The week ahead, w/c 11 Feb

Chris Scicluna
Emily Nicol

Overview:
It has been a mixed start to the week in Asian markets, which gained little direction from Wall Street’s eventual flat close on Friday. With Japan’s markets closed for a national holiday today – and thus no trading in US Treasuries either – most interest has centred on the re-opening of equity markets in mainland China following last week’s Lunar New Year holiday. While concerns about prospects for a US-China trade deal had weighed on Wall Street last week, perhaps surprisingly markets in China have made a positive start today with the CSI300 rising 1.8% as investors await the visit to Beijing at the back end of this week from Trade Representative Lighthizer and Treasury Secretary Mnuchin. In a session devoid of major economic news, meanwhile, equity markets in Taiwan and – to a lesser extent – Hong Kong and South Korea, have also begun the week on the front foot. However, equity markets closed somewhat in the red in both Singapore and Australia. In forex markets, the dollar has edged higher after five consecutive days of gains.

Looking ahead to the rest of today, UK Q4 GDP will be the most notable new data release while the US will bring revisions to past CPI inflation figures. German and Japanese GDP for Q4, and US, UK and Chinese CPI data for January are among other significant economic reports due over the remainder of the week. Politics-wise, the week brings another (likely inconsequential)) debate on Brexit in the House of Commons (Thursday) while the US government shutdown will rear its ugly head at the end of the week if there’s no breakthrough in talks on federal funding before then. 

UK:
As Theresa May strives for new concessions on the Irish backstop that might appease her most Brexity Tory MPs and the Northern Irish DUP, another meeting between UK Brexit Secretary Steve Barclay and EU chief negotiator Michel Barnier will take place today while discussions between UK and EU officials should continue over the coming week. May’s letter to Labour leader Corbyn, published last night, hinted at her readiness to turn her back on her right-wing backbenchers and instead strike a cross-party deal if they fail in due course to support her preferred approach. Among other things, May offered Corbyn more talks on Brexit, and pledged to protect existing commitments on workers’ rights, while also proposing a new mechanism for Parliament to consider upgrades to those rights if and when EU rules change. However, she continued to resist Corbyn’s call for a permanent customs union, arguing that it would curtail the UK’s ability to strike new trade deals. And that suggests that she is not prepared to strike a grand bargain with the opposition front bench. Instead, she appears to hope to persuade just about enough Labour and Tory backbenchers to back her preferred deal to allow it scrape through Parliament before Brexit Day on 29 March. And as Corbyn seems likely to cast a blind eye towards those Labour MPs voting for May’s deal in such circumstances, that remains the Brexit scenario to which we attach the greatest probability.

Of course, we doubt that anything significant will emerge from the UK-EU Brexit talks over the first half of this week. So, the Government will continue to argue that it needs more time to try to strike a deal. On Thursday, MPs will have the opportunity to debate the lack of progress and vote on proposed amendments to a ‘neutral’ government motion on the state of play, just as they did on 29 January. As on that occasion, theoretically those votes could establish new Parliamentary processes to allow MPs to influence the course of Brexit policy. But the failure of MPs to agree anything last month suggests that they will likely similarly fail to take greater control of the process this week. Instead, Parliament will be able to come back again at the end of the month to discuss progress and vote on next steps, although a meaningful vote is unlikely to be held until next month.

It is set to be a noteworthy week for UK economic data with Q4 GDP due today and January inflation and retail sales releases due Wednesday and Friday respectively. The BoE's updated forecasts published on Thursday suggested that growth last quarter is set to have eased from 0.6%Q/Q to 0.3%Q/Q, although we think that a lower reading of 0.2%Q/Q is possible. Once again, weakness in business investment will be striking, with a fourth consecutive quarterly decline likely to highlight the highly adverse impact of Brexit-related uncertainty on business activity. Private consumer spending growth, however, seems likely to remain in positive territory as does growth in government expenditure.

The monthly figures, meanwhile, are expected to show that manufacturing output rose slightly at the end of the year, with Brexit-related precautionary stock-building likely to have provided support. But, as far as GDP is concerned, most depends on the services sector. Consumer-focused services might be weaker, in line with the drop in retail sales in December. But the pace of increase in professional services is less certain – activity in this category has been growing at a decent pace in recent months, and it remains to be seen if this was maintained against the backdrop of higher uncertainty. Meanwhile, trade data, also due today, are set to show that the deficit remained little changed at the end of 2018 at around £3bn.

With regards to inflation, a fall in the headline CPI rate is on the cards on Wednesday, likely by 0.2ppt to 1.9%Y/Y, and the core rate might edge lower too from 1.9%Y/Y in December. But Friday's figures from the retail sector are likely to be a bit more positive than of late – following the disappointing festive period, some reports suggest that January discounting lured more buyers into the shops. Among other releases, the RICS Residential Market survey, due on Thursday, will be worth watching too. Housing market sentiment turned for the worse at the end of last year, and price developments are likely to have remained skewed to the downside in January. 

