Bond markets rallied across the US and most of Europe on Wednesday as investors continued to factor the likelihood of easier-than-previously-thought monetary conditions in response to concerns about the global economic outlook. Most notably perhaps, 10Y Bund yields fell about 6bps to -0.08% as Mario Draghi stated that ‘if necessary’ the ECB would consider measure to ‘preserve the favourable implications of negative rates for the economy while mitigating the side effects’ – a signal that policymakers were ready to introduce a tiered rate system should rates need to remain at current levels for longer or, indeed, need to be cut further. In the US the 10Y Treasury yield fell to 2.38% – reaching 2.36% intraday – while the rush towards bonds saw the S&P500 eventually close down 0.5% on a day in which the US trade data for January were nevertheless firmer than market expectations.
In Asia the risk-off tone on Wall Street has weighed heavily on equity markets in Japan, with the TOPIX falling 1.7% as investors await tomorrow’s deluge of local data. Meanwhile, the yield on JGBs fell a little over 2bps to -0.10%. Declines in equity markets in China were not quite so marked (CSI300 down 0.4%) while the Hang Seng was up slightly after Premier Li Keqiang reaffirmed that China’s government would apply targeted stimulus to boost the economy, including tax cuts to support the business sector (at least partly paid for by changes made to other spending and revenue), lower real interest rates and increased access to finance for SMEs. Li also reaffirmed the Government’s intention to further open up China’s financial sector. And at the other end of the spectrum, stocks in Australia rallied 0.7% as increased expectations of RBA policy easing – especially in light of yesterday’s dovish RBNZ pivot – drove the 10Y ACGB yield down 5bps to a new low of 1.73%. In New Zealand bond yields also nudged lower after business confidence was reported to have declined in March.
Theresa May’s increasingly desperate attempts to get her Withdrawal Agreement passed, including a promise to Conservative MPs yesterday evening to step down as Prime Minister if it was indeed passed, might have run out of road. The DUP’s statement that it would not support the deal, which several Tories will hide behind, was a key nail in its coffin and there is now no chance of a meaningful vote 3 (MV3) before this Friday, the EU’s ‘deadline’ to secure an extension of Article 50 to 22 May.
So, in order to prevent a no-deal Brexit on 12 April, attention now turns almost exclusively to the indicative votes MPs are holding on various options. But while Conservative lawmakers were given a free vote – with Cabinet ministers abstaining – and the Labour party pledged support for the customs union and public vote motions, last night’s ballot saw all options fail to win a majority. But with the motion for a customs union and a second referendum relatively narrowly defeated (and by less than MV2), and with no MV3 likely, MPs look set to vote again on these options (and other scenarios) on Monday. It is possible that one or more of these options gets a majority at that point and become the cross-party preference to deliver Brexit.
So the Brexit outlook remains highly uncertain. No Deal will not happen – Parliament has been clear it won’t accept it, while Donald Tusk suggested that the EU should be flexible in providing a longer extension to rethink its Brexit strategy. So, we now attach a probability of 35% or more that May’s deal will be eventually confirmed subject to a second referendum. And we attach a similar probability that MPs will eventually endorse a softer Brexit. Other possible scenarios include a General Election (about 20%). But clearly a far longer extension of the Article 50 deadline looks set to be agreed over the next couple of weeks, something that will require the UK to participate in European Parliament elections, which also implies that May could well remain in power for some time to come.
Today’s UK economic data further highlighted the adverse impact on UK manufacturers of continued Brexit uncertainty. According to the Society of Motor Manufacturers and Traders (SMMT), car production was down compared with a year earlier for the ninth consecutive month in February and by 15.3%Y/Y, following a drop of more than 18%Y/Y in January. Admittedly, this weakness was less pronounced in the official IP release in January, which showed output of motor vehicles down 9½%Y/Y, nevertheless the largest drop since last April. According to SMMT, production for domestic demand declined 11%Y/Y in February, while output for overseas demand – which accounts for almost 80% of production, with more than half of that destined for the EU – fell 16½%Y/Y. So, SMMT once again emphasised the importance of finding a solution to the ongoing Brexit uncertainty, and restated its hope for subsequently securing ‘a truly free and frictionless future trading relationship with our most important trading partner’. Over the near term, UK car production data are not going to get better, with several firms (including Honda, BMW and Jaguar Land Rover) having announced plans to halt production over coming days due to no-deal risks.
