Despite some disappointing economic data, Wall Street ended last week on a positive note amidst newswire reports indicating that the US and China had been making progress in their trade talks. The S&P500 eventually closed up 0.7% and modestly in the black for the week, while the risk-on environment was also reflected in slightly tighter credit spreads, a 4bp lift in the 10Y Treasury yield to 2.75% and a slightly firmer US dollar. The latter drew some late unfavourable comments from President Trump that temporarily weighed on the greenback as the market reopened today.
Importantly, the positive commentary concerning prospects for ending the US/China trade impasse continued over the weekend with suggestions that the two governments are now close to finalising a deal. Reportedly, China is offering to lower tariffs on a range of items imported from the US, while the US is considering removing most if not all of the tariffs implemented last year as long as China fulfills its pledges with respect to intellectual property rights and increasing purchases of a range of US items. Chinese officials have confirmed “substantial progress” today. Not surprisingly, this gave a further lift to markets in Asia, and while some of the morning’s gains in China were subsequently given up, the CSI300 closed up 1.1%. The welcome elsewhere in Asia was a little more restrained, with Japan’s TOPIX beginning the week with an advance of 0.7% and benchmark indices rising at a similar rate in Hong Kong and Singapore. US equity futures have firmed modestly and the 10T Treasury yield has nudged up 1bp to 2.76%. The yen is little changed from Friday’s New York close, however, while the 10Y JGB yield has edged back up to zero.
Meanwhile, sterling is a touch firmer after a couple of the UK Sunday newspapers suggested that the Conservative Brexiters were willing to soften their position in terms of what they require from May in return for their support for a deal with the EU. However, a very significant gap persists between what they are demanding and what the EU will be willing to agree – something that tallies with a further report in the Telegraph today – and so the likelihood of Parliament voting in favour of May’s deal next week looks little higher than it did before these latest reports.
Looking ahead, a busy week includes the latest policy announcements from the ECB (Thursday) and RBA (tomorrow), US payrolls (Friday) and Japanese and Aussie GDP (Friday and Wednesday respectively).
A quiet start to the week in Japan saw the BoJ release monetary data for February. Reflecting the BoJ’s declining asset purchases off an increasing base, growth in the monetary base continued to slow to 4.6%Y/Y from 4.7%Y/Y previously – the slowest growth recorded since May 2012.
Looking out over the remainder off the week, one focus will be on the second release of the national accounts for Q4, on Friday. Given the new information from the MoF corporate survey, we expect the preliminary estimate of 0.3%Q/Q to be revised up slightly, possibly to 0.5%Q/Q. Of more contemporary interest will be tomorrow’s service sector and composite PMI readings for February and Friday’s Economy Watchers survey results for the same month. On Thursday, we will receive the BoJ’s consumption activity index for January, while the MIC household spending survey for January will be released on Friday. Also on Friday the BoJ will release bank lending statistics for February and the preliminary balance of payments statistics for January, while we expect the Monthly Labour Survey for January will likely also be released that day. In the bond market, the MoF will auction 10-year JGBs tomorrow and 30-year JGBs on Thursday.
The main event this week will be the conclusion of the ECB policy meeting on Thursday. There are three main things to watch: the updated staff economic forecasts; possible amendments to the forward guidance on rates; and news on plans to offer new longer-term liquidity operations.
First, as soon as they were published in December, the ECB’s forecasts looked woefully optimistic. And at the policy meeting in January, the Governing Council acknowledged that subsequent economic data had been weaker than it expected, and also revised its assessment of the risks to the outlook, judging them to be skewed to the downside. Actual GDP growth in Q418 of 0.2%Q/Q was just half the ECB’s central projection, which also foresaw implausibly strong growth of 0.5%Q/Q from Q119 to Q319 and 1.7%Y/Y over 2019 as a whole. While they were not quite so unrealistic, the December inflation forecasts of 1.6%Y/Y for headline CPI and 1.4%Y/Y for core CPI also look too strong. Nevertheless, comments last week from Irish Central Bank Governor and ECB Chief Economist-designate Philip Lane suggested that the December projections would need only “reasonably small adjustments”, a sentiment tallying with comments of other Governing Council members. Certainly, it would be out of character for the ECB to make marked downward revisions. That, however, would raise the risks that the forecasts to be published this week will have to be revised down again in June, which would represent a fifth consecutive negative adjustment to the ECB’s growth outlook.
