The week ahead, w/c 11 March

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
With Wall Street closing down only modestly on Friday, paring earlier large losses, markets in Asia today have largely taken their cue from a partial rebound in Chinese equities markets. On that score, the CSI300 closed up 2.0% after slumping 4% on Friday, shrugging off weekend news that credit had grown less than expected in February and weekend comments by PBoC Governor Yi Gang that seemed to indicate some reluctance to significantly cut the various reserve requirement ratios facing different banks. Japan’s TOPIX and Hong Kong’s Hang Seng have posted smaller gains of 0.6% and 0.7% respectively after losing significant ground on Friday, while markets in Taiwan, Singapore and South Korea were little changed. US equity futures are generally little changed also – albeit with some nervousness concerning Boeing stock after China ground its fleet of B737Max-8 aircraft in response to the weekend’s Ethiopian Airlines crash. But US Treasury yields have nudged up slightly from Friday’s close (and yields also rose fractionally in Japan and Australia) after Fed Chair Powell stated that there would be a “high bar” to justify any “fundamental change” in its inflation targeting strategy despite examining so-called “make-up strategies”, whereby the FOMC might strive to compensate for past undershoots to its inflation target with a period of above-target inflation.

Looking ahead, after some weaker-than-expected German IP data this morning, attention later today shifts to the US with a rebound in retail sales expected in January’s figures after the exceptionally weak reading for the previous month. Other key events due this week include US CPI and UK monthly GDP data (tomorrow), Chinese activity figures (Thursday), the latest BOJ Policy Board meeting (Friday) and key Brexit votes in the UK House of Commons (tomorrow, and perhaps also the following two days). The nature of those Brexit votes look unclear, however, with Theresa May seemingly set for another massive three-figure defeat if she goes ahead with another ‘meaningful vote’ on her deal.  

Japan:
The only economic reports in Japan today were the BoJ’s broad money aggregates for February (M3 rose a steady 2.1%Y/Y) and preliminary machine tool orders for February (down on an annual basis for a fifth consecutive month and by a whopping 29.3%Y/Y, compared to growth of almost 40%Y/Y the same month month last year).

The main focus in Japan this week will be the BoJ policy meeting, which concludes on Friday. While Governor Kuroda’s recent comments suggest that policy settings are bound to remain unchanged, the disappointing economic dataflow clearly merits a less upbeat assessment in the Bank’s commentary. Reports last week suggested that the BoJ will revise down its assessment of IP and exports, with some indicators implying acknowledgment of a more widespread moderation in economic activity would be justified. Against this backdrop, Kuroda will no doubt reiterate in his post-meeting press conference that the BoJ retains several options to ease monetary policy further if necessary at subsequent meetings. But while dovish Board member Harada pledged in the past week that the BoJ would take action without delay if the downside risks to the economy and inflation materialise, for most Board members the bar is likely to be high to justify adding further policy accommodation. Given concerns about increasing negative side effects on the financial sector, a substantive adverse shock, rather than just a softening of the growth outlook and continued sub-target inflation, would likely be required for the BoJ to pull the trigger on new easing measures over the near term.

Aside from the aforementioned BoJ Board meeting we have a relatively quiet week for data and events, kicking off tomorrow with the release of the MoF/Cabinet Office Business Outlook survey for Q1, which will cast further light on business sentiment ahead of next month’s more widely-followed BoJ Tankan survey. The machinery orders report for January will be the main focus on Wednesday, while the Tertiary Industry Activity Index for January and the goods PPI for February are also released that day. The Cabinet Office Synthetic Consumption Index for January may also make an appearance this week. In the bond market, the MoF will auction 5-year JGBs tomorrow and enhanced liquidity (maturities 5-15.5 years) on Thursday.

Euro area:
This week is set to be a quieter one for euro area economic releases, with January IP figures arguably of most significance. But in marked contrast to Friday’s upbeat reports from France, Italy and Spain, Germany’s IP data, published this morning, fell well short of expectations, with total output declining 0.8%M/M fully reversing December’s upwardly revised increase. The drop in manufacturing output was even steeper (-1.2%M/M), with notable weakness in production of capital and intermediate goods only in part offset by a rise in consumer goods production. So, the level of IP (excluding construction), was left 0.2% below the average in Q4 and more than 3% lower than a year earlier. Overall, however, given the strength in the other large member states, euro area aggregate figures, due to be published on Wednesday, are expected to show growth in IP of almost 1%M/M in January, albeit still leaving output down compared with a year earlier.

