The week ahead, w/c 21 January 2019

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Following on from Friday’s gains in the US, Asian equity markets have on the whole started the week on the front foot. Today’s data confirmed a slowdown in Chinese GDP in Q418 to 6.4%Y/Y, which matched the reading of Q109 to be the joint-weakest since 1992. That, however, was broadly as expected, and there was a modicum of comfort taken from China’s monthly data for December, with slightly stronger-than-expected retail sales growth and a pickup in industrial production growth too. As a result, China’s main equity indices advanced about ½% on the day. Likewise, despite a disappointing Reuters Tankan report which flagged downside risks to the manufacturing output (details below), Japanese equities also advanced, with the Topix closing up 0.6% on the day, while the yen strengthened only slightly having depreciated on Friday to close to ¥110/$ for the first time since New Year’s Day.

Futures, however, are pointing to declines when US equity markets reopen tomorrow. And European stock markets (with the exception of the UK) have opened on the back foot, while most euro govvies (except BTPs) opened a touch firmer. The day ahead should be relatively quiet for economic news, with no new top-tier data due and Theresa May’s latest statement to MPs on her Brexit intentions likely to suggest that her Plan B is simply to carry on with her Plan A, with further discussions to run down the clock in the hope that her Brexiter backbenchers and the Northern Irish DUP will eventually back her negotiated deal with the EU in order to avoid the major economic self-harm of a no deal. Looking ahead to the rest of the week, scheduled announcements from the BoJ (Wednesday) and ECB (Thursday) will see monetary policy left unchanged but recognition of the recent deterioration in the economic dataflow. Data-wise, the flash euro area PMIs, UK labour market, Japanese trade and US housing reports are arguably the most notable releases to come.

China:
Chinese GDP in Q418 came in broadly in line with expectations, with growth down 0.1ppt to 6.4%Y/Y, matching the weakness seen during the global financial crisis, which itself was the softest quarterly pace since 1992. So, this left full-year growth at 6.6%Y/Y, a touch above the government’s target but still the slowest annual pace since 1991. On a seasonally adjusted quarterly basis, growth weakened in Q418 by 0.1ppt to 1.5%Q/Q, the softest rate since Q118. In terms of the sectoral breakdown, growth in the secondary and tertiary sectors alike slowed 0.1ppt apiece to 5.8%YTD/Y and 7.6%YTD/Y respectively, but while the former matched the lowest since Q109, the latter merely reversed the rise in Q3.

December’s monthly indicators, also published today, were slightly more encouraging than the quarterly aggregates, suggesting slightly more positive momentum heading into the New Year. In particular, retail sales growth picked up 0.1ppt to 8.2%Y/Y, while the increase in industrial production was firmer at 0.3ppt to 5.7%Y/Y. However, despite recent policy initiatives, there appeared to be little improvement in investment at the end of last year, with urban fixed asset investment growth unchanged at 5.9%Y/Y and growth in property investment easing to 9.5%Y/Y, the softest pace for a year.

Japan:
The BoJ policy meeting, concluding on Wednesday, is the main Japanese event this week, with most focus on the Policy Board’s updated economic forecasts. Some disappointing activity data – especially the lower base provided by the Q3 GDP report – will require a downward adjustment to its forecast for growth, at least for FY18 (currently 1.4%Y/Y). The inertia of underlying inflation, step down in oil prices, and government plans to abolish pre-school education fees, demands a downwards revision to the BoJ’s inflation projections. In our view, the Bank’s forecast for core CPI in FY19 of 1.4%Y/Y (excluding the impact of the consumption) could be as much as 1ppt too high. But the updated Outlook Report will likely see the Board’s median view nudged only modestly lower, with comfort still taken from its estimate of a positive output gap and tight labour market. So, the BoJ will remain constructive about the medium-term inflation outlook, albeit still reluctant to place a date on when the current 2% target might actually be achieved. And it is also highly unlikely to adjust its key policy settings. Instead, Kuroda can note the flexibility afforded by the current framework, including the wide range (+/-20bps) around its zero per cent 10Y yield target.

There are a number of noteworthy new Japanese data due this week too, with the flow kicking off today with the Reuters Tankan for January, which illustrated the need for the BoJ to downwardly revise its expectations for the near-term growth outlook. Against the backdrop of heightened concerns about the global demand, Japanese manufacturers in particular were much more downbeat at the start of the year, with the headline DI down for the third consecutive month in January and by a sizeable 5pts to 18, a two-year low. While the weakness was broad-based, sentiment among auto and steel manufacturers saw the largest declines this month, in part reflecting ongoing concerns about the outlook in China and the US. And manufacturers expected a further modest deterioration in conditions over the coming three months. While non-manufacturers similarly were less upbeat about the near-term outlook, they assessed conditions at the start of the year at least to be little changed, with the respective DI unchanged at 31, close to the average of the past twelve months. And perhaps encouragingly for household spending, retailers were notably more upbeat with that sector’s DI up 10pts to 14, above the average for the past year.

With respective to household expenditure, in line with other measures of spending in November, the Cabinet Office’s synthetic consumption index – the most reliable guide to the national accounts measure of consumption – reported some payback that month for the post-disaster strength seen in October. Indeed, consumption on this measure was down 0.4%M/M following an upwardly revised increase of 0.9%M/M in October. So, on average in the first two months of Q4, consumption was up 0.8% compared with the average in Q3, suggesting a solid contribution to GDP growth from households to growth in the final quarter of last year.