Euro area:
This week will bring a handful of notable economic releases from the single currency area, including euro area and German Q4 GDP (due Thursday). While the updated estimate of euro area GDP growth is expected to align with the flash estimate of 0.2%Q/Q, Germany will publish its Q4 data for the first time – with most activity indicators having remained weak last quarter, there’s a significant probability that the economy just moved no better than sideways in Q4 following the 0.2%Q/Q contraction in Q3 and a non-negligible risk of a negative figure which would confirm a German technical recession in H218. Ahead of this will bring the euro area’s December industrial production figures on Wednesday. We expect industrial output to have dropped a little less than ½%M/M in December, which would leave production down around 1% over the quarter as a whole, the third quarterly contraction out of the past four and the steepest since 2012. Meanwhile, against a backdrop of slowing economic growth, euro area labour market figures (also due Thursday) might also show only a limited rise in employment over the fourth quarter. Friday, meanwhile, will bring euro area trade figures for December, as well as new car registrations data for January.

Today’s most notable new data from the euro area have already been released in the shape of the latest business survey from the Bank of France. In contrast to the modest improvement reported in the French PMIs, these indices suggested a weaker start to the year. In particular, the headline manufacturing index declined 3pts in January to 99, its lowest reading since October 2016 and just below the long-run average, as production reportedly fell and order levels remained subdued. Sentiment in the services sector also dipped slightly, with the respective index down 1pt to 100, its lowest level since August 2017. In contrast, construction firms remained broadly upbeat about conditions at the start of the year, with the relevant index unchanged at an above-average 105. So, despite the downbeat tone among manufacturing and services firms – no doubt in part reflecting ongoing disruptions from the Gilet Jaunes protests – the Bank of France assessed today’s survey to be consistent with GDP growth of 0.4%Q/Q in Q119, an improvement of 0.1ppt from the surprisingly stable growth of 0.3%Q/Q in Q418.

In the markets, after Friday saw 10Y Bund yields slip below 0.1%, and the 10Y spread of BTPs over Bunds briefly touch 300bps, the bond auctions from Germany and Italy, scheduled for Wednesday, will be watched.

Japan:
Following today’s national holiday, the highlight of the Japanese economic diary this week will be Thursday’s preliminary national accounts for Q4. After a disappointing 0.6%Q/Q contraction in Q3, our colleagues in Tokyo forecast a 0.5%Q/Q rebound in real GDP in Q4. Solid growth in private consumption, a rebound in business capex and a small positive contribution from inventories is expected to be partly offset by a further negative contribution from net exports and a small negative contribution from public spending. Ahead of the national accounts we will receive the Tertiary Industry Index for December tomorrow and the January goods PPI on Wednesday. The final results of the December IP survey are due on Friday. In the bond market, the MoF will auction 5-year JGBs on Wednesday and 10-year inflation-linked JGBs on Friday. 

US:
In the US, today will bring the release on Monday of revisions to the CPI, which will include new quality adjustments for telecommunication services and new seasonal factors. The NFIB small business survey for January and JOLTS survey for December are due tomorrow. Likely of more interest will be on the January CPI report on Wednesday, with the PPI report for last month due the following day. Also on Thursday we will finally receive the December retail sales report and November business inventory data, which will provide additional information ahead of the Q4 GDP report now scheduled for release at the end of this month. On Friday January IP data and February’s New York Fed manufacturing survey will cast more light on the factory sector. That day will also see the release of the preliminary findings of the University of Michigan’s consumer survey for February and import price data for January. 

China:
No major Chinese data are scheduled for release during the early part of this week, so the main focus will be on any headlines that emerge from trade meetings in Beijing between Chinese and US officials (the latter represented by US Treasury Secretary Stephen Mnuchin and US Trade Representative Robert Lighthizer). The domestic data flow begins on Thursday with the trade report for January. According to Bloomberg’s survey, analysts expect exports to have improved only slightly from the surprise 4.4%Y/Y drop reported in December, while imports are expected to have declined by even more than the 7.6%Y/Y slump reported last month. That said, as usual at this time of the year, the proximity of regional holidays can add volatility and cloud interpretation of the outcome. Inflation data for January will follow on Friday, with the market expecting the annual CPI rate to be steady at 1.9%Y/Y but the PPI rate to decline to a 26-month low of just 0.3%Y/Y. 

Australia:
There were no domestic economic reports in Australia today and the rest of this week is relatively quiet too. The main focus will be tomorrow’s NAB business survey for January, especially in light of last week’s RBA commentary and the sharp decline in business conditions that was reported by firms in the previous survey. Housing finance data for December will also be released tomorrow, while the Westpac consumer confidence survey for February will be released on Wednesday. 

New Zealand:
The main focus in New Zealand this week will be on monetary policy, with the RBNZ scheduled to announce the outcome of its first OCR review at 2pm NZT on Wednesday (henceforth the new time and day for RBNZ monetary policy announcements). The Bank will also release updated economic and monetary policy forecasts in the accompanying Monetary Policy Statement (MPS). While the OCR is very likely to be retained at 1.75%, the deterioration in the global backdrop means that the Bank is likely to backtrack on some of the positive commentary offered in the November MPS – in essence, mirroring last week’s action by the RBA. This means that policy tightening will be projected to be at least a year away, with the Bank remaining open to the possibility of easing monetary policy in the interim should that be needed to ensure that inflation returns sustainably to 2%. This week we may also receive more information on how monetary policy will operate under the new remit/charter structure when the new MPC decision-making structure takes effect on 1 April. On the data front we will receive a key indicator of January retail spending tomorrow, followed by home price data on Wednesday and the January manufacturing PMI and December migration reports on Friday.

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