Second, the weaker outlook for GDP growth and inflation – particularly if the core CPI forecasts for 2020 and 2021 of 1.6%Y/Y and 1.8%Y/Y are revised down – would justify a revision to the ECB’s policy guidance, which states that the key interest rates are expected “to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary”. A plausible amendment would be the deletion of the words “through the summer of 2019 and in any case” from the existing commitment. But a majority of policy members might not be ready to go quite so far this time around. Indeed, Bundesbank President Weidmann last week suggested that he did not necessarily see the need for a change in guidance, noting that the market’s postponed expectation of a “lift-off” to rates was a “plausible” reaction to softer economic data and consistent with the existing guidance. Moreover, many members are concerned about possible negative side effects on banking sector conditions from maintaining negative rates for a prolonged period. So, they could be reluctant at this stage to rule out the possibility of a 2019 rate hike this year, and the current forward rate guidance might well remain in place until June.
Third, this meeting will see the Governing Council discuss how it should respond to the redemption of more than €700bn of outstanding TLTROs-II (Targeted Longer-term Refinancing Operations) funds, due from the middle of next year, which represent a potential future “cliff edge” to banking sector liquidity. It is possible that these discussions will not be conclusive. However, we expect that the detail of a new phase of longer-term liquidity operations, with conditions less generous than those applied to the TLTROs-II (e.g. in terms of maturity, interest rate charged, and/or total funds available), will be announced following one of the subsequent two meetings to provide an adequate backstop for bank refinancing in June 2019, when almost €380bn of borrowings from the first TLTRO-II operation will mature.
Data-wise, this week in the euro area should be less eventful. Today brings just euro area PPI figures for January after this morning’s Spanish labour market data for February showed that unemployment claims there rose for the second successive month in February and by 3.3k (unadjusted basis). While Spanish joblessness had declined in each of the previous two Februarys, today’s small increase still left unemployment down compared with a year earlier (181k, 5.2%Y/Y). And the figures also showed the fifth consecutive increase in the number of people employed that month and by 39k (adjusted basis), taking total employment to 19.1mn, an increase of more than ½mn over the past year and the highest level since mid-2008. So, it remains the case that Germany and Spain are accounting for the lion’s share of job creation in the euro area.
Tomorrow brings euro area retail sales figures for January. With Friday’s German figures having shown solid growth in January – with the 3.3%M/M increase the strongest since October 2016 and more than fully reversing the decline in December – euro area retail sales also seem likely to show a rebound following a notable drop in December. Also due that day are the final services PMIs for February, for which the flash euro area index rose 0.9pt to a three-month high of 52.3, contributing to a 0.4pt rise in the composite PMI to 51.4. A quiet Wednesday will bring just the German construction PMI, while the ECB announcements the following day will coincide with an updated estimate of euro area GDP in Q4 together with a first expenditure breakdown. The week will conclude with German factory orders numbers for January and French and Spanish industrial production data for the same month. In the markets, Germany will sell inflation-linked bonds tomorrow, while France and Spain will sell bonds on Thursday.
A positive spin on a weekend report in the Sunday Times tried to imply that Theresa May might be a step closer to securing parliamentary agreement to her planned Brexit deal, claiming that the Conservative Brexiter MPs in the ERG were now offering a compromise on the Irish border backstop, which they had previously argued should be cut from the Withdrawal Agreement. But the updated demands of the Brexiters suggest they are hardly in the mood to make very significant concessions. In particular, the report suggested that the Brexiters would now be willing to agree to a "clearly worded, legally binding, treaty-level clause that unambiguously over-rides" the Withdrawal Agreement, and one that "must go beyond simply re-emphasising/re-interpreting the temporary nature of the backstop". They would also still expect Attorney General Geoffrey Cox – currently in negotiations with Brussels on behalf of Theresa May – to change his previous legal advice that the backstop "would endure indefinitely", and expect the new text to give "a clear and unconditional route out of the backstop" if talks on a future relationship collapse. In particular, they still expected that to include "a time limit or a unilateral exit mechanism".
