Morning comment: More euro area surveys & further humiliation for May

Chris Scicluna
Emily Nicol
Mantas Vanagas

After tumbling on Friday, Wall Street began the new week with a modest 0.1% loss on Monday following a relatively quiet session. In the Treasury market the 10Y yield recovered from a session low of 2.38% to close at 2.42%, while in currency markets the US dollar was little changed. And perhaps taking heart from the stability on Wall Street, little substantive economic news from the region, and a modest rise in US futures since the close, most Asian bourses have moved in the right direction on Tuesday. This is especially so in Japan, where Monday’s 2.5% slump in the TOPIX has been followed by a 2.6% rebound today. Gains elsewhere have been much smaller, however, with benchmark indices rising less than 0.5% in Singapore, South Korea and Australia. And equities in mainland China bucked the trend, with the CSI300 falling 1.4%, adding to Monday’s 2.4% decline. In bond markets, the 10Y US Treasury yield inched up towards 2.44% during Asian trading – back in line with Friday’s close. As a result, the 10Y JGB yield increased 2bps to -0.06%, while Australia’s 10Y yield rose 5bps to 1.83%. Yields continued lower in New Zealand, however, as investors eyed tomorrow’s RBNZ policy review.

In Europe, bond yields are also a touch higher this morning. And sterling remains within yesterday’s range against dollar and euro after yesterday evening’s Parliamentary defeat for Theresa May, which will allow MPs tomorrow to indicate support for a range of different Brexit scenarios. In Germany, meanwhile, yesterday’s improved ifo business survey has been followed this morning by a disappointing consumer confidence report but France’s latest INSEE business survey provided better news. Looking ahead, consumer confidence and housing will be the data focus in the US.

So, yesterday was another bad day for Theresa May. There continues clearly to be no majority in Parliament for her deal, with the Northern Irish DUP still playing hard-ball, Tory Brexiteers happy to hide behind their objections, and Labour Leave MPs antagonised. And yesterday evening saw May suffer yet another humiliating Parliamentary defeat, and further Ministerial resignations, as MPs voted to try to wrest control of the Brexit policy process from the Government. In particular, the House of Commons will tomorrow see MPs hold a series of ‘indicative votes’ to test support for a range of Brexit scenarios – from no deal to a second referendum via a spectrum of deals including or excluding a permanent customs union and/or single market participation (i.e. the kind of process that ideally would have been conducted before Parliament invoked Article 50 and May set out her negotiating red-lines).

The Government insists that the outcome of the indicative votes will not be binding – May will be obliged neither to honour the result, nor negotiate with the EU to try to deliver MPs preferred scenario. However, it would be inflammatory if she chose entirely to ignore tomorrow’s process, which might be expected to see greatest support expressed for softer forms of Brexit (e.g. Norway plus a customs union, or something closer to Labour’s permanent customs union). Of course, May will hope that such a result would scare the DUP and hardcore Brexiters to finally give their backing to her deal, which therefore could yet resurface for a third meaningful vote before the end of the week.

So, what does this mean for the likely path ahead? Clearly, the Brexit remains highly uncertain. Despite the threat to the Brexiters of a softer Brexit or no Brexit at all, we currently attach a probability of little more than 10% that May’s deal will be approved unconditionally this week to allow Brexit to happen on 22 May. Far more likely is that May’s deal will be eventually confirmed only subject to a second referendum or Article 50 is revoked (30% or more). And we attach a similar probability that MPs will eventually endorse a softer Brexit. Other possible scenarios include a General Election (about 20%). But we attach a minimal probability to a no-deal Brexit on 12 April, and so strongly expect a far longer extension of the Article 50 deadline to be agreed in due course.

Euro area:
While yesterday’s German Ifo survey provided a more positive assessment of economic activity in March than last week’s dire PMIs, it nevertheless still indicated a further slowing of economic momentum in the first quarter of the year. And today’s GfK consumer confidence survey also hinted at a loss of confidence among households heading into the second quarter, with the headline index declining 0.3pt (the largest monthly drop since November 2016) to 10.4, matching the eighteen-month low reached in December. Within the detail, while consumers were more upbeat about economic expectations that in recent months, they were reportedly more downbeat about their income expectations. And, as a result, their willingness to buy reportedly decreased notably, with the relevant indicator at its lowest level since December 2016.