Today’s other German releases included January’s trade report, which similarly reported a softer start to the year for external demand, with the value of exports unchanged on the month following growth of 1.6%M/M in December. Admittedly, this still left the level of exports up almost 1% compared with the average in Q4. Nevertheless, with the value of imports up 1.5%M/M in January, the seasonally adjusted trade surplus narrowed to €18.5bn, a three-month low, suggesting that net trade remained a drag on GDP growth at the start of 2019.

The latest German labour cost data were also, at face value, disappointing. While Germany’s labour market seemingly remained tight and employee compensation continued to rise at a decent pace in Q4, growth of labour costs per hour worked dropped by 0.6ppt to 2.0%Y/Y, a four-quarter low and one of the weakest readings in recent years. That suggests that domestically-generated inflationary pressures in Germany eased slightly towards the end of last year. Gross earnings increased by 2.4%Y/Y, broadly in line with the recent average, but non-wage cost growth fell 1.7ppts to just 0.7%Y/Y. However, Destatis, Germany’s statistics agency, attributed the slower growth in labour costs to the relatively low number of people on sick leave that quarter, which increased total hours worked. Assuming that figure goes into reverse this quarter, and with economic momentum remaining subdued,  labour costs growth appears likely to tick back up in Q1.

In France, meanwhile, following last week’s strong IP report in January, today’s Bank of France business sentiment survey suggested a further welcome improvement in sentiment in February, with the relevant index rising 2pts to 101 on the back of stronger production and orders that month. Conditions in the services and construction sectors were reportedly little changed on the month, with the respective indices stuck at 101 and 105. And overall, the Bank of France considered today’s survey to be consistent with GDP growth of 0.3%Q/Q, bang in line with our own forecast for the first quarter and unchanged from growth in Q3 and Q418.

Among other data from the euro area due this week, Friday will bring an update on conditions in the retail sector, with euro area new car registrations figures for February scheduled for release. The final estimate of euro area inflation in February is also due on Friday and expected to confirm that the headline CPI rate edged slightly higher that month by 0.1ppt to 1.5%Y/Y, while the core rate fell by the same magnitude to 1.0%Y/Y. Before that release, final inflation figures from Spain are due Wednesday, Germany and France on Thursday, and Italy on Friday. Other national data releases include the Bank of France’s business sentiment survey for February (Monday) and French payrolls figures for Q4 (Tuesday). In the markets, Germany and Italy will sell bonds on Wednesday. 

UK:
Of course, all eyes in the UK this week will be on Brexit, with the long-awaited next vote on Theresa May’s Brexit deal set to be held tomorrow, and – if the PM loses it – subsequent votes possibly to be held on whether to exit with no deal (on Wednesday) or request the EU to agree an extension of the Article 50 deadline (on Thursday). However, the negotiations between the EU and UK – specifically on new arrangements related to the Irish border backstop – remain deadlocked. So, while talks will continue today, May appears likely to have little if anything new to offer MPs tomorrow on top of the deal that was rejected by a record majority of 230 votes at end-January. As such, if she reruns the ‘meaningful vote’ tomorrow, she’d surely be on track for another defeat firmly in three figures. As last month, therefore, to avoid another humiliating defeat, it’s possible that the PM will simply back an amendment on the need to agree alternative arrangements to the Irish backstop. If so, it’s also possible that she will not proceed with the votes she earlier promised on whether to proceed with a no-deal Brexit, or whether to seek an extension of the Article 50 deadline. And then attention will shift to the EU summit on 21-22 March where all will be up for grabs, with the decisive votes probably then to be held in the last week of March.

Beyond Brexit, on Wednesday Chancellor of the Exchequer Phillip Hammond will make his 2019 Spring Statement. Tax receipts once again have surprised on the upside in the current fiscal year and, therefore, the public sector deficit is likely to undershoot the latest OBR’s prediction from October (£25.5bn). This should give the Chancellor extra room for manoeuvre for more expansionary fiscal policy going forward, but he is unlikely to draw on this windfall on Wednesday – there will be no new tax or spending measures announced at this point. Instead, he will probably present it as a Brexit dividend which would only be available and spent if MPs reject a no-deal Brexit in the subsequent Parliamentary vote that day.

Data-wise, tomorrow’s releases will be most notable, with the ONS set to release its short-term output indicators, including the monthly GDP figures for January. In December UK economic activity dropped by 0.4%M/M, which represented the joint steepest fall in the last six years, and a small recovery, of about 0.2%M/M, is expected for the start of the year. Of course, the magnitude of the rebound will mostly depend on services activity, which accounts for around 80% of the economy. Industrial production growth looks set to remain unimpressive, perhaps declining for a sixth consecutive month. The RICS Residential Market survey, due on Thursday, will be worth watching too for a comprehensive guide to the housing market. And a speech this afternoon by Jonathan Haskel, the recently appointed and very credible member of the BoE’s Monetary Policy Committee, should be worth following too.

