The week ahead, w/c 7 January 2019

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Investors ended last week in a much better mood, with equities rallying in most markets and UST yields shifting higher once again on the bumper December US jobs report and supportive language from Fed Chair Powell, who noted among other things that low inflation would allow the Fed to be ‘patient’, the FOMC is sensitive to downside risks, and policymakers stand ready to shift course on policy ‘significantly if necessary’. The S&P500 closed up a bumper 3.4% while 10Y UST yields rose more than a dozen basis points from their Friday morning low to above 2.66%. Meanwhile, futures markets pushed back further into 2020 the implied timing for a cut in the fed funds rate. Of course, if the US labour market data over coming months remain as firm as in Friday’s report, the next move in the fed funds rate will be up not down.

Against that background, and with investors also encouraged by the resumption of US-China trade talks in Beijing as well as the PBOC’s cut in bank reserve requirement ratios later on Friday, Asian equities were very much on the front foot today. After a weak showing on Friday, Japanese markets led the way, with the TOPIX rising 2.8% and 10Y JGB yields edging up 3bps to -0.1%, despite a disappointing services PMI survey (detail below). Having fared better on Friday, however, Chinese stocks today were among the laggards in the region, although the CSI300 still posted a gain of 0.6% while CNY appreciated through 6.85/$ to its strongest level in more than a month.

Looking ahead, futures markets point to further equity market gains in the US and Europe today although government bonds have largely opened higher. Data-wise, following last week’s much weaker manufacturing survey, the non-manufacturing ISM will be the focus in the US. In the euro area, retail sales figures are due, with the German numbers already released this morning surprising on the upside with the strongest showing since April. German factory orders figures, however, were disappointing, pointing to continued weakness in the manufacturing sector.

Japan:
A week to be dominated by December sentiment surveys in Japan got underway today with the services and composite PMIs. These were less upbeat than last week’s manufacturing sector indices. In particular, the headline services PMI fell for the second successive month and by 1.3pts to a three-month low of 51.0, while the new orders component fell 0.9pt to a five-month low of 52.0. However, given the initial post-disaster rebound in October, the output PMI averaged 51.9 in Q4, a rise of 0.9pt compared with Q3 and the strongest quarterly rate for a year. Elsewhere in the survey, the employment component rose to a three-month high of 51.5, while the output price index rose for a second consecutive month to 52.0, also its highest level for three months. However, no doubt reflecting the weakening oil price, the input price PMI fell to a seven-month low (53.8).

Given the services figures, despite last week’s 1.5pts increase in the manufacturing output PMI, the headline composite index fell 0.4pt in December to 52.0. But given the strength at the start of the quarter, the composite PMI rose in Q4 to 52.3, 0.8pt higher than Q3 to match the reading in Q2 – a quarter that saw strong GDP growth of 0.7%Q/Q. We currently forecast a slightly softer pace of growth in Q4 (circa ½%Q/Q), not quite reversing the 0.6%Q/Q contraction in Q3. With respect to inflation, meanwhile, the composite indices were on the whole disappointing with the input price index declining 1.4pts to 55.4, while the output price index fell to 52.0, its lowest level for six months.

Looking ahead, consumer confidence indicators will be published tomorrow while the Economy Watchers survey is due Friday. The BoJ’s latest Regional Economic Report, due Thursday, will also provide an update on economic conditions around the country. With respect to hard data, November’s labour earnings figures on Wednesday are expected to show that average wage growth moderated slightly from October’s rate of 1½%Y/Y, albeit remaining within the range of the past year. Meanwhile, November consumption-related reports scheduled for release include the BoJ’s consumption activity index on Thursday and household spending data on Friday. The latest trade figures for the first twenty days of December are also due Thursday, while bank lending figures for the same month are due Friday. And the BoJ’s latest estimates of the output gap and potential growth will be published on Tuesday. In the bond market, the MoF will auction 10-year JGBs tomorrow and 30Y JGBs on Thursday.

Euro area:
This week is set to be a relatively busy one for euro area economic data, with several reports due on the strength of activity in November and sentiment in December. Today kicks off with euro area retail sales figures for November, which look set to show a second successive monthly increase which would also point to positive growth in consumer spending over Q4 as a whole. We have also already seen the release of the German sales figures, which showed a healthy rise of 1.4%M/M – the most since April – following an upwardly revised increase of 0.1%M/M the previous month.

