a change in policy settings while the Bank’s ‘patient’ stance is very unlikely to have changed either. And in terms of the labour market, there is little reason to expect other than another solid gain in non-farm payrolls in April, another sub-4% unemployment reading and further evidence of gradually increasing labour costs.
As far as the rest of the week’s diary is concerned, today will bring the personal income and spending report for March, which will reveal the monthly profile – including for the core PCE deflator – implicit in the related Q1 national accounts. On Tuesday, the Conference Board’s consumer survey and Chicago PMI reports for April are due alongside pending home sales for March and the Employment Cost Index for Q1. Wednesday, meanwhile, sees the release of the April manufacturing ISM and PMI reports, together with March construction spending and April’s auto sales and ADP employment report. On Thursday the preliminary estimates for non-farm productivity and unit labour costs for Q1 will be released, together with the full factory orders report for March. On Friday, advance trade and inventory reports for March will cast light on potential revisions to GDP growth in Q1, while the non-manufacturing ISM and services PMI reports for April will also be released.
The US corporate earnings season will remain in top gear with more than 150 S&P500 companies due to report their results. However, the US Treasury will auction only T-bills over the coming week.
The main event in China this week will be the resumption in Bejing of trade talks with the US, which Treasury Secretary Mnuchin said yesterday were now “getting into the final laps”. With national holidays in China from Wednesday on, there is little time for new data, but the focus will be firmly on April’s PMIs, with the official manufacturing and non-manufacturing indices due for release tomorrow. After a surprise pick up in the composite PMI in March to 54.0, its highest reading for six months benefiting from improved showings in both manufacturing and services, these are expected to show only a modest improvement in economic conditions at the start of Q2. The private sector Caixin manufacturing PMI will also be published tomorrow and, likewise, is expected to point to modest expansion in the sector in April.
Ahead of next week’s much anticipated RBA meeting, it should be a relatively quiet week for top-tier Aussie data, kicking off tomorrow with the release of money and credit aggregates for March. Later in the week will bring the twin (AiG and CBA) manufacturing PMI reports for April on Wednesday, followed by the equivalent twin services PMI reports on Friday. But likely of more interest for the RBA will be the CoreLogic house price release for April on Wednesday, as well as building approvals figures for March on Friday, both of which will be closely watched for evidence of further housing market weakness.