That so-called “compromise” still leaves a massive gap between the ERG’s demands and what the EU might ultimately be willing to offer. Indeed, a report today in the Telegraph suggests that Cox has already given up trying to secure a time limit or unilateral exit clause on the backstop. And so, the ERG and their other Tory Brexiter brethren are bound to be disappointed with whatever Cox eventually agrees, suggesting that – unless they give further significant ground to Theresa May – they are still likely to vote against the revised deal in the next House of Commons ‘meaningful’ vote on 12 March. Indeed, other reports suggest that May and her entourage see greater chances of success that a deal will eventually gain the agreement of MPs in a third meaningful vote – perhaps in late June if the EU agrees to a short extension of the article 50 deadline – than next week.
Such Brexit noise will no doubt continue to dominate the news flow this coming week. And, with one or two exceptions, the data calendar will unlikely provide much distraction. But survey indicators will be of most interest in this respect. The flow of February PMIs resumes today with the construction survey, and will be followed tomorrow by the services survey. The headline indices from both sectors declined notably in January to only just above the neutral level of 50, and similarly subdued readings are expected this time around. So, taken with Friday’s weaker manufacturing output PMI, the composite PMI is expected to fall to just 50.0, which would be its lowest level since 2012 and raise the risk of a negative GDP growth print in Q1.
Tomorrow also brings the BRC’s latest Retail Sales Monitor, which will provide an update on how conditions in the sector fared in February, after the discounting-related boost to sales growth in January. That day will also bring February new car registrations figures. The Halifax house price index, due on Thursday, will probably echo the downbeat message from last week’s Nationwide release. Policy-wise, BoE Governor Carney is due to appear before the House of Lords tomorrow, while Deputy Governor Cunliffe and MPC member Saunders are scheduled to speak on Wednesday, while the MPC’s Tenreyro will speak publicly on Thursday.
In the US, the main data focus this week will be Friday’s employment report for February, in which developments in the unemployment rate and wage growth will remain of particular interest. Perhaps unsurprisingly, non-farm payrolls are expected to have posted a more modest increase in February following the 304k increase in January. Daiwa’s US chief economist Mike Moran currently predicts a gain of 180k. Nevertheless, the unemployment rate is expected to have fallen back below 4%, while average hourly earnings growth is likely to have ticked higher. Ahead of that report further clues on the labour market will be provided by the non-manufacturing ISM tomorrow and the ADP employment report on Wednesday.
The week’s other key releases are today’s construction spending estimates for December, tomorrow’s new home sales report for December, Wednesday’s full trade balance for December, Thursday’s unit labour cost and productivity estimates for Q4, and Friday’s housing starts and permits data for January. The Fed’s latest Beige Book, released on Wednesday, will also be of interest. In the bond market, the US Treasury will auction only short-term bills.
There were no economic reports released in China today. Looking out over the remainder of the week, we will receive the Caixin services PMI for February tomorrow, followed by the February trade report on Friday and the February CPI and PPI figures on Saturday. As far as the trade report is concerned, Bloomberg’s survey indicates that the market expects a sharp narrowing of China’s trade surplus with the Lunar New Year holiday expected to see exports decline slightly from levels a year ago after growing a surprising 9.1%Y/Y in January. Meanwhile, the consensus expects CPI inflation to have slowed 0.2ppt to 1.5%Y/Y. Aside from these economic reports, the other key focus in China will be the National People’s Congress, which begins in Beijing tomorrow. The Government’s growth target – widely expected to be lower than last year’s target of “around 6.5%” – will be of particular interest. Investors will also try to gauge the Government’s willingness to adjust its fiscal and monetary policy stance if that is needed to achieve the selected target.