In contrast, however, the latest German factory orders data surprised on the downside showing a drop of 1.0%M/M in November. So, orders rose in only three of the first eleven months of last year, and compared to a year earlier were down in November by 4.3%Y/Y, the worst annual rate since 2012. The weakness in the latest month was driven by a huge drop in orders from euro area countries (down 11.6%M/M), while orders from other countries and within Germany itself rose by 2.3%M/M and 2.4%M/M respectively. Meanwhile, manufacturing turnover – generally a better guide to changes in industrial production in the month concerned – fell a steeper 2.4%M/M, suggesting that tomorrow’s IP figures might bring a downside surprise suggestive of another drop in manufacturing production over the fourth quarter as a whole.

Meanwhile, the European Commission’s economic sentiment survey results for December are also due tomorrow: not least given the significant drop in consumer confidence to a twenty-two-month low flagged in its flash estimate, we expect the headline Economic Sentiment Index to decline for a twelfth successive month to the lowest level since March 2017. Wednesday brings unemployment data for November, with the headline euro area rate having remained unchanged at 8.1% since July in a further sign of slowing economic momentum. German goods trade figures for the same month and the INSEE French consumer confidence survey for December are also due that day. French industrial production figures for the previous month are due Thursday while the week will end with the equivalent Italian and Spanish IP data and the Bank of France business survey for December.

ECB speakers this week will include Vice President De Guindos today and Bank of France Governor (and possible next ECB President) De Galhau on Friday. In the markets, finally, Germany will sell 2030 inflation-linked bonds tomorrow, and 10Y Bunds on Wednesday. France will sell a range of bonds on Thursday, while Italy will sell 3Y and 7Y BTPs on Friday.

UK:
The focus in the UK this week will shift back to politics and Brexit. Having shelved her plan to hold the parliamentary ‘meaningful vote’ in December in the face of mass opposition among MPs to her deal, Theresa May promised that parliament will have its say in the third week of January. Ahead of that vote, now expected on 15 January, MPs will re-start debating the deal in the second half of this week. But in the absence of a sudden substantive concession from the EU (which appears highly unlikely to emerge), there is no reason to believe that a majority in favour of May’s plan will emerge then. Indeed, we expect May to lose the vote next week.

May's likely response to a negative outcome in next week's vote remains unclear - she is certainly keeping her cards close to her chest. But having survived her confidence vote among Conservative MPs, one of the most likely next steps would be for her simply to try once again to force through her deal in a further parliamentary vote – an approach that would be consistent with her remarks in yesterday’s TV interview. Meanwhile, ahead of the Brexit debate, MPs are set to vote tomorrow on a proposed amendment to the Finance Bill that would seek to grant parliament powers to impede the path to a no-deal Brexit. There are likely to be many occasions over coming weeks when MPs could vote to help reduce the likelihood of such a disorderly Brexit, and so we continue to view the likelihood that the UK leaves the EU without a deal at end-March to be low (no more than 5%).

Data-wise, the first half of the week should be relatively quiet. New car registrations data, due this morning, and the BRC retail sales monitor, due on Wednesday, will provide more information about consumer spending at the end of the year. But Friday’s release of monthly output indicators for November will be most notable. We expect only a small increase in GDP, likely of 0.1%M/M, which would be an unchanged reading from October with manufacturing and construction output stronger but services activity slowing. The November trade figures will probably show a modest reduction in the large deficit.

US:
In the US, what should have been a busy week for economic releases looks set, at the time of writing, to be disrupted once again by the federal government shutdown. Scheduled releases that should be unaffected, however, include the December non-manufacturing ISM survey later today, the December NFIB small business sentiment survey and November JOLTS job openings figures tomorrow, and the minutes from the December’s FOMC meeting on Wednesday. The usual weekly claims numbers are due on Thursday, while December’s CPI report is due on Friday. The headline CPI is expected to drop slightly due not least to falling fuel prices, which would likely push its annual rate back below 2.0%Y/Y. Core CPI, however, is currently expected to post another increase of 0.2%M/M to leave the respective annual rate unchanged at 2.2%Y/Y.

Trade, inventory, home sales and construction data – all postponed from the past couple of weeks – could be published in the sudden event of a deal to resolve the shutdown. Meanwhile, there are plenty of Fed policymakers set to speak publicly, with Chair Powell set to address the Economic Club of Washington on Thursday. Finally, in the bond market, the Treasury will auction 3Y notes tomorrow, 10Y notes on Wednesday and 30Y bonds on Thursday.

China:
While focus this week will undoubtedly remain on any developments in the US-China trade discussions with official talks being held in Beijing today and tomorrow, Thursday will also bring the latest inflation figures for December. While headline CPI is expected to have slipped back only slightly at the end of last year, by 0.1ppt to 2.1%Y/Y, the recent fall in oil prices look set to be more evident further down the pipeline, with the headline PPI rate expected to fall more than 1ppt to 1.6%Y/Y.

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