Week ahead, w/c 25 Feb

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Following a positive end to the week for stocks on Wall Street, the ‘risk on’ tone continued in Asia today, especially in China where key equity indices have rallied more than 5% (so that the CSI300 is now up more than 27% year-to-date in USD terms) after President Trump tweeted that he had decided to delay the tariff increases on $200bn of imports from China that had been scheduled for 1 March. According to Trump, “The U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues”, with a summit with President Xi Jinping at Mar-a-Lago proposed to “conclude an agreement”.

On a day largely devoid of major local data, however, equity markets elsewhere in the region were somewhat more reserved, suggesting that for most investors Trump’s announcement was already in the price with China clearly perceived to be the big winner. So, Japan’s TOPIX rose 0.7%, the Hang Seng is up less than ½%, and South Korea’s KOSPI closed little changed. US equities futures and the 10Y Treasury yield similarly have risen only slightly, with the latter at 2.66% still a couple of basis points below where it was this time Friday, having fallen later that day in response to more dovish commentary from Fed officials. In currency markets the NZ dollar received a small boost following a much stronger-than-expected retail spending report (detail below). And this morning, BTPs have bucked the trend elsewhere of rising yields, making gains following Friday night’s decision by Fitch to eschew an Italian sovereign downgrade, nevertheless maintaining a negative outlook on its BBB rating.

Looking ahead, a busy week in the US will bring Fed Chair Powell’s delayed semi-annual testimony to Congress (tomorrow and Wednesday) as well as plenty of data, including the first estimate of Q4 GDP (Thursday). Other highlights include further Brexit votes in the UK House of Commons on Wednesday, which might try to force Theresa May to request a delay to the Article 50 deadline, and flash euro area inflation and Tokyo CPI data (both Friday).

Japan:
A quiet start to the week in Japan brought just the BoJ’s services PPI figures for January. In aggregate prices fell 0.5%M/M, nonetheless leaving annual inflation on this measure steady at 1.1%Y/Y – an outcome that was in line with market expectations. Within the detail, as in December, the largest downward pressure emanated from volatility in prices in the advertising sector, which were down 2.6%M/M but still up 1.9%Y/Y. Transportation prices fell 0.6%M/M – led by lower prices for domestic airfares, ocean freight and international air freight – but were up 1.7%Y/Y.

Looking ahead, there is now set to be a lull in Japan’s domestic data flow until Thursday, when the pace will pick up considerably with the release of the IP, retail trade, housing starts and construction orders reports for January. Given last week’s soft manufacturing sentiment readings and very weak export news, the IP report – including the forecasts made by firms for the remainder of the quarter – will attract even greater-than-usual interest, with Bloomberg’s survey suggesting that analysts are bracing for a decline in output of more than 2%M/M. The household employment survey for January will follow on Friday, together with the final results of the manufacturing PMI for February, the Cabinet Office consumer confidence survey for February and the MoF’s corporate survey for Q4 – the latter providing investment and inventory data that will drive any revisions to the estimate of GDP growth that will be published a week later. Adding to a busy Friday, the advance February CPI reading for the Tokyo region will also be released and watched for clues to the national figures due next month. In the bond market the MoF will auction enhanced liquidity (maturities 15.5-39 years) on Tuesday and on 2-year JGBs Thursday.

Euro area:
This week’s euro area data calendar brings further results of February sentiment surveys, including the Commission’s business and consumer confidence indices on Wednesday and the final manufacturing PMIs on Friday. While the flash consumer confidence indicator in the past week posted a larger-than-expected improvement in February, business sentiment is expected to have edged further lower, to leave the Commission’s headline economic sentiment indicator similarly down slightly this month to 106.0, which would be a fresh 26-month low. The final euro area manufacturing PMI, meanwhile, is likely to align with this week’s preliminary reading showing the headline index dropping 1.3pts to a 5½-year low of 49.2.