After yesterday’s dovish remarks from Mario Draghi, this week’s flow of sentiment surveys concludes today with the European Commission’s consumer and business surveys, which arguably provides the best guide to euro area GDP growth. While the Commission’s flash consumer confidence indicator last week signalled a modest improvement, the flash PMIs pointed to a deterioration in business sentiment. So, we do not expect an overall improvement in the headline ESI, and the average index in Q1 will remain well down on Q4, suggesting subdued GDP growth this quarter. Euro area bank lending figures for February are also due and will provide an update on demand for loans against the backdrop of slowing economic momentum.
Ahead of Monday's euro area flash CPI estimate for March, today will also bring preliminary inflation figures from Germany and Spain. In particular, having remained steady for three consecutive months, Germany’s headline EU-harmonised CPI rate is expected to have edged slightly lower by 0.1ppt to 1.6%Y/Y. In contrast, the equivalent inflation rate in Spain – just released – jumped 0.2ppt to 1.3%Y/Y, a four-month high, on account of higher fuel prices and a smaller drop in electricity prices than a year earlier. So, core inflation in Spain seems unlikely to have picked up. And headline inflation was still unchanged from its level a year earlier, underscoring the continued lack of underlying price pressures.
Supply-wise, finally, Italy will sell 5Y and 10Y bonds.
In the US, today will bring the ‘final’ estimate of Q4 GDP growth, which is expected to report a modest downward revision, possibly by 0.4ppt to 2.2%Q/Q annualised, on the back of softer than previously estimated household consumption. Alongside the weekly jobless claims numbers, February pending home sales figures will also be worth watching. In the markets, the US Treasury will auction 7Y notes.
The ABS index of job vacancies – using information collected directly from employers and thus not impacted by changes in advertising techniques – increased a further 1.4% over the 3 months to February, following an upwardly-revised 1.6% increase over the previous 3-month period. As a result, the number of vacancies rose to a new high of 246k and was up 9.9%Y/Y – an outcome that appears consistent with the RBA’s positive assessment of near-term prospects for the labour market.
The focus in New Zealand today was on the ANZ Business Outlook Survey for March, especially in light of yesterday’s very dovish RBNZ commentary. Unfortunately the headline business confidence index fell 7pts to -38.0, marking the weakest outcome since September last year. The more important index measuring firms’ own outlook for activity remained positive, but this too fell 4pts to +6.3 – the lowest level since August last year and 20pts below the historical average. The weaker tone was also reflected in reduced hiring and capex intentions – these indices now only barely positive and well below average levels. Export intentions are now even weaker than was recorded during the GFC, which seems an unduly negative assessment but is indicative of the concerns about the global economy highlighted by the RBNZ yesterday. As far as pricing was concerned, there was a small increase in the proportion of firms expecting to increase their selling prices over the next three months. However, firms’ average year-ahead inflation expectation fell 0.01ppt to 2.05% – the lowest reading since October 2017 but still consistent with the midpoint of the RBNZ’s inflation target.
In other news, the Minister of Finance announced the identities of the first RBNZ Monetary Policy Committee, which will assume responsibility for monetary policy decision making from 1 April. In addition to the Governor, Adrian Orr, and three internal Bank staff, there are three external appointees. Two of those appointees are academics – one, Bob Buckle, a retired macro/monetary economist, who spent some time as an advisor in the NZ Treasury, and one, Catherine Saunders, a sitting Professor of International Trade and Environment at Lincoln University. The other external member is Peter Harris, a former economist for the Council of Trade Unions. Unfortunately, therefore, none of the external members have a corporate background.