The week ahead, w/c 18 March

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Following stronger Asian markets earlier in the day – helped by Premier Li Keqiang’s remark that the Government would not allow China’s economy to underperform the macro targets set at the National People’s Congress – Wall Street ended a very good week with both the S&P500 and DJI posting further 0.5% gains on Friday, buoyed also perhaps by an upbeat consumer confidence survey. Credit spreads were little changed, but bond yields moved slightly lower (with 10Y UST yields below 2.60%) as investors appeared to look forward to more dovish commentary from the Fed at this week’s FOMC meeting. The market mood was further supported by news out of Europe, including a one-notch sovereign credit-rating upgrade for Portugal by S&P late Friday as well as the weekend confirmation by Deutsche Bank and Commerzbank that they are in negotiations

Today Asian bourses have therefore mostly continued in a positive vein, especially in China where the CSI300 rose a further 2.8%. In Japan the TOPIX gained a more moderate 0.7%, with neither the February trade report nor a final weak January IP report providing the market with material surprises. A larger gain was seen in Hong Kong, whereas markets underperformed in South Korea, Singapore and Australia. A quiet day in bond markets saw only a fractional rise in yields in Japan and Australia.

Looking ahead, following reports on euro area trade and US housing today, two topics look set to dominate the week: the latest policy announcements (and dot-plots) from the Fed (Wednesday), and Brexit, with the House of Commons’ third meaningful vote (MV3) on May’s deal most likely to take place tomorrow evening ahead of the EU Summit on Thursday. The BoE’s latest monetary policy announcement (Thursday) will pale into insignificance in comparison. Details below...

Japan:
The main focus in Japan today was on the MoF’s merchandise trade report for February, especially in light of the exceptionally weak performance of exports in January. In summary, this report – which broadly conformed to market expectations – seemed to confirm that much of last month’s especially poor result was likely due to volatility associated with regional holidays. That said, as the BoJ acknowledged followed last week’s Board meeting, there is no denying that the underlying performance of the export sector has weakened in recent months.

Turning to the details, the value of exports rebounded 6.7%M/M in February, following a slightly-revised 6.3%M/M decline in January. Even so, exports were still down 1.2%Y/Y. Moreover, exports fell 4.5%Y/Y taking the last three months combined, marking the weakest three-month period since November 2016. Based on the MoF’s calculations, after adjusting for changing prices, export volumes fell 0.6%Y/Y in February. While the volume of shipments to both the US and the EU grew slightly over 4%Y/Y, exports to Asia fell 1.3%Y/Y and exports to China were up a comparatively weak 2.5%Y/Y (the latter still a relief considering the 20.8%Y/Y decline reported in January). Meanwhile, the value of imports rose just 0.1%M/M in February – this following three months of oil-driven declines – and was down 6.7%Y/Y. According to the MoF’s calculations import volumes were down 6.5%Y/ in February. Given the rebound in exports, the seasonally adjusted trade balance amounted to a small surplus of ¥116bn – the first surplus since June last year – following a January deficit of ¥292bn (the latter revised from ¥370bn previously).

Turning to implications for the national accounts, after adjusting for both seasonal and price effects, the BoJ estimated that export volumes had rebounded 6.0% in February following a 5.3%M/M decline in January. Even so, on this measure, export volumes were still down 0.2%Y/Y. Moreover, even if February’s export volumes were to be maintained in March, this would leave them down 1.8%Q/Q in Q1 – a similar decline to that recorded in Q3. On the same basis, the volume of imports fell 3.2%M/M in February and were down 5.8%Y/Y. Again, assuming that import volumes in March were to remain at February’s level, volumes would decline 3.9%Q/Q over Q1 as a whole. At face value this suggests that while both exports and imports are likely to contract in Q1, net goods exports could yet make a positive contribution to GDP growth (if so, for the first time since Q118). That said, if export and import volumes in March prove similar to the average readings over the past three months, the extent of that positive contribution will likely be relatively small.

In other news, today also saw METI release the final results of the IP report for January. The news was only marginally better than indicated by the poor preliminary result, with the slump in industrial output revised to 3.4%M/M from 3.7%M/M previously. Given this revision, rather than being unchanged from a year earlier, output increased a barely-improved 0.3%Y/Y. Elsewhere in the report, we learned that aggregate shipments also declined 3.4%M/M in January – rather than 4.0%M/M as estimated previously – but were still down 0.4%Y/Y. Inventory levels fell a welcome 1.4%M/M in January – albeit 0.1ppt less than estimated previously – but remained up 1.2%Y/Y. The overall inventory-shipments ratio fell 1.1%M/M in January – rather than the 0.8%M/M increase estimated in the preliminary report – and so was down 3.0%Y/Y. Firms’ operating rate (capacity utilisation) fell just 0.4%Y/Y, reflecting the fact that output had also fallen steeply in January 2018 (indeed, an even steeper 4.7%M/M). While today’s revision slightly improves the base for the current quarter, it does not alter the likelihood that a substantial decline in industrial output will be recorded in Q1 – at least in the absence of output rising considerably more in February than the 0.4%M/M advance indicated by METI after adjusting firms’ forecasts for their usual optimistic bias.

