May rolls the dice, China loses steam, Aussie wages steady, & Germany returns to growth

Chris Scicluna

Overview:
After yesterday saw major equity markets in Europe and the US put the trade war to one side for a while – with gains of 1.3% on the Euro Stoxx50 and 0.8% on the S&P500 – the relief rally continued today in the Asia-Pacific region where the main stock indices have largely followed suit.

While China’s latest slug of economic data showed that industrial production, retail sales and fixed investment all slowed more than expected last month, stocks in the PRC led the way, with the CSI300 up 2.25% as expectations rose of imminent new policy stimulus. In Japan, the Topix closed up 0.6% on a quiet day for economic news which saw the yen stable and BoJ Governor Kuroda respond to the Government’s downgraded assessment of the economy by stating predictably that he was not currently considering adding stimulus although the Policy Board stood ready to do so if the economic outlook merited it. Elsewhere, the Aussie dollar maintained its recent downtrend but ACGBs were little changed as the latest Australian wage data broadly met expectations. USTs are little changed too, with 10Y yields within yesterday’s range at 2.41%.

European stocks, however, have opened in reverse this morning with Bunds making gains (10Y yields approaching -0.10%) even as Germany’s Q1 GDP figure aligned with the consensus expectation of 0.4%Q/Q, the first positive growth in three quarters. And BTPs having added to yesterday’s significant losses (2Y yields now up about 15bps over the two days to a 5½-month high of 0.76%) after Italian Deputy PM Salvini suggested the Government might ignore the EU’s fiscal rules. And Gilts are higher (10Y yields down to 1.07%) after Downing Street last night confirmed Theresa May’s intention to ask MPs to vote on her domestic Brexit legislation in the first week of June – a vote that she looks set to lose. Looking ahead, April retail sales and IP data are due from the US later today.

China:
Having surprised on the upside in March as activity rebounded from the Lunar New Year lull, China’s data for retail sales, industrial production and investment did the opposite in April, suggesting renewed weakness even before the escalation of the trade war takes its toll. Among the headline numbers, contrary to the Bloomberg consensus expectation of little change, overall retail sales slowed 1.5ppt to 7.2%Y/Y, the slowest rate since May 2003, leaving them up 8.0%YTD/Y (8.3%YTD/Y previously).  Sales of autos remain firmly in reverse gear. Growth in industrial output was also significantly weaker than expected, slowing more than 3ppts from March’s 4½-year high back to January’s rate of 5.4%Y/Y.

While growth in production in SoEs picked up 1.3ppts to 6.0%Y/Y, private enterprise output slowed more than 9ppts to 5.1%Y/Y. And production slowed in most sub-sectors, with output of autos notably down on a year ago but growth in output of iron and steel accelerating.

Finally, contrary to expectations of a pickup, fixed-asset investment growth slowed 0.2ppt to 6.1%YTD/Y. Despite policy stimulus, growth in infrastructure spending was steady at 4.4%YTD/Y while private sector fixed-asset investment slowed almost 1ppt to 5.5%YTD/Y and investment in manufacturing slowed more than 2ppts to a new series low of just 2.5%YTD/Y. Real estate investment, however, ticked up slightly to 11.9%YTD/Y. Given the particularly weak tone to most of today’s data, additional policy stimulus seems likely to be announced sooner rather than later.

Euro area:
This morning brought the first estimate of German GDP in Q1, with positive growth confirmed for the first time in three quarters. Growth matched the consensus expectation of 0.4%Q/Q, following zero growth in Q4 and a dip of 0.2%Q/Q in Q3. That left GDP up a tepid 0.7%Y/Y, up just 0.1ppt from Q4. The detailed expenditure breakdown has yet to be released. But the German statistical agency reported that growth came primarily from final private domestic demand, with strong growth in fixed investment in equipment, machinery and construction, and household consumption too. Both exports and imports picked up significantly from Q4, leaving the contribution from net trade limited. Looking ahead, we forecast a moderation in GDP growth in Q2 to 0.2%Q/Q, and full-year growth in 2019 of just 0.7%, half the rate of 2018.

The second estimate of euro area Q1 GDP, due later this morning, seems bound to confirm the initial estimate of growth of 0.4%Q/Q, 1.2%Y/Y. But euro area employment data for Q1, also due this morning, might well show a moderation in job growth 0.3%Q/Q, 1.3%Y/Y in Q4.

Finally, after yesterday’s final figures of April inflation in Germany and Spain aligned with their flash estimates (2.1%Y/Y and 1.6%Y/Y respectively on the EU-harmonised measures), the equivalent French CPI data surprised on the upside, with an upwards revision of 0.1ppt on the EU measure to 1.5%Y/Y, up 0.2ppt from March. Of course, in each of these member states, the impact of the timing of Easter appears to have been key in driving the rise in inflation from March, particularly via higher services prices, and so we expect them all to fall back again in May.

UK:
After weeks of policy vacuum, and ahead of Theresa May’s meeting tomorrow to discuss her resignation timetable with the key backbench 1922 Committee Executive, the Government last night finally confirmed its intention to hold a vote on the Withdrawal Agreement Bill – the domestic legislation required to implement Brexit – in the first week of June (a date that will coincide with the controversial state visit of Donald Trump to the UK). We do not, however, expect the Bill to pass. The cross-party talks between the Government and Labour party look set to collapse, perhaps as soon as tomorrow. And while May will hope that dire performances in next week’s European Parliament elections will focus minds among backbench MPs from both main parties, we would strongly expect Labour to vote against the Bill and ensure its defeat, triggering the resignation of Theresa May before the summer.

The UK economic data calendar is empty today.

Australia:
Ahead of tomorrow’s jobs report for April, the main focus in Australia today was on the Wage Price Index for Q1, with both day’s data important in light of the RBA’s Board emphasis on developments in the labour market as pivotal in determining the next move in rates. Today’s figures, however, provided no surprises. The headline index – which excludes bonuses – rose 0.5%Q/Q, the same rate as Q4, leaving annual growth also unchanged at the three-year high of 2.3%Y/Y recorded in each of the last two quarters. Given the oddities of rounding, however, private and public sector wages both rose just 0.4%Q/Q, matching the weakest rates of the past couple of years. While annual growth in private sector wages was unchanged at the cyclical high of 2.3%Y/Y, annual growth in public sector wages eased 0.1ppt to 2.4%Y/Y. Once bonus payments are included, annual wage growth eased 0.2ppt to 2.6%Y/Y, with the private sector figure unchanged at 2.7%Y/Y and the public sector figure down for the third successive quarter at 2.4%Y/Y. Of course, all these rates remain stubbornly  below the rates of 3-4%Y/Y required for the RBA to meet its inflation target.

US:
In the US, today will bring the most notable economic data of the week in the shape of industrial production and retail sales figures for April. Following a slight drop in March, IP likely struggled to gain traction at the start of Q2 with a modest increase in manufacturing, subdued activity in mining, and a drop in utilities likely. And after a surprisingly strong end to the first quarter, underlying retail sales growth is expected to be softer last month although the headline rate will likely be inflated by higher prices of gasoline. The Empire manufacturing and NAHB housing indices, both for May, and business inventory data for March, are also due.  

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