The week ahead: RBA, BoE, etc.

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
After positive weekend comments made by President Trump regarding US-China trade negotiations, Japan’s equity markets have started the week on the front foot, with the TOPIX up 1.1%, benefiting also from a depreciation in the yen to its weakest level in more than a week (around 109.75/$). In the bond market, Friday’s post-payrolls sell-off in US Treasuries has seen JGB yields nudge up no more than 1bp today (with 10Y yields still at the BoJ’s target of zero percent). Ahead of tomorrow’s RBA policy announcement, Australian bond yields rose around 2bps despite some disappointing local data (detail below). Markets in mainland China, Taiwan and South Korea were all on holiday today (indeed China and Taiwan will remain closed all week, while South Korea is closed until Thursday). Elsewhere in the major economies, it should be a relatively uneventful day for economic data (e.g. just factory orders numbers out of the US), with the coming week relatively on potential game-changing releases, although the UK’s services PMI (tomorrow) and BoE policy announcement and Inflation Report will be watched as Brexit policy remains in flux. 

Japan:
A relatively quiet week for data in Japan kicked off today with the release of monetary data for January. Reflecting the BoJ’s declining asset purchases off an increasing base, growth in the monetary base slowed to 4.7%Y/Y in from 4.8%Y/Y previously – the slowest growth recorded since May 2012. Looking out over the remainder of this week, the service sector and composite PMI readings for January will be released tomorrow. A further take on sentiment will be provided by Friday’s Economy Watchers survey for January, which will be of particular interest in light of the sharp decline in sentiment reported last month. Also on Friday we will receive more news on household consumption and incomes, with MIC releasing its measures of household spending and the MHLW releasing the results of its preliminary Monthly Labour Survey (in both cases pertaining to December). The BoJ will release its measures of consumption activity in December on Thursday, followed by bank lending data for January on Friday. The BoJ will release full balance of payments data for December on Friday too. In the bond market the MoF will auction 10-year JGBs tomorrow and 30-year JGBs on Thursday.

Euro area:
This week should be quieter than of late for the euro area economic news flow. Tomorrow will bring the final services and composite PMIs for January, which are likely to confirm the findings of the flash estimates to suggest a further weakening in economic conditions at the start of 2019. In particular, the headline euro area composite PMI is likely to align with the flash estimate, which declined 0.4pt in January to 51.1, a 5½-year low. Tomorrow will also bring euro area retail sales figures for December, which are expected to show some payback for the solid increases in the first two months of Q4, not least given the exceptionally sharp decline already reported in Germany that month. With respect to the new data from individual member states, Germany’s December industrial production report, due Thursday, will be most notable. While expectations are for an increase (0.7%M/M) that month, this would still leave output down in Q4 by more than 1½%Q/Q for the second successive quarter. Those data will be preceded by German factory orders numbers on Wednesday and followed by German trade figures on Friday. French and Italian IP releases for December are also due Friday, while French trade and Italian retail sales figures will be published on Thursday. In the markets, Germany will sell index-linked bonds tomorrow, while France will sell bonds with various maturities on Thursday.

UK:
There is little doubt that Brexit will remain in the limelight this week, as Theresa May and Government officials continue discussions with selected political opponents in the UK and European interlocutors to try to find agreement on new proposals to put before Parliament next week. There still appears little chance of the EU budging from its refusal to reopen the Withdrawal Agreement to drop the Irish border backstop. But the Political Declaration remains open for modification. And with the Government offering Labour MPs financial inducements to benefit their constituencies, and conducting discussions on safeguards and possible enhancements to workers’ rights, there remains the possibility that a majority in Parliament could eventually be found for a deliverable Brexit, probably including permanent customs union as long – of course – as Theresa May dilutes her red lines.

Monetary policy will be back in the limelight too this week, with the BoE set to announce its latest policy decision on Thursday. With the UK economy facing severe headwinds from Brexit uncertainty and concerns about slowing global growth, there is no chance of a policy change at this meeting: we expect that all nine MPC members will vote to keep Bank Rate at 0.75%. The policymakers might take comfort from the fact that the tight labour market is finally generating some domestic inflationary pressures – the latest data for average weekly earnings showed the strongest growth since the global financial crisis. However, the Inflation Report will probably show downward revisions to the near-term BoE forecasts for both GDP growth and inflation. Indeed, the headline CPI rate in the last three months of 2018 was notably lower than the BoE expected, and the MPC has already acknowledged that GDP in Q4 will have grown by less than the 0.3%Q/Q rate expected in November. And in any case, the BoE’s forecasts are based on a smooth-Brexit assumption, which can certainly not be taken for granted, with a risk of no deal and also a high probability that Article 50 will have to be extended. Elevated uncertainty will depress UK economic growth further. And, against this backdrop, the MPC should refrain from sending any unnecessarily hawkish signals this week.

On the data front, the flow of January PMIs will continue today and tomorrow bringing the surveys respectively from the construction and services sectors. Both headline PMIs are expected to slip back, and that would leave the composite PMI, which is also due on Tuesday, falling from the 51.4 level seen in December. In addition to the PMIs, the BRC Retail Sales Monitor for January and new car registration data are also out Tuesday. These releases will give us more insights into how consumer spending fared at the beginning of the year.

