The week ahead, w/c 14 Jan 2019

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Wall Street eventually closed flat on Friday – but still up about 2½% for the week – erasing losses that had been recorded early in the session. However, the 10-year Treasury yield still closed down 4bps at 2.70%, even as the US core CPI met market expectations with a 0.2%M/M 2.2%Y/Y gain in December. With that background, and with Japan’s markets closed, one might have hoped for a reasonably quiet start to the week in Asia. However, a very disappointing Chinese trade report – more on this below – has seen key regional bourses begin the week in the red. Not surprisingly, markets were generally weakest in mainland China and Hong Kong (the CSI300 fell 0.9% and the Hang Seng is down about 1.5%) with slightly smaller losses seen elsewhere. China’s trade data also precipitated a decline in both the Australian and New Zealand dollars, a firmer yen and some weakness in crude oil and copper futures markets. Elsewhere, President Trump’s tweet that the US will ‘devastate Turkey economically’ if it hits the Kurds inevitably has taken its toll on the lira this morning.

So, futures point to weaker euro area and US equity markets today, while bond markets have seen core euro area govvies make gains and the periphery make losses. While it will be quiet for economic news from the US, the mood might not be helped by the euro area industrial production due later this morning, which are set to report the steepest drop in output since February 2016. But, of course, most notable this week will be events in the UK, where tomorrow evening’s Parliamentary vote will highly likely see Theresa May’s negotiated Brexit deal rejected by MPs, raising further the likelihood, at a minimum, of an extension of the Article 50 process beyond end-March.

China:
The countdown to the release of China’s Q4 GDP report (due next Monday) continued today with the release of trade data for December. China’s trade surplus widened to a much greater-than-expected $57.1bn from $41.9bn previously – the largest surplus since January 2016. Significant negative surprises were seen on both sides of the ledger, but were largest with regards to imports – these fell 7.6%Y/Y, much weaker than the 2.9%Y/Y increase reported in November, weighed partly by lower oil prices. Exports fell 4.4%Y/Y, marking the weakest reading since December 2016, with growth in November also revised down to 3.9%Y/Y from 5.4%Y/Y previously. Looking at the export data by region, exports to the US fell 3.5%Y/Y despite likely continuing to benefit from a front-loading of orders in advance of possible further increases in tariffs. Exports to the EU fell 0.3%Y/Y while exports to Japan fell 1.0%Y/Y. Some of the additional weakness at the aggregate level reflected an unusual 26%Y/Y slump in exports to Hong Kong, which failed to record the lift typically seen in December. Meanwhile, China’s import data also provided some early pointers on the yet-to-be reported export performance of some of its key trading partners. For example, imports from Japan fell 11.4%Y/Y in December – and so were down 0.9%Y/Y in Q4 – with the decline slightly larger after allowing for the performance of the yen. By contrast, China’s imports from the US slumped a whopping 35.8%Y/Y. As a result, China’s bilateral surplus with the US stood at $29.9bn in November. While down from a record surplus of $35.5bn last month, this was still more than $4bn wider than that recorded in December 2017.

Looking out over the remainder of this week the only scheduled Chinese report due is Wednesday’s home price data for December. The money and credit aggregates for December may also make an appearance over coming days.

UK:
Brexit is set to dominate the week in the UK, with all eyes on Parliament’s ‘meaningful vote’ tomorrow and Theresa May’s response to the result. Commission President Juncker is expected today to write to Theresa May to try to offer reassurances that, if the Irish backstop is triggered, the UK would be kept in a customs union with the EU only temporarily. But, not least as it will not be legally binding, nor will it offer anything new, the letter seems highly unlikely to change tomorrow’s result. So, the Prime Minister looks set to suffer defeat, with the main question seemingly being the magnitude of the loss. Reports of MPs’ intentions currently suggest the defeat could well be the largest ever endured by a Government in the modern House of Commons (the current record being a defeat by a margin of 166 votes suffered by the Labour Government in 1924). Belated efforts by Theresa May to reach out to certain Labour MPs – specifically by endorsing an amendment specifying that the UK should commit in the Political Declaration on the future relationship not to lower its standards on workers’ rights and environmental standards – might limit the size of the defeat somewhat. But it will not prevent a rejection of May’s Brexit deal.

It is still highly uncertain what May’s strategy will be in the event of defeat tomorrow. She will be pressed to give an early indication of her planned next steps, perhaps as soon as tomorrow evening or at Prime Ministers’ Questions in the House of Commons the following day. And the Government’s loss in a vote last week specifies that, in the event of defeat, May will have to submit a statement to Parliament on her intended next steps by close of business next Monday. But her strategy up to now has appeared to be to run down the clock, using the threat of a disorderly no-deal Brexit to try to persuade MPs to back her Brexit deal in the absence of alternatives. And if the size of defeat is not too extreme, she is likely to maintain that strategy and merely seek to resume talks with the EU to try to find a new way forward.

To some extent, however, May’s response might be constrained by what happens in tomorrow’s Parliamentary votes on various amendments, including one tabled by Hilary Benn which rejects both May’s deal and no deal, and seeks to give MPs a say in what happens next. Indeed, if she was being constructive, May might give her consent for Parliament to hold a set of ‘indicative’ votes on a range of different options to try to see whether a majority might exist on any particular path forward for Brexit. And we cannot exclude the possibility that May will call Labour’s bluff and propose a new General Election or second referendum.

