Morning comment: Brexit shambles, Tankan prices & RBA policy

Chris Scicluna
Emily Nicol
Mantas Vanagas

Following a strong day in Asian markets – driven largely by reaction to China’s improved PMI reports – the S&P500 advanced 1.2% on Monday, matching an earlier gain the Stoxx600. Reduced levels of concern were especially evident in the bond market, with the 10Y Treasury yield rebounding 9bps to 2.49%. Earlier European yields posted a smaller advance, weighed down by the soft euro area HICP reading for March. However, US equity futures and Treasury yields drifted slightly lower after the New York close, possibly influenced by the UK Parliament’s continued Brexit impasse (see below), which nevertheless saw sterling lose little more than ½ cent against the euro.

So, after yesterday’s strong showing, most equity markets in Asia have still seen limited follow-through buying today, although gains have been generally ½% or less. In Japan, where inflation expectations data from the Tankan were on the whole unsurprisingly slightly weaker than the previous quarter’s report, both the TOPIX and JGB yields were little changed. In Australia, bond yields opened higher in line with US Treasuries. However, yields subsequently drifted lower, especially following the release of the RBA’s Board’s post-meeting statement, which contained a small tweak in the important last paragraph – a tweak that provides some ‘wriggle room’ for the Bank to adjust its broadly neutral policy stance at a future meeting if required (more on this below).

Having on Friday rejected Theresa May’s Withdrawal Agreement by a majority of 58 MPs, the House of Commons last night rejected two softer Brexit options (customs union and Norway-plus ‘common market 2.0’) as well as a confirmatory second referendum. But while most Conservative MPs failed to indicate support for any of the options last night, the margins of defeat were far smaller than for May’s deal. Most notably, the customs union proposal was rejected by just three votes, and the second referendum proposal was defeated by twelve while gaining the most votes overall. And with plenty of abstentions all round, these options retain a glimmer of a hope of eventual success. Indeed, a wide range of Brexit scenarios – including a softer Brexit, second referendum, General Election, no deal, Article 50 revocation or even eventual victory for a variant of May’s deal – remain possible. But the precise sequence of events, and the eventual outcome, between now and the all-important EU summit on 10 April remains unclear.

Certainly, MPs will run a third phase of indicative votes tomorrow – perhaps allowing a combination of the options voted on last night to be considered, and also perhaps with a different voting system based upon preferences – to try finally to find majority support for a way forward. And Theresa May might also tomorrow try to bring her own proposal back for another parliamentary vote, albeit amended to allow MPs a say in the subsequent negotiations on the future relationship with the EU. First of foremost, however, today will see her try to agree on a plan at what is set to be a highly acrimonious and lengthy Cabinet meeting, the outcome of which could feasibly provoke further ministerial resignations and fracturing of the seriously troubled Conservative party.

Today the BoJ released further details from its latest Tankan survey, including information on firms’ inflation expectations. As in previous surveys, firms indicated that they are unconvinced that the BoJ will achieve its 2.0% inflation target, even within a 5-year horizon. Perhaps the only good news was that there was limited evidence that firms’ scepticism had strengthened as a result of a more cautious assessment of the economic outlook. For all firms, the average expectation of inflation one year ahead remained at just 0.9%Y/Y, while firms’ average expectation at the 3-year horizon was unchanged at 1.1%Y/Y for an eighth consecutive quarter. However, firms’ expectation at the 5-year-ahead horizon was nudged down 0.1ppt to 1.1%Y/Y, reversing the increase recorded in the prior survey.

As usual firms’ expectations regarding their own output prices remained even softer but in aggregate were unchanged from the prior survey across all time horizons. On average, they forecast a 0.8% rise in prices over the coming year and a cumulative increase of 1.2% and 1.5% over the next 3 and 5 years respectively. The unchanged aggregate result occurred despite increased pessimism regarding prices by large manufacturers (who now forecast a cumulative 0.5% decline in prices over the next 5 years, from a drop of 0.1% previously, on the back of a notable deterioration in price expectations among some key export-oriented sectors). And while large non-manufacturers were also more downbeat about their price outlook over the coming five years, this was countered by slightly greater optimism amongst small non-manufacturing firms.

Another reasonably busy day in Australia has already seen the release of the outcome of the RBA’s latest Board meeting, together with more economic reports. In addition, the Treasurer will shortly present the Government’s pre-election federal Budget to Parliament, which is expected to contain some fiscal giveaways to try to entice voters at the ballot-box next month.

