Morning comment: Brexit & RBNZ

Chris Scicluna
Emily Nicol & Mantas Vanagas

Overview:
After broadly stabilising on Monday, Wall Street moved higher on Tuesday with the S&P500 eventually closing up 0.7% – a rally that was partly driven by energy stocks as WTI crude oil recovered to about $60/bbl. Treasury yields traded in a narrow range and eventually closed little changed (the 10Y sitting at 2.42%), while credit spreads were slightly tighter and the US dollar slightly firmer.

With that background, equity markets across Asia have been mixed today. After underperforming on Tuesday, the CSI300 rebounded 1.2% as US-China trade talks resumed in Beijing, with equities also firmer in Hong Kong. By contrast, Japan’s TOPIX fell 0.5%, while markets were generally little changed elsewhere in the region. In bond markets, JGBs were little changed, with 10-year yields at -7bps. But, in New Zealand, 10-year bond yields fell a substantial 11bps to a new historic low of 1.76% after the RBNZ surprised the market and adopted an easing bias, leading the market to price in more than a 50% probability of a 25bp rate cut at one of the next two meetings. The NZ dollar fell more than 100 pips against the greenback, reaching the lowest level in more than two weeks. The price action in New Zealand dragged Australian bond yields and the Aussie dollar lower too as investors pondered whether the RBA might also move to an easing bias at an upcoming meeting.

Looking ahead, all eyes today will be on the UK House of Commons as MPs hold a first round of indicative votes on various Brexit scenarios this evening, while European sentiment surveys will dominate the dataflow.

UK:
Of course, the main focus today will be on the UK House of Commons as MPs hold a first round of indicative votes on various Brexit scenarios. These votes will simply select the most popular options that will be debated and voted on individually next Monday. Sixteen motions have been submitted, from no deal to a second referendum via a spectrum of deals including or excluding a permanent customs union and/or single market participation, with the House of Commons set to debate them from 14.00GMT, the ballot paper to be printed at 16.00GMT, voting to commence at 19.00GMT and results likely around 20.30GMT. While it is still unclear as to whether Tory ministers will be allowed a free vote this evening – reports suggest that there could be a further 20 resignations from junior ministers if not – it seems unlikely that any one proposal will garner support of greater than 50% this evening.

Of course, May hopes that an indication of possible majorities in favour of a soft Brexit or second referendum will scare the DUP and hardcore Brexiters to finally give their backing to her deal. Certainly, the reported suggestion by attorney general Geoffrey Cox yesterday that the Government would be in breach of the ministerial code (and law) if it fails to follow MPs instructions, should they pass a motion to engage in an alternative Brexit arrangement, might well be enough to twist their arms. Although, while Jacob Rees-Mogg, the Chair of the hard-Brexit Conservative ERG, yesterday suggested he would now support May’s deal (if the DUP backs it), many other Tory Brexiters remain opposed. And with the opposition of the DUP seemingly hardening and Labour Leave MPs now less likely to back the deal, there currently remains no majority in Parliament for her deal. Nevertheless, May is currently scheduled to speak to her backbench MPs this evening to give an indication of her preferred way forward, which might include timetables for an MV3 – with reports indicating could be scheduled on Friday – her resignation as PM, or both.

While of secondary importance, the economic data flow will bring the March CBI distributive trades survey, which seems likely to indicate a subdued month of sales on the High Street.

Euro area:
Sentiment indicators will continue to dominate the dataflow today, with the release of the French INSEE consumer confidence and Italian ISTAT consumer and business surveys for March. Following the sharp deterioration at the end of last year, when the Gilet Jaunes protests caused the most significant disruption, French consumer sentiment continued to recover this month. In particular, the INSEE survey released this morning showed that the headline consumer confidence index inched higher in March by 1pt to 96, a six-month high and 10pts above the trough in December. Consumers assessed the outlook for their personal financial situation to have improved and that seems to have supported intentions for major purchases over the coming twelve months. Nevertheless, the survey’s indicator for the general economic outlook inched lower and remained well below its long-term average. The labour market outlook has deteriorated too - having decreased sharply in February, the unemployment fear index took a step up again. So, overall, while the headline index is moving in the right direction, the survey highlighted that French consumers remain wary and that a notable recovery in household consumption this quarter from a flat reading in Q4 is far from guaranteed.

In Italy, while consumer confidence is expected to have remained broadly stable, business confidence might well have slipped further to its lowest level for four years. Today will also see various ECB Governing Council members, including President Draghi and Chief Economist Praet, speak at the annual ECB watchers’ conference. In the markets, meanwhile, Germany will sell 10Y bonds.

US:
In the US, this afternoon will bring the full trade report for January, which is expected to reveal an improvement in the headline deficit on the back of stronger goods exports, as well as balance of payments data for Q4. Elsewhere, Fed Governor George will speak publically, while the Treasury will sell 2Y floating-rate notes and 5Y notes.

New Zealand:
The main focus in New Zealand today was on the outcome of the RBNZ’s Interim OCR Review – the last decision to be made under the single decision maker structure that has been in place since inflation targeting was introduced three decades ago. As was widely expected, once again the RBNZ left the OCR at 1.75%. More importantly, and more surprisingly, in the short statement accompanying the decision the Bank validated the increasingly dovish leanings expressed in financial markets. Indeed, the Bank abandoned its previously neutral policy stance, instead saying that “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.”

In particular, the Bank pointed to a weaker outlook in New Zealand’s major trading partners, such as Australia, Europe, and China. And it noted that this weaker outlook had prompted other central banks to ease their policy stances, placing upward pressure on the New Zealand dollar. As before, the Bank expects ongoing low interest rates and increased government spending to support economic growth this year. So as capacity pressures build, CPI inflation is still expected to rise to around 2% – the midpoint of the Bank’s target range. However, in the Bank’s opinion, the balance of risks around this outlook has now shifted to the downside. Specifically, according to the Bank, the risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending (not that there was much evidence of the latter in the Q4 GDP report). On the other hand, the Bank continues to acknowledge that inflation could rise faster if firms pass on increased costs to a greater extent than presently assumed.

The key data releases between now and the next policy review on 8 May are the Q1 CPI (17 April) and Q1 employment and labour cost estimates (1 May). In the near term, Governor Adrian Orr will give a presentation on the new monetary policy decision-making structure on Friday, with the identity of the membership of the new Monetary Policy Committee (MPC) presumably announced at or before that presentation.

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