Likely of more interest on Friday will be the euro area’s flash estimate of February inflation – we expect the headline and core CPI rates to move sideways at 1.4%Y/Y and 1.1%Y/Y respectively. Ahead of this, the week will bring the equivalent national releases from Germany, France, Italy and Spain on Thursday. Other releases of note in the coming week include euro area bank lending figures and unemployment numbers, both for January, on Wednesday and Friday respectively. Meanwhile, tomorrow Irish central bank Governor Philip Lane will have a hearing in the European Parliament to seek its approval of his nomination to become ECB Chief Economist once Peter Praet’s term concludes at end-May. Finally, in the markets, Germany will sell 2Y and 10Y bonds tomorrow and Wednesday respectively, while Italy will also sell bonds on Wednesday.

UK:
While Theresa May on the weekend admitted that she would not be able to secure a new deal with the EU this week, and would instead aim for a ‘meaningful vote’ on 12 March (just seventeen days before the Article 50 deadline), all eyes in the UK will still be on Westminster on Wednesday as MPs vote to try to influence the way forward. Among the most notable proposals is one tabled by the Conservative MP Sir Oliver Letwin and Labour’s Yvette Cooper, which, if approved, would allow MPs to demand that Theresa May should request an extension of the Article 50 deadline beyond 29 March if Parliament fails to approve a deal by the middle of March. An alternative, tabled by Conservative backbenchers Andrew Percy and Simon Hart, calls for a limited delay to Brexit Day to 23 May (the start of the European Parliament elections) if there is no formal deal approved by 13 March.

Given that there would still be insufficient time for Parliament to adopt the necessary legislation (particularly the key Withdrawal Agreement Bill) before 29 March even if MPs approve a deal on 12 March, an extension would seem essential to avoid a disorderly no-deal Brexit, and reportedly May herself might make a concession to such a move ahead of Wednesday’s votes. Finally, a further amendment to be watched this week is that proposed by Labour MPs Peter Kyle and Phil Wilson, which would call for MPs to support the negotiated Brexit agreement conditional on the outcome of a new public referendum – this one, however, might seem premature, and might be parked until the meaningful vote on 12 March.

Contrasting with the eventful week in store for politics, the coming week will be a quiet one for new UK economic data releases. Nevertheless, the flow of negative UK sentiment indicators continued today with the CBI’s quarterly services survey reporting that overall optimism in the sector fell in the three months to February at the fastest pace since the financial crisis, while sentiment in the consumer services sector – including hospitality, travel and leisure firms – deteriorated at the steepest pace since August 2016. According to the survey, business volumes posted the steepest drop since early 2013 and were anticipated to decline further over the coming three months, while profits fell at the sharpest pace for six years. And so, perhaps unsurprisingly given this backdrop and continued Brexit uncertainty, the survey indicated the weakest employment growth in the sector for eight years.

Further UK economic sentiment surveys – the GfK consumer confidence indices due Wednesday and the manufacturing PMIs out on Friday – will be most notable among the remainder of the UK data due this week. Not least given Brexit uncertainty, like the CBI’s today, both surveys will probably remain consistent with subdued economic sentiment this month. Among the hard economic data releases, BoE lending figures, due on Friday, are expected to confirm that mortgage lending flows in the UK remained little changed at the start of the year, as activity in the housing market remained subdued. Meanwhile, stronger activity in the retail sector that month likely provided some support to consumer credit growth, which in December eased to a more than four-year low of 6.6%Y/Y. We will get an early preview of how UK bank lending evolved that month tomorrow when UK Finance, an industry body, announces its own figures from the major retail banks. We could also get some insights on monetary policy tomorrow as BoE Governor Mark Carney and his colleagues from the MPC are scheduled to testify before the Treasury Select Committee.