US:
The US economic diary contains a number of important reports this week, beginning this afternoon with retail sales data for January – of particular interest in light of the unusual slump recorded in December. The business inventory report for December is also released that day. On Tuesday, attention will turn to inflation, with the release of the February CPI report. PPI figures for the same month will follow on Wednesday. However, most interest on Wednesday will be centered on the advance durable goods orders report for January, especially given the further disappointing decline in core capex orders that was recorded in December. Construction spending data for January will also be released on Wednesday. On Thursday we will receive the new home sales report for January and import prices for February. On Friday the IP report for February and New York Fed manufacturing survey for March will cast light on conditions in the factory sector. That day will also bring the preliminary results of the University of Michigan’s consumer survey for March and the JOLTS report for January. In the bond market, a busy week will see the US Treasury auction 3-year notes today, 10-year notes tomorrow and 30-year bonds on Wednesday.

China:
Over the weekend China released both its CPI and PPI inflation reports together with the money and credit aggregates for February. Beginning with inflation, there was no real surprise. Headline CPI inflation slowed to 0.2ppts to 1.5%Y/Y, which was bang in line with market expectations. All of the slowdown was accounted for by food inflation (down 1.2ppts to 0.7%Y/Y), with non-food inflation steady at 1.7%Y/Y for a third consecutive month. Core inflation (i.e. ex food and energy) eased 0.1ppts to 1.8%Y/Y while service sector inflation fell 0.3ppts to 2.1%Y/Y, unwinding the increase that had occurred in January. Meanwhile, the PPI rose a steady 0.1%Y/Y in February, with the inflation in the manufacturing sector also steady at 0.3%Y/Y. At the PPI level inflation in consumer goods prices slowed 0.2ppts to 0.4%Y/Y, however, with durable consumer goods prices falling 0.6%Y/Y.

In other news, after growing much faster than expected in January, credit growth slowed more than expected in February. Total financing increased CNY0.7tn, which was CNY0.6bn shy of market expectations. But given the huge CNY4.6tn lift in January – even greater than the usual seasonal surge – total financing over the first two months of the year remains over CNY1tn higher than recorded over the same period last year. Growth in M2 slowed to 8.0%Y/Y from 8.4%Y/Y previously.

Looking out over the rest of the week, aside from any developments in US-China trade negotiations, the focus will be on Thursday’s combined January-February readings for IP, retail sales and capex (unemployment data for February will also be released). Not surprisingly, Bloomberg’s survey indicates that analysts expect to see markedly weaker growth in both IP and retail spending compared to the last published figures for December. However, in keeping with the trend in the latter months of last year, analysts expect a slight lift in growth of non-rural capex. Home price data for February completes this week’s Chinese diary on Friday.

Australia:
There were no economic reports released in Australia today and the remainder of these week’s economic diary is also sparsely populated. Following last week’s news that GDP growth had disappointed in Q4, as well as a meek rebound in retail sales in January, most interest will centre on tomorrow’s NAB business survey for February and Wednesday’s consumer confidence reading for March. Housing finance data for January will also be released tomorrow. However, given the RBA’s recent commentary, next week’s Labour Force survey for February looms as the next really important release in Australia.

New Zealand:
The focus in New Zealand today was on the release of the Electronic Card Transactions survey for February – a timely indicator of retail spending based on payments processed electronically. The good news is that both total and core retail spending increased a stronger-than-expected 0.9%M/M, with spending increasing across all categories aside from durables. As a result, total spending rose 3.3%Y/Y – still weighed down by lower spending on fuel – while core spending rose a healthy 5.0%Y/Y. Moreover, given today’s figures, over the first two months of the quarter core spending is running 1.6% above the average seen in Q4, thus almost guaranteeing a strong outcome for Q1.

Looking ahead to the remainder of the week the economic diary in New Zealand is relatively light. The February edition of the ANZ ‘Truckometer’ survey – a measure of traffic flows that correlates quite well with overall economic activity – will be released tomorrow. On Friday we will receive the manufacturing PMI for February, along with information on visitor and migrant arrivals for January. The REINZ housing report for February should also make an appearance towards the end of the week, proving insight into how the housing market has begun the important post-Christmas summer selling period.

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