The week ahead, w/c 18 February

Emily Nicol

On Friday, Wall Street celebrated the avoidance of a further government shutdown, positive commentary from US President Trump and China regarding progress in the trade negotiations, and some signs of a lift in consumer and manufacturer sentiment. The S&P500 closed up 1.1% and on its highs for the session, taking its gain for the week to 2.5%. Credit spreads narrowed, commodities rallied and US Treasury yields inched higher. And so, not surprisingly, Asia today saw a significant rally in equity markets across much of the region. This is especially so in mainland China (CSI300 +3.2%), Hong Kong (Hang Seng +1.7%) and Japan (TOPIX 1.6%), where markets had been down particularly heavily on Friday. Investors in China may have been additionally comforted by late-Friday’s much stronger-than-expected January credit data. Meanwhile, investors in Japan seemed to shrug off today’s machinery orders report, which cast some doubts about the prospects for continued growth in business investment, at least in the near term.

In Europe and the US, after a relatively quiet start to the week, focus will turn to February sentiment surveys, while Brexit noise will no doubt continue to dominate the news flow in the UK. And investors will no doubt watch the minutes from the RBA (tomorrow) and the FOMC (Wednesday) and the ECB account (Thursday) for any further insights into near-term policy.

Following last week’s indication that business investment spending had rebounded in Q4, the domestic focus in Japan today was the machinery orders report for December. In summary, while the key headline measure of orders proved slightly firmer than market expectations, the details of the report pointed to the potential for some near-team weakness in investment spending, driven by offshore markets and weak public spending.

In particular, following a strong start to Q4, total machinery orders – which are very volatile from month to month – slumped 18.6%M/M In December and so were down 1.6%Y/Y. However, the closely-watched series of core private orders – which excludes ships and other volatile categories – fell a negligible 0.1%M/M in December, after being completely unchanged in November. This result was actually slightly stronger than market expectations, and saw annual growth virtually unchanged at 0.9%Y/Y. Core private orders from the non-manufacturing sector rose 6.8%M/M and 6.5%Y/Y in December. By contrast, private orders from manufacturers – more exposed to the global economy – fell 8.5%M/M and were down 5.3%Y/Y. A particular source of weakness in December was foreign orders, which fell 21.9%M/M. However, coming after two previous months of strong growth, foreign orders still rose 1.7%Y/Y. Meanwhile public sector orders, which are especially volatile, fell 14.8%M/M and 12.2%Y/Y.

Given the virtually flat outcome in December, core private orders fell 4.2%Q/Q in Q4. This marked the weakest outcome since Q216 and was a much weaker performance than machinery manufacturers had forecast at the beginning of the quarter (indeed, core private orders had been forecast to rise a very strong 3.6%Q/Q). Total machinery orders were much more robust, rising 3.9%Q/Q. Looking ahead to the current quarter, the Cabinet Office’s latest survey of 280 machinery manufacturers saw firms forecast a 1.8%Q/Q decline in core private orders in Q1, which if realised would leave orders lower than a year earlier. Meanwhile, firms are forecasting a heavy 13.0%Q/Q decline in total machinery orders. The particularly downbeat forecast for total orders was substantially driven by very pessimistic expectations for orders from the foreign and public orders, which are expected to decline 17.1%Q/Q and 22.7%Q/Q. It remains to be seen whether these forecasts prove too pessimistic.

Looking out over the remainder of this week, tomorrow’s Reuters Tankan for February will be of interest in light of the decline in sentiment recorded in January (especially in the manufacturing sector, where the headline diffusion index hit a two-year low). On Wednesday, attention will turn to the external sector with the release of the trade balance and overseas visitor reports for January – over the first twenty days of the month, the value of exports fell a steep 8.9%Y/Y while imports fell 8.4%Y/Y. Thursday’s focus will be February’s preliminary manufacturing PMI, which also saw a sharp decline in January. Finally, Friday brings the national CPI for January, which may point to some better – but likely short-lived – inflation news for the BoJ in light of the advance results from the Tokyo region. The final Monthly Labour Survey for December will also be released that day. In the bond market the MoF will auction 20Y JGBs tomorrow and enhanced liquidity (maturities of 5-to-15.5 years) on Thursday.

Euro area:
After a quiet start to the week with no data of note due today, it will be a busy one for euro area economic data, dominated by February sentiment surveys, including the Commission’s flash consumer confidence indicator on Wednesday and the flash PMIs on Thursday, while also bringing final inflation figures for January and the ECB’s account from its most recent Governing Council meeting.