A very busy week in Australia kicked off today with the release of further partial indicators of the economy’s performance in Q4, together with indicators of more recent trends in activity and inflation.
Starting with the former, today the ABS released its quarterly Business Indicators report. In summary, this report added to earlier signs that economic growth has probably proceeded at a below-trend pace in Q4, and probably at a slightly slower pace than the RBA had factored in its most recent forecasts. The report pointed to a 0.2%Q/Q decline in the volume of inventories in Q4 (weaker than the market’s expectation of a 0.3%Q/Q increase); a 0.8%Q/Q increase in nominal company operating profits (well below the market expectation of a 3.0%Q/Q increase); and a 0.8%Q/Q increase in nominal wages and salaries (the smallest increase since Q117). Company profits rose 10.5%Y/Y whereas growth in wage and salaries continued to lag at 4.1%Y/Y.
Moving ahead in time, the number of dwelling approvals rose 2.5%M/M in January. While this outcome was slightly above the surveyed market consensus, approvals were still down 28.6%Y/Y as a result of the particularly sharp declines recorded over the previous two months. Approvals in the apartment sector rose 3.8%M/M but were still down a whopping 50.9%Y/Y, while approvals for houses rose 1.9%M/M and so were down a relatively moderate 7.0%Y/Y. In value terms approvals for dwellings fell 27.6%Y/Y in January. However, with the value of approvals for non-residential buildings rising 10.3%Y/Y – the first positive annual growth since July – total construction approvals fell a more restrained 15.8%Y/Y.
Turning to the labour market, the ANZ Jobs Ads Index maintained its recent downbeat tone, declining 0.9%M/M in February. The index has now fallen in six of the last seven months and is down 4.3%Y/Y. While the RBA has played down the importance of this internet-based indicator – reflecting the growing importance of other advertising forms, including social media – the weaker trend of late does suggest that employment growth is likely to slow from the rapid pace seen over the past two years.
Finally, the Melbourne Institute of Applied Economic and Social Research reported that its monthly inflation gauge increased just 0.1%M/M in February. Favourable base effects meant that annual inflation rose 0.2ppt to 1.7%Y/Y after hitting a more than 2-year low in January. The trimmed mean was unchanged on the month but annual growth in this measure also picked up by 0.2ppt to 1.6%Y/Y – still nowhere near consistent with annual inflation returning to the midpoint of the RBA’s 2-3% target, however.
Looking out to the remainder of this week, tomorrow’s RBA Board meeting should be a non-event. The Bank’s cash rate will almost certainly remain at 1.5% and there has been no significant data released that would likely have greatly altered the Bank’s policy stance. As a result the post-meeting statement should remain consistent with the notion that a rate hike can be expected eventually if the labour market tightens as the RBA expects, while acknowledging that the risks of a rate hike and rate cut are now almost evenly balanced (a risk distribution that was clarified by the RBA in the days that followed the February Board meeting). We will also receive Australia’s service sector PMI reports for February tomorrow, as well as information on government spending and net exports that will complete the picture ahead of Wednesday’s national accounts for Q4. Regarding the latter, in advance of the final partial indicators, Bloomberg’s survey presently indicates a consensus expectation that real GDP growth will print at 0.5%Q/Q, causing annual growth to slow 0.1ppt to 2.7%Y/Y (in quarter-point rounded terms the RBA had forecast growth of 3%Y/Y at end-2018). On Thursday there will be plenty of interest in the retail sales report for January, especially in light of the 0.4%M/M decline reported in December and the continued decline in home prices. The trade balance for January will also be released on Thursday.
There were no economic reports in New Zealand today. The remainder of this week’s diary is also fairly quiet with the highlights being the February QV home price report, released on Wednesday, and the Q4 manufacturing and construction reports on Friday – the latter reports providing further partial indicators ahead of the release of the full national accounts on 21 March.