US:
In the US, this week’s economic diary remains somewhat uncertain given the ongoing effects of the recent partial government shutdown. As things stand, the factory orders report for November is scheduled for today, followed tomorrow by the non-manufacturing ISM and services PMI reports for January. The previously delayed November trade report has been rescheduled for Wednesday, while the Fed’s consumer credit report for December will be released on Thursday. At the time of writing it remains to be seen whether any of the myriad of delayed reports will see the light of day perhaps late in the week. The Q4 GDP report, postponed from this past Wednesday, may well still be more than a week away given delays in the release of many of the key contributing reports (at this stage the December retail sales report does not have a release date). A busy week for bond issuance will see the US Treasury auction 3-year notes on Tuesday, 10-year notes on Wednesday and 30-year bonds on Thursday.

China:
Following Friday’s disappointing Caixin manufacturing PMI for January (the headline index fell 1.4pts to 48.3), Sunday brought the release of the counterpart index for the service sector. The headline services PMI weakened a comparatively modest 0.3pt to 53.6 – but still contrasting with the improvement registered in the official non-manufacturing PMI – so that the overall composite PMI index fell 1.3pts to a 3-month low of 50.9.

Australia:
A busy week for local data and events in Australia kicked off today with a trio of soft economic reports. First up, the number of dwelling approvals fell a disappointing 8.4%M/M in December. This marks the fifth decline registered in the past six months and means that approvals ended the year down 22.5%Y/Y. As in prior months most of the weakness was due to the apartment sector, with approvals there slumping 18.6%M/M and 38.0%Y/Y. Approvals for houses fell a more restrained 2.1%M/M and 11.1%Y/Y. In value terms approvals for dwellings fell 13.7%Y/Y in December. And with the value of approvals for non-residential buildings down a similar 15.0%Y/Y, total construction approvals fell 14.2%Y/Y to the lowest level since October 2016. Adding to the downbeat tone, the ANZ Jobs Ads Index fell 1.7%M/M in January – also marking the fifth decline in the last six months and leaving the series down 3.7%Y/Y. While the RBA has somewhat played down this internet-based indicator – reflecting the growing importance of other advertising forms, including social media – the weaker trend of late does appear consistent with other labour market indicators. Meanwhile the day’s pricing news was also weak, with the Melbourne Institute of Applied Economic and Social Research reporting that its monthly inflation gauge fell 0.1%M/M in January, lowering annual inflation by 0.4ppt to 1.5%Y/Y – the lowest reading since November 2016. The trimmed mean was also weak, falling 0.1%M/M and so lowering annual growth by 0.4ppt to 1.4%Y/Y – the latter just above the November low.

In other news, late in the day the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released its final report. The report stopped short of recommending the separation of financial institutions’ advice and wealth management functions, but did make 76 other recommendations – all of which the Government and Opposition have pledged to adopt. A significant focus of those recommendations is on sharpening oversight of institutions’ salary and incentive structures and on requiring regulators to hold institutions and individuals to account when misconduct occurs.

Turning to the remainder of this week’s diary, the key focus will undoubtedly be on the RBA. Tomorrow the Bank’s Board will announce the outcome of its first policy review for this year. While actual policy settings will almost certainly remain unchanged, and the Bank’s overall stance will likely remain neutral, a combination of weaker-than-expected domestic activity data and a weaker outlook for the global economy should lead to a more dovish post-meeting statement than that issued back in December. Specifically, the Bank will likely indicate that future growth and inflation outcomes are likely to be slightly weaker than forecast in the November Statement on Monetary Policy. Governor Philip Lowe will have an opportunity to elaborate on the outlook when he gives a speech to the National Press Club on Wednesday, while the Bank will release its full updated Statement on Monetary Policy on Friday. The latter will see the Bank formally update its growth and inflation forecasts, which will most likely roll back the upgrade that was made in November. If so, the Bank’s forecasts will remain consistent with the next policy move still being a tightening, but will clearly imply that a rate hike is unlikely to be required until sometime next year.

On the data front tomorrow will also bring more clues regarding GDP growth in Q4 with the release of both the December retail sales and international trade reports (the former will also include an estimate of growth in volumes in Q4, which should be modestly positive following subdued growth of just 0.2%Q/Q in Q3). Thursday’s construction PMI for January and quarterly NAB business survey for Q4 are the only other data releases of note this week.

New Zealand:
The number of Kiwi dwelling approvals rose 5.1%M/M in December and was up 12.0%Y/Y. Approvals for houses fell 3.2%M/M and were up 6.1%Y/Y, underperforming growth in smaller units (town houses, apartments etc). The value of all dwellings approvals rose just 4.4%Y/Y, however, weighed down by weaker approvals for renovations. Meanwhile the value of non-residential approvals rose 8.2%Y/Y, so that the value of all approvals issued grew 6.1%Y/Y – a more resilient performance than that seen across the Tasman, not least due to New Zealand’s continued strong population growth.

The remainder of this week is a quiet one, especially with the market closed on Wednesday for the Waitangi Day national holiday. The only economic report due – albeit a very important one – is Thursday’s suite of labour market indicators for Q4. Following a much stronger-than-expected 1.1%Q/Q increase in employment in Q3, and an even more surprising 0.5ppt decline in the unemployment rate to just 3.9%, the market suspects that some statistical payback will be seen in Q4. According to Bloomberg’s survey, analysts expect the survey to reveal that employment grew 0.3%Q/Q (up 2.6%Y/Y) and that the unemployment rate moved up 0.2ppts to 4.1%. Of greater importance will be developments in labour costs, which will have a particular bearing on the tone of the RBNZ’s commentary at next week’s policy review. The market’s forecast of a 0.6%Q/Q lift in the Labour Cost Index – essentially a proxy for unit labour costs – implies a lift in annual growth to a post-GFC high of 2.1%Y/Y. Such an outcome should give the Bank greater confidence that its inflation target can be met without the need for further stimulus.

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