The remainder of this week’s diary is sparsely populated. On Wednesday, the Reuters Tankan survey for March will provide a further take on business sentiment, while overseas visitor arrivals data for March will cast light on whether tourism receipts are continuing to provide a buffer against what has been a weakening trend in other service sector exports. Following a holiday for the Vernal Equinox on Thursday, the week will conclude on Friday with the release of the nationwide CPI for February and the preliminary results of the manufacturing PMI survey for March. The CPI report is expected to see the headline inflation rate rise 0.1ppt to 0.3%Y/Y, but the BoJ’s forecast core rate (excluding fresh food prices) might well slip back by 0.1ppt to 0.7%Y/Y. Meanwhile, the manufacturing PMI will hopefully point to at least some improvement after declining sharply over the first two months of this year. In the bond market, the MoF will auction 1-year Treasury bills and 20-year JGBs tomorrow and enhanced liquidity (maturities 1-5 years) on Friday.

UK:
With just eleven days to go until the UK was meant to exit the EU, this week will see Theresa May trying to salvage any dignity she might have left after her further humiliating House of Commons setbacks last week. Despite the PM’s major setbacks in the first two Parliamentary ‘meaningful votes’, she will still hope that – with a ‘no deal’ Brexit effectively ruled out – 75 MPs will be willing to reverse their opposition and vote to secure a majority in favour of her deal in an unprecedented third vote (MV3), most likely to be held tomorrow evening.

Judging from events over the weekend, the Northern Irish DUP could well be willing finally to support May’s deal this week, and many Conservative Brexiters will use that as an excuse to reverse their opposition. Indeed, among the high-profile Brexiter U-turners, former minister Esther McVey and backbench spokesman Sir Graham Brady are among those who have already announced their intention to back May’s deal for the first time in MV3. However, many Brexiters will certainly not change their position, with former Foreign Secretary Boris Johnson stating in the Daily Telegraph today that he will vote against if MV3 is held before the summit, and other Tories such as Bolton MP Chris Green also refusing to budge – and a number of others are likely to follow suit.

As such, if May is to win this week, she’ll need to persuade several Labour MPs to come behind her deal. But given her concession of a process to allow MPs to find an alternative path forward after the summit if her deal hasn’t passed, it would seem unlikely that sufficient Labour MPs will be found to get her deal over the line at this stage. One further source of uncertainty this week relates to the Kyle-Wilson amendment, which, if tabled and passed, could yet see May’s deal approved by MPs subject to a confirmatory second referendum.

Either way, May will request an extension of the Article 50 deadline at the EU Summit on Thursday. Not least as EU leaders wish to avoid the damage of a no-deal Brexit – and also wish to avoid being blamed for such an outcome – we fully expect the Article 50 extension to be granted. The length of the extension to be agreed by the EU leaders remains to be seen – if the deal only narrowly fails to pass at MV3, the EU could still grant only a short extension to end-June as May will be seeking, although in the event of defeat a longer one to end-2020 would seem more likely.

While all eyes this week will be glued on Brexit, Thursday’s monetary policy announcement from the BoE will be watched too. At February’s meeting the MPC left policy unchanged and reaffirmed its forward guidance that limited and gradual policy tightening will be required over the coming years if the economy evolves in line with expectations. However, Carney’s tone in the press conference was quite dovish, acknowledging that the outlook for the UK economy had deteriorated. With no new economic forecasts due at this point and with Brexit uncertainty weighing ever more heavily on the economy, MPC members will not want to make any adjustments to their policy stance at this point, so we expect Thursday’s announcements to be uneventful. Nevertheless, while last week’s House of Commons votes significantly reduced the likelihood of a disorderly Brexit, we would expect the Committee to reaffirm its readiness to change policy in either direction in such a scenario, depending on the balance of the impact to supply, demand and the exchange rate.

After a downbeat start to the week for economic data – with the Rightmove survey suggesting that home asking prices fell 0.8%Y/Y this month, the biggest decline since 2011 – tomorrow will bring the latest labour market release, which is expected to show headline employment and wage growth easing slightly at the beginning of the year. But this should leave the unemployment rate unchanged at 4.0%, the lowest level since mid-1970s. On Wednesday, the focus will shift to inflation with CPI figures for February due. We expect both headline and core inflation to have remained unchanged from the previous month, at 1.8%Y/Y and 1.9%Y/Y respectively. On Thursday, alongside the announcement from the BoE, we will receive the latest official data on retail sector activity. Surveys suggest that after a stronger performance in January growth stalled in February, as many retailers introduced new-season items at full price. So, having risen to a two-year high of 4.2%Y/Y in January, retail sales growth is set to have softened in February, likely to around 3%Y/Y. Among other data releases, the CBI Industrial Trends survey for March is due on Wednesday, while public finance data for February are out on Thursday.