US:
The US economic diary for the coming week will be especially busy, not least due to the release of a number of reports that had been delayed by the partial government shutdown, as well as the semi-annual testimony of Fed Chair Powell to Congress, now re-scheduled for tomorrow and Wednesday. Data-wise, following today’s wholesale inventory report for December, tomorrow brings housing starts and permits data and the S&P CoreLogic house price index, both for December. That day will also see the release of the Conference Board’s consumer survey for February. On Wednesday we will receive the advance goods trade report for December, together with factory orders for December and pending home sales for January. On Thursday we will finally receive the first estimate of GDP growth in Q4 with the full detail normally only published during the second release – expectations are for growth to moderate to close to 2%Q/Q ann. from an average of more than 3% over the first three quarters of 2018. The Chicago PMI for February will also be released on Thursday, casting more light on conditions in the manufacturing sector. On Friday we will receive the personal income and spending report for December, including the core PCE deflator. Data on personal income for January will be released at the same time, but estimates of spending and the core PCE deflator for that month still face a delay. Also on Friday we will receive the manufacturing ISM for February, final readings from the manufacturing PMI and University of Michigan consumer survey for February and information on auto sales during February. In the bond market the US Treasury will auction 2Y and 5Y notes today and 7Y notes tomorrow.

China:
There were no economic releases in China today. Looking out over the remainder of the week, aside from any further developments in US-China trade negotiations, most interest will centre on Thursday’s official PMI reports for February. Unfortunately, Bloomberg’s survey suggests that analysts expect no improvement on last month’s reading of 49.5 and so anticipate a third consecutive reading below 50. The Caixin manufacturing PMI, focusing on the SME sector, will follow on Friday. As usual, the presence of significant regional holidays means that these reports will need to be interpreted with a degree of caution.

Australia:
There were also no economic reports of note in Australia today. Over the remainder of the week the focus for investors will be on partial indicators of GDP growth in Q4 and on more recent developments in house prices. Regarding the former, the construction work done and CAPEX surveys are released on Wednesday and Thursday respectively, with Bloomberg’s poll of analysts suggesting that both construction activity and total capex is likely to have rebounded from the declines recorded in Q3. As usual, the forward-looking intentions component of the latter survey will be of at least as much interest as the quantum of activity in Q4, with this survey providing a 5th estimate of spending in the ‘18/19 financial year as well as the first estimate of intentions for the ‘19/20 financial year. On Thursday we will receive the money and credit aggregates for January, while the CoreLogic home price index for February will be released on Friday (the latter will likely have declined for a 16th consecutive month). The final CBA manufacturing PMI results for February will also be released on Friday, together with the AiG manufacturing index for February.

New Zealand:
The main focus in New Zealand today was the official retail sales report for Q4, representing the first of the major partial indicators to be released ahead of next month’s national accounts. The news was very good, with the value of all spending rising a strong 1.8%Q/Q and core spending (which excludes auto-related purchases) rising an even stronger 2.3%Q/Q. Given minimal inflation, total retail volumes rose 1.7%Q/Q – the most since Q117 and more triple market expectations – to be up 3.1%Y/Y (growth in Q3 was also revised up 0.3ppt to 0.3%M/M). Core volumes rose 2.0%Q/Q – the most since Q216 – and were up a very sturdy 4.5%Y/Y. These annual growth rates are consistent with consumer confidence indicators, which have generally remained quite robust (in contrast to indicators from the business sector, where firms’ have registered their dissatisfaction with aspects of government policy).

As far as the rest of this week’s diary is concerned, the key focus will be the ANZ Business Outlook survey for February, which is released on Thursday and will provide the first look at how business sentiment has begun the year (as usual there was no survey in January). The ANZ-Roy Morgan consumer confidence survey for February will follow on Friday. This week’s other key releases are the January merchandise trade and building approvals reports, released on Wednesday and Friday respectively. The Overseas Trade Indices for Q4, also released on Friday, will take already-released merchandise trade value data and estimate underlying movements in volumes and prices, allowing analysts to further refine their estimates of net export volumes during the quarter.

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