Starting with the RBA, as widely expected, once again the Bank retained the cash rate at 1.5%. The concluding paragraph of the post-meeting statement, which summarises the Bank’s stance, again stated that: “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” This suggests that the Bank continues to expect that the single most likely next policy move will be a (far off) policy tightening.

However, as Governor Lowe had indicated after this year’s first meeting in February, the Bank regards the chances of a rate hike and rate cut as now almost evenly balanced. This now appears to be recognised, albeit not explicitly, in the conclusion of this paragraph, which was tweaked for the first time since December 2017. Specifically, the paragraph now concludes with the observation that “The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”. The reference to ‘monitoring developments’ is new and suggests that the RBA is wanting to reassure investors that policy is not on a predetermined path and will be adjusted if required.

Elsewhere there were only a few changes in the post-meeting statement from that issued in March. The Bank’s description of the global economy was little changed, with the outlook still said to be subject to downside risks. The Bank noted the recent easing of global financial conditions which had been reflected in lower short-term funding costs and historically low bond yields in Australia. As regards the domestic economy, the Bank noted that the GDP data paint a softer picture of the economy than the labour market data, with household consumption weighed down by slow growth in household incomes and the ‘adjustment’ in housing markets. On this occasion the Bank was silent regarding its specific forecast for economic growth. However, the Bank’s outlook for inflation was unchanged, with the central scenario still for underlying inflation to be 2% this year and 2¼% in 2020.

Turning to the day’s economic data, the number of dwelling approvals rose a far greater-than-expected 19.1%M/M in February, thanks to a 62.4%M/M surge in the volatile ‘other dwellings’ category (i.e. apartments). Even with that rebound, total approvals were still down 12.5%Y/Y. Approvals for houses fell 3.7%M/M and were down 14.2%Y/Y. In value terms approvals for dwellings fell 5.9%Y/Y in February, but the value of approvals for non-residential buildings fell a somewhat greater 15.7%Y/Y. As a result, the value of total construction approvals fell 9.7%Y/Y. In other news, the weekly ANZ-Roy Morgan consumer confidence index rose 2.6%M/M to four-week high of 114.7 last week, moving it back into line with its long-run average. A sharp improvement in consumers’ year-ahead outlook for the economy was the biggest driver of the increase in the aggregate index.

It should be a relatively quiet day for European economic data today, with just second-tier data due. Euro area PPI figures for February expected to show that producer price inflation was unchanged at 3.0%Y/Y for the third consecutive month, down almost 2ppts from October’s high.

This morning brought the latest Spanish labour market figures for March, which predictably saw a further decline in jobless claims, down 34k on an unadjusted basis to 3.255mn. That took the decline over the year to 167.5k, representing a drop of 4.9%Y/Y in registered unemployment. Meanwhile, registered employment rose a further 19k, maintaining the clear uptrend of recent years, and pushing the total up to 19.1mn, still however about 300k down from the pre-crisis peak. So, while the headline Spanish unemployment rate on the EU measure likely fell further from 13.9% in February, and seems likely to continue to decline as economic growth (0.6%Q/Q in each quarter of 2018) remains relatively firm, significant spare capacity is set to persist in the labour market for a while yet.

In the UK, today will bring just the construction PMI for March, which is expected to suggest that conditions remained little changed at the end of Q1, albeit still signalling a deterioration in the sector from the final quarter of last year. Supply-wise, the DMO will sell 5Y Gilts.

In the US, focus today will be on February’s durable goods orders release, as well the latest vehicle sales figures for March. In particular, total durable goods orders likely declined due not least to issues at Boeing, and core orders likely registered only a modest gain.

New Zealand:
The only economic report released in New Zealand today was the latest instalment of the long-running NZIER Quarterly Survey of Business Opinion. As expected this pointed to a decline in business sentiment over the past three months, confirming the picture presented by the monthly ANZ Business Outlook Survey. The headline business sentiment index fell to -27, thus undoing the modest improvement that had been registered in Q4. Moreover, a net 1% of firms reported weaker trading conditions over the period. Manufacturers reported especially weak demand, curiously driven by domestic sales as export sales were said to have strengthened slightly. Uncertainty about the global outlook probably contributed to the weakest capex intentions since 2012, although firms continued to indicate an intention to expand hiring. Elsewhere, the survey indicated that businesses are finding it increasingly difficult to raise prices despite rising cost pressures, contributing to pressures on profitability, although more firms indicated an intention to raise prices over the coming quarter.

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