Whatever path May chooses, however, there is very little chance of Parliament endorsing a Brexit deal and adopting all of the necessary legislation in time for the UK to leave the EU by end-March. As such, even though May’s spokesperson subsequently tried to rule it out, we were not surprised by Friday’s reports of senior UK Ministers and certain European governments, repeated in some of the UK press today, suggesting that Brexit will be delayed beyond end-March, perhaps initially to July. Those reports match our expectation that extra time will ensue and also that a ‘no deal’ Brexit will be avoided. And so we continue to attach roughly equal probabilities to the likelihoods of eventual (i) endorsement of a variant of May’s deal (perhaps whereby the door is left open to the so-called Norway-plus arrangement) or (ii) revocation of the Article 50 notice, with a second referendum or general election possible before then too.

Data-wise, this week brings December inflation (Wednesday) and retail sales figures (Thursday). We expect that the core CPI rate remained unchanged at 1.8%Y/Y, the lowest rate since Q117. But with energy prices having fallen very significantly, the headline CPI rate should come in below the 2.3%Y/Y rate seen in November – we forecast a decline to 2.1%Y/Y, which would also be the slowest pace since the start of 2017. Meanwhile, the retail sales data will probably be very weak. The growth rate in November, when many retailers offered attractive deals during Black Friday promotions, was flattered as many shoppers brought their spending forward. So, we expect payback in December, which might see sales falling by around 1.0%M/M or even more. Among other data announcements, UK Finance lending data (tomorrow), the RICS Residential Market survey and the BoE Credit Conditions survey (both due on Thursday) will be worth following too.

Japan:
Japanese markets were closed for a national holiday today. Looking out over the remainder of the week, there are several reports due that will cast further light on the strength of activity in Q4, as well as an update on national inflation. Wednesday brings November’s tertiary activity index, likely to report payback for the near-2%M/M rise in October. That day also brings November machine orders figures, similarly expected to be softer, while overseas visitor numbers for December will come with associated spending figures for Q4.

The coming week will also likely bring the Cabinet Office November Synthetic Consumption Index, as well as final industrial production data for November. Regards inflation, Friday’s national CPI release will likely show the headline rate falling sharply in December from 0.8%Y/Y due to declining prices of fresh food prices and energy. The BoJ’s preferred core rate, excluding those items, seems likely to move sideways at 0.3%Y/Y. Ahead of this, Wednesday brings December goods producer price inflation data, with the impact of the recent drop in oil prices set to be evident. In the markets, the MoF will auction 5Y JGBs on Wednesday.

Euro area:
The coming week brings a handful of top-tier economic data from the euro area kicking off today with November’s industrial production figures. In light of the weak readings from the four largest member states, euro area IP is set to post a decline of 1½%M/M or more leaving it firmly on track for a drop over the fourth quarter as a whole. A preliminary full-year German GDP growth figure for 2018 is due tomorrow along with an estimate of the government budget surplus – consistent with our forecast of subdued activity in Q4, we expect the figures to show full-year GDP growth of 1.5% down from 2.2% in 2017. November’s euro area goods trade data are also due tomorrow along with final French and Spanish inflation numbers for December. The equivalent German and Italian CPI figures are due Wednesday and the euro area numbers due Thursday – the flash euro area estimates of 1.6%Y/Y for headline inflation and 1.0%Y/Y for core inflation seem likely to be confirmed. Euro area car registrations figures for December are also due on Wednesday and, with German registrations down 7%Y/Y, seem bound to confirm a weak end to the year. Construction output figures are due Thursday with ECB balance of payments figures out Friday. Meanwhile, ECB President Draghi will speak at the European Parliament tomorrow. In the bond markets, Germany will sell 30Y bonds on Wednesday while Spain will sell bonds on Thursday.

US:
In the US, despite the ongoing government shutdown, the coming week looks set to bring a handful of economic data, starting on Tuesday with the Empire Manufacturing survey for January and December PPI figures. Wednesday will bring the Fed’s latest Beige Book, capital inflows data and the NAHB housing index, with weekly jobless claims and the Philly Fed index due the following day. Friday, meanwhile, will bring December’s industrial production report and the preliminary University of Michigan consumer sentiment survey for January. December’s retail sales and business inventories data (Wednesday), as well as housing starts figures (Thursday) risk postponement due to the government shutdown. In the markets, the Treasury will sell 10Y TIPS on Thursday.

Australia:
The only economic data released in Australia today concerned inflation. The Melbourne Institute of Applied Economic and Social Research reported that its monthly inflation gauge rose 0.4%M/M in December, lifting annual inflation by 0.3ppts to 1.9%Y/Y – back to where it had stood in October. The trimmed mean rose 0.2%M/M, lifting annual inflation on this measure by 0.5ppt to a 3-month high of 1.8%Y/Y – still below the bottom of the RBA’s 2-3% target band, nonetheless. Looking ahead, the only reports of any note scheduled over the remainder of the week are Wednesday’s Westpac consumer confidence reading for January and Thursday’s housing finance report for November. 

New Zealand:
There were no economic reports of any note released in New Zealand today. Tomorrow the Food Price Index for December will allow analysts to refine their estimates ahead of next week’s Q4 CPI release, while Wednesday’s Electronic Card Transactions report will cast light on consumer spending over the holiday season. The QV house price index for December is also scheduled for release on Wednesday while the REINZ housing report for December – containing data on sales – will be released on Thursday. This week’s Kiwi diary will conclude on Friday with the release of the manufacturing PMI report for December.

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