Turning to France, like the German ifo, today’s INSEE business confidence survey – arguably the better guide to economic activity – also provided a more upbeat assessment than the PMIs, with the headline indicator rising 1pt to 104, a four-month high. The improvement principally reflected firmer construction sector confidence, with the respective index rising to its highest level since mid-2008. Meanwhile, confidence among services and retail firms remained stable this month, with the respective indices at 103 and 102, both above the long-run average. But sentiment among manufacturers fell slightly in March as weaker past production weighed, with the relevant index down 1pt to 102, the lowest reading since November 2016. Overall, on average over the first quarter, the headline index was little changed from the average in Q418 and still comfortably above the long-run average, supporting our view that GDP growth likely remained stable at 0.3%Q/Q.

A quiet day in Japan saw the release of the BoJ’s services PPI figures for February. In aggregate prices increased 0.3%M/M and were up 1.1%Y/Y – an outcome that was in line with market expectations, although the January outcome was revised down 0.1ppts to 1.0%Y/Y. Within the detail, transportation prices rose 2.0%Y/Y, led by higher prices for international airfares and ocean freight. However, prices for information and communication services fell 0.1%Y/Y, as did prices for leasing and rental services. A 1.3%Y/Y increase in the price of ‘other services’ was driven by higher prices for engineering and employment agency services.

In other news, the BoJ also released the ‘summary of opinions’ from this month’s Policy Board meeting. With regard to economic developments, one theme concerned uncertainty regarding the outlook for the Chinese economy, including that economy’s response to recent stimulus measures. Domestically some concerns were raised about the outlook for investment in light of global developments, a peaking of corporate profits and the looming consumption tax hike. Most opinions pointed to continued optimism that the Bank’s inflation target would eventually be achieved as long as a positive output gap is maintained. Therefore, most opinions posited that that current monetary policy settings remained appropriate for now, but with some arguing that it was important to pay close attention to incoming information on the economic outlook and developments in financial conditions.

In the US, today will bring the Conference Board consumer confidence survey for March, which should be upbeat if the preliminary University of Michigan survey is anything to go by. In addition, a raft of housing market data are due, including February housing starts and building permits data, and the January FHFA and S&P CoreLogic price indices. In addition, the Treasury will sell 2Y notes.

The only data release in Australia today was the weekly ANZ-Roy Morgan consumer confidence survey, in which the headline index nudged down just 0.1pts to 111.8 – a reading that remains near the lower end of the range experienced over the past 12 months.

In other news, speaking to the Housing Industry Association, RBA Assistant Governor (Economic) Luci Ellis said that the RBA had been grappling with how to reconcile apparently weak national accounts figures with the noticeably stronger labour market data. Unsurprisingly, she argued that the disconnect can be traced to the household sector – outside of that sector she said “the economy is not doing too badly” – with income growth having remained slow even as labour market conditions have improved. Moreover, she pointed out that in recent years a combination of tax-bracket creep and policy changes meant that growth in the tax take was exceeding nominal income growth by even more than would usually be the case, weighing on disposable incomes (albeit with some of that additional tax feeding back into the economy through increased government consumption). She concluded by reaffirming that “the nexus between labour markets, households and housing is crucial to our assessment of the broader outlook”.

New Zealand:
New Zealand reported a small merchandise trade surplus of NZD12mn in February – an outcome that was around NZD200mn more favourable than the market had expected, albeit coming after a surprisingly large deficit in January (revised up slightly today to NZD948mn). After allowing for usual seasonal effects, the February outcome equated to an underlying deficit of NZD458m, which is slightly less than the average deficit reported over the previous 12 months. There were small surprises on both sides of the ledger this month. Exports rebounded a slightly larger-than-expected 7.7%M/M, lifting annual growth to 8.4%Y/Y. Exports of dairy produce rose 24.3%Y/Y – driving continued strong growth in exports to China – while meat exports rose 10.7%Y/Y, with exports of Kiwi lamb reaching a record high. Imports edged up 0.7%M/M, with annual growth standing 13.0%Y/Y due to an especially weak outcome in February last year. Imports of consumer goods rose 8.1%Y/Y while imports of machinery and plant rose 6.2%Y/Y. The strong growth in aggregate imports reflected developments in capital transport items and passenger cars, which are especially volatile from month to month (the former rising 92%Y/Y).

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