Having maintained a downward trend throughout 2018, consumer confidence surprised on the upside at the start of 2019. And expectations are for a further modest improvement in February, although this would likely still be the third-lowest reading for almost two years. Business sentiment similarly fell sharply last year and the euro area’s composite PMI took a further step down in January to its lowest level for 5½ years. But expectations are for the PMIs to move broadly sideways in February in the euro area and the two largest member states. Other national sentiment indicators due include those from Germany’s ZEW survey of investors (tomorrow), and the business climate indices of France’s INSEE (Thursday) and Germany’s Ifo institute (Friday). The back end of the week will also bring final January inflation numbers from Germany, France and Italy on Thursday, ahead of the euro area aggregate figure on Friday – the flash euro area estimates of 1.4%Y/Y for headline inflation and 1.1%Y/Y for core inflation seem likely to be confirmed. Thursday’s ECB account will be worth watching for any further insight into likely changes to the Governing Council’s interest rate guidance at the next meeting in March as well as views on the case for a new round of TLTROs.

Among other releases, euro area construction output and current account figures are due tomorrow and the final estimate of German Q4 GDP will come with a first expenditure breakdown on Friday. There are several policy members due to speak in this week including Vice President Guindos tomorrow, Chief Economist Praet every day bar today, and President Draghi on Friday. In the markets, Germany will sell 5Y bonds on Wednesday, while France and Italy will sell bonds with various maturities on Thursday and Friday respectively.

As the next crucial Brexit debate and subsequent vote looms on 26 and 27 February, and her attempts to persuade her Tory MPs to unite over a Brexit deal over the weekend seemingly falling on deaf ears, Theresa May has a busy week ahead speaking with leaders of EU member states and once again heading to Brussels to meet with European Commission President Jean-Claude Juncker to try (most likely in vain) to win concessions over the backstop. Aside from Brexit noise, this week will also bring several UK data releases of note. First up will be the latest labour market report tomorrow, which is expected to show modest employment growth in the three months to December to leave the unemployment rate unchanged at 4%. Nevertheless, wage growth is likely to remain close to November’s increase of 3.4%3M/Y, which was the strongest in more than a decade. Wednesday, meanwhile, will bring the CBI’s industrial trends survey for February, which is expected to show that conditions in the manufacturing sector continued to deteriorate in the face of ongoing Brexit uncertainty. The CBI will also provide an update on retail sector conditions in February in its distributive trades survey due for release on Friday. Elsewhere, Thursday will bring public spending figures for January, the last release of such data before next month’s Spring Statement. Supply-wise, the DMO will sell 2057 bonds on Thursday.

In the US, following today’s Presidents’ Day holiday, the economic diary begins tomorrow with the release of the NAHB housing index for February. On Wednesday there will be plenty of interest in the minutes of last month’s FOMC meeting. Thursday will see the release of the delayed durable goods orders report for December, together with the Philadelphia Fed’s manufacturing survey for February. Also that day we will receive existing home sales data for January, the Conference Board’s leading Index for the same month and the preliminary Markit PMI reports for February. While there are presently no reports scheduled for release on Friday, several FOMC members will speak at a Fed conference on ‘The future of the Federal Reserve’s balance sheet’. Other Fed speakers in the coming week include Mester tomorrow and Bostic on Thursday. In the bond market, the US Treasury will auction 2-year FRNs on Wednesday and 30-year TIPS on Thursday.

There were no economic reports in China today and Friday’s home price report for January is the only diary entry over the remainder of the week. As a result, there will be little to distract attention away from any further headlines concerning progress towards a US-China trade deal.

There were no economic reports released in Australia today. However, with the RBA having signalled a clear focus on developments in the labour market as a key determinant of the Bank’s policy direction, there is plenty for investors to get their teeth into over the remainder of the week. Perhaps the key release will be Wednesday’s Wage Price Index for Q4. Any sign of a lift in wage pressure would undermine the policy easing that the market is currently pricing, while any disappointment would be viewed as confirming downside risks to the broader inflation outlook. The DEWR job vacancies index for January will also be released on Wednesday, while the Labour Force survey for January will follow on Thursday. Regarding the latter, while these figures can bounce around a bit from month to month, the market is likely to be sensitive to any deviation from the consensus expectation that the unemployment rate has remained steady at 5.0% during the month. Following these reports, investors will have the opportunity to hear again from RBA Governor Phil Lowe when he gives his semi-annual testimony to a parliamentary committee on Friday, which as usual will feature a lengthy Q&A that normally lasts 2-3 hours or so. The minutes from the last RBA Board meeting will be released tomorrow. The only other reports this week are Thursday’s flash CBA PMI indices for February, although given their short history they will likely continue to be largely ignored by the market.

New Zealand:
While Friday’s manufacturing PMI had pointed to weaker conditions in the factor sector in January, today New Zealand’s services PMI indicated that this sector had made a much brighter start to the year. The headline index rose 3.1pts to an 8-month high of 56.3 in January, with the activity index jumping 9.2pts to a 10-month high of 61.5. Meanwhile the new orders index rose 1.8pts to 61.4 – about 3pts above the average for that series – and the employment index rose 2.6pts to 52.9.

The Kiwi diary is sparsely populated over the remainder of the week. The Q4 PPI may attract a passing interest on Wednesday.

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