Looking ahead to the rest of the week, Wednesday’s December goods trade report will likely strongly suggest that net exports made a negative contribution to GDP growth in Q4. The final results of the Monthly Labour Survey for November will also be released that day, and the BoJ will publish its latest Senior Loan Officer Survey. The flash manufacturing PMIs for January will be released on Thursday, together with the All Industry Activity Index for November. And the advance Tokyo area CPI report for January will complete the week’s diary on Friday. In the bond market, the MoF will auction enhanced liquidity (maturities of 1-5 years) tomorrow and 20-year JGBs on Thursday.

Euro area:
The main event in the euro area this week will be the conclusion of the ECB’s latest policy meeting on Thursday. While its policy guidance will undoubtedly be left unchanged, we expect the Governing Council’s economic assessment and Draghi’s press conference to adopt a more dovish tone. In particular, with the recent dataflow having signalled a further slowdown in economic momentum in the euro area heading into the New Year, Draghi last week admitted that uncertainties remain prominent. Indeed, some Governing Council members at December’s meeting had already cautioned more strongly about rising downside risks. And Draghi’s opening statement on Thursday should acknowledge that the risks to the outlook are now skewed to the downside. However, while Draghi last week hinted that the ECB might struggle to adjust the stance of monetary policy this year, we do not expect to see until March at the earliest any tweaks to the guidance that its key interest rates are expected “to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary”. The next policy initiative of the ECB will relate to liquidity, and so the press conference might also see Draghi questioned about whether, and if so what, work is currently underway on future long-term financing operations.

With respect to the dataflow, this week will be dominated by January sentiment surveys, including the Commission’s flash consumer confidence indicator on Wednesday and the preliminary PMIs on Thursday. Having maintained a downward trend throughout 2018, consumer confidence took a notable step down in December to a 22-month low and a further modest deterioration is expected in January. Business sentiment similarly fell sharply last year, with the euro area composite PMI declining more than 7½pts over the year to its lowest level (51.1) for more than four years. But expectations are for sentiment to have moved broadly sideways in January, with the PMIs forecast to signal little change in momentum in the two largest member states too. Other national business sentiment surveys due include Germany’s ZEW (tomorrow), France’s INSEE (Wednesday) and Germany’s Ifo (Friday). Tuesday will also bring the ECB’s latest Bank Lending Survey, while Friday will see the ECB’s latest survey of professional forecasts published. In the markets, Germany will sell 5Y bonds on Wednesday and France will sell bonds with various maturities on Thursday.

UK:
All eyes in the UK today will be on Theresa May as she presents this afternoon to Parliament what is meant to be her new proposal on the way forward for Brexit. But it’s clear that, despite last week trying to give the impression of consulting widely with other parties in an attempt to reach a new consensus on the way forward, the lady is not for turning. Instead, her Plan B appears simply to be to persist with Plan A, hoping that further talks with the EU might help to alleviate concerns on the Irish backstop sufficiently so that – with the clocking counting down to Brexit Day on 29 March – her Brexiter backbenchers and the Northern Irish DUP will finally back her negotiated settlement. Of course, there’s little hope of any material amendments to the backstop arrangements, with the possible initiatives flagged in UK weekend press reports – that the UK would seek a bilateral agreement with the Republic of Ireland, or would try to rewrite the Belfast Good Friday Agreement which brought peace to Northern Ireland – undoubtedly absolute non-starters.

Given the fragility of her position as Prime Minister, her limited political skillset, and the sharply opposing views of members of her cabinet and Conservative MPs, May never looked likely to provide much substance today. But, ahead of the formal debate on her proposals next week, today is also likely to see other MPs table their own proposals to try to shape the way forward on Brexit, whether by simply seeking to express the will of Parliament against a no-deal Brexit, or, more substantively, seeking to demand that the Government request from the EU an extension of the Article 50 notice. Another notable proposal, from Dominic Grieve, will seek a legislative change to allow MPs to take control of Parliamentary business.

The most UK notable data release this week will be the latest labour market figures, which are due tomorrow. Most headline numbers are set to be little changed from the previous month. Indeed, three-month employment growth is expected to have remained at around 80k3M/3M in November, up from -5k3M/3M in August but very similar to October’s reading, while the headline unemployment rate is also likely to have moved sideways at 4.1%. Similarly, we think that headline growth in average weekly earnings is also likely to be little changed, having posted growth of 3.3%3M/Y in October, which was the strongest rate since the 2008 crisis. Among other new data, the CBI Industrial Trends and Distributive Trade surveys, due on Wednesday and Friday respectively, will be worth watching too. The end of the week will also bring UK Finance lending data from major High Street banks.

US:
Following Friday’s strong manufacturing production data but disappointing consumer confidence reading, the week’s US economic diary remains somewhat uncertain given the government shutdown. As things stand, following today’s Martin Luther King Jnr holiday, the first scheduled report of the week is tomorrow’s existing home sales report for December. The Richmond Fed’s manufacturing survey will be released on Wednesday while the flash PMI indices for January are released on Thursday, together with the Conference Board’s Leading Index for December and the Kansas City Fed manufacturing survey for January. Friday will bring new home sales data for December, while the advance durable goods orders report for December appears likely to be delayed. In the bond market, issuance by the Treasury will be restricted to bills.

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