Euro area:
In the euro area, this week brings several releases of note, with March flash sentiment surveys at the back end of the week to be watched closely for an update on economic conditions at the end of the first quarter. In particular, the Commission’s preliminary consumer confidence indicator, due Thursday, is expected to have posted another modest improvement in March for the third consecutive month, albeit still leaving the index on average in Q1 roughly ½pt below the average in Q4. The flash PMIs, due Friday, are also anticipated to have inched slightly higher in March, although the manufacturing index is likely to have remained in contractionary territory. Moreover, the composite PMI in Q1 is still expected to remain below the Q4 average, therefore signalling a further moderation in GDP growth this quarter.

The first half of the week will bring an update on activity at the start of the year, with January trade and construction output reports due today and tomorrow respectively. Tuesday will also bring the latest labour cost data for Q4, which, if the equivalent German figures are to go by, will see softer annual growth than the 2½%Y/Y rate in Q3. Germany’s latest ZEW survey (tomorrow) and euro area balance of payments data (Friday) are also due. In the markets, Germany will sell 5Y bonds on Wednesday.

US:
The focus in the US this week will be firmly on the Fed, with the conclusion of the two-day FOMC meeting on Wednesday. Given recent communications, it goes without saying that the Fed will leave its policy settings unchanged. So, most interest will be on the Fed’s revised Summary of Economic Projections and Chair Powell’s post-meeting press conference to see what meeting participants have in mind regarding policy over the remainder of this year and beyond.

Certainly, we expect more dovish dot plots than the previous set issued in December, with the dots back then showing the median expectation for two interest rate hikes this year and a further 25bp hike in 2020. We expect the dots to be tightly packed this time around, with the median view likely to suggest no change to rates all year and only a modest skew to the upside.

Of additional interest will be further insights into the Fed’s balance sheet plans. With Chairman Powell indicating in January that the FOMC expects to end the redemption of securities later this year, the Committee might well provide more details with specific dates and as to whether it plans to end its redemptions suddenly or to do so gradually via a taper. The Committee might also indicate how the composition of the portfolio will evolve over time – officials have long planned to move to a portfolio primarily of Treasury securities – as well as the likely maturity structure of its holdings once the transition has concluded. The minutes from December’s FOMC meeting suggested two possibilities, with a focus on short-term securities that would give the Fed another tool for stimulating the economy during a downturn, or an alternative – matching the Treasury’s maturity structure – that would allow market forces to determine the shape of the yield curve and leave the Fed playing a neutral role.

On the data front, the week begins with the NAHB housing index for March today, followed by factory orders figures for January tomorrow. The Philadelphia Fed’s manufacturing survey for March and the Conference Board’s leading indicator for February will be released on Thursday. On Friday, the week concludes with February existing home sales and January wholesale trade reports, as well as the preliminary PMIs for March. In the bond market, the US Treasury will auction 10-year TIPS on Thursday.

China:
There were no major economic reports released in China today and there are none scheduled over the remainder of this week either. This will leave the focus firmly on any headlines surrounding developments in US-China trade negotiations.

Australia:
There were no major economic reports released in Australia today. Looking out over the remainder of the week, given the RBA’s focus on developments in the labour market as being the likely key driver of future developments in monetary policy, the key report for investors this week will be Thursday’s Labour Force Survey for February. According to Bloomberg’s survey the median analyst expects a trend-like 15k increase in employment – this following a strong 39.1k increase in January – so that the unemployment rate is forecast to remain at 5.0%. Ahead of this report, tomorrow we will receive the ABS house price index for Q4 – this should confirm the decline reported by more timely indicators – together with the minutes from this month’s RBA Board meeting. The DEWR job vacancy index for February will be released on Wednesday while the preliminary CBA PMI indices for March will be released on Friday.

New Zealand:
Following Friday’s slightly improved reading for the manufacturing sector, today’s BNZ-Business NZ services PMI cast the economy in a slightly weaker light. The headline index fell 2.4pts to 53.8 in February, thus giving back most of the increase recorded in January. After rising sharply in January, the activity index fell 8.1pts to 53.4, but the new orders index fell a less-concerning 1.4pts to 59.9 – a level that remains slightly above the average recorded last year. The employment index fell 0.8pt to 51.9, although this too remains above last year’s average reading.

Over the remainder of this week most interest will centre on Thursday’s national accounts for Q4, which will provide important information ahead of next week’s RBNZ policy review. According to Bloomberg’s survey the median analyst estimates that the economy has grown 0.6%Q/Q, causing annual growth to slow 0.1ppts to 2.5%Y/Y – an outcome that would be 0.2ppt weaker than the RBNZ had estimated in the last Monetary Policy Statement. A day earlier the Balance of Payments report for Q4 will provide some additional information on net trade in services. The only other report of any note this week is tomorrow’s Westpac consumer confidence reading for Q1, which should mimic the consolidation seen in the monthly ANZ-Roy Morgan survey.

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