The week ahead, w/c 8 April 2019

Chris Scicluna
Emily Nicol
Mantas Vanagas

At the end of last week, the US employment report for March depicted slightly stronger-than-expected job growth and slightly weaker-than-expected wage growth – a combination that boosted Wall Street (S&P500: +0.5%) on Friday, while also placing slight downward pressure on Treasury yields (10Y: -4bps from its daily peak to 2.50%). Today equity markets in mainland China, Hong Kong and Taiwan initially posted decent gains as they played some catch-up following Friday’s holiday. However, the gains in mainland China and Hong Kong were subsequently erased, with the CSI300 going on to close down 0.1%. Most other Asian bourses have also posted small losses, including Japan’s TOPIX which declined 0.4% against the backdrop of a further set of downbeat economic surveys (detail below). And UST yields have nudged down a little lower too.

So, it’s perhaps no surprise that equity futures are pointing lower in European and US markets and most euro area government bonds have also opened higher. The mood wouldn’t have been helped by this morning’s German trade report, which at face value disappointed, while the US factory orders later today also seem highly likely to be subdued. Looking further ahead, the key day this week looks to be Wednesday, which brings data on US CPI, UK GDP and Japanese machine orders, as well as the latest ECB policy announcement, and a key EU summit to discuss the UK’s latest request for a Brexit delay.

This week’s sparsely-populated Japanese diary kicked off with further indicators of business and consumer sentiment, as well as the release of the BoJ’s equivalent of the Fed’s Beige Book. Consistent with last week’s Tankan, the latest monthly surveys signalled ongoing weakness at the end of the first quarter. Perhaps most striking was the Cabinet Office’s Economy Watchers survey, with the headline current conditions index declining for the third month out of the past four in March and by 2.7pts to 44.8, the weakest level since July 2016 and well below the key-50 ‘improving’ level. And the deterioration in this survey was widespread, with the index related to household demand down 2.9pts to 44.2, while the index related to corporate demand fell 2.0pts to 44.9, with particular weakness in the manufacturing sector whose equivalent index (41.9) fell to its lowest level since October 2012. While the forward-looking components pointed to some improvement relative to current conditions, the degree of improvement expected was slightly less than the previous two months. The overall outlook index fell 0.3pt to 48.6, with the corporate sector index declining 1.0pts to 47.7 but the household sector index rising 0.1pt to 48.6.

Meanwhile, the Cabinet Office also released the results of its survey of consumer sentiment for March. Disappointingly, the headline index fell for a sixth consecutive month, declining a full 1.0pt to 40.5. This marks the lowest reading since January 2015 and means that the index is now below its long-term average. Within the detail, sizeable declines were recorded across all four main sub-indices. The index measuring consumers’ willingness to buy durable goods fell 1.0pt to 39.9 (the lowest since September 2015), while the index measuring income growth fell 0.6pt to 41.2 (the lowest since November 2016).

In other news, the BoJ’s quarterly Regional Economic Report indicated that each of the nine major regions considered their economies to have been either expanding or recovering over the past three months. The Hokkaido region revised up its assessment, reflecting a continued recovery from the impact of last year’s Hokkaido Eastern Iburi Earthquake. By contrast, the Tohoku, Hokuriku and Kyushu-Okinawa regions all described their economies in slightly less positive terms than was the case in the previous survey, with the Tohoku region noting that “some weakness has been observed in part”. In describing various sectors of the economy, comments concerning “weakness” were most prevalent with regard to production, whereas business investment was described as increasing or flat at a high level. Importantly, comments regarding the labour market, household incomes and consumer spending remained generally favourable.

Completing the day’s data releases, after seasonal adjustment, Japan’s current account surplus widened slightly to a 13-month high of ¥1.96tn in February. As usual most of that balance was driven by a large surplus on the primary income balance (¥1.74tn), while the goods and services balance produced a small surplus (¥0.24tn).

Looking ahead to the remainder of the week, on Wednesday most interest will centre on the machinery orders report for February, especially in light of the 5.4%M/M decline in core private orders reported in January. In addition, Wednesday also brings the BoJ’s goods PPI and bank lending figures for March. There are no market-moving reports scheduled over the remainder of the week, although the Cabinet Office Synthetic Consumption Index for February could make an appearance. In the bond market the MoF will auction 5-year JGBs on Tuesday and enhanced liquidity (maturities 15.5-39 years) on Thursday.

Euro area:
The main event in the euro area this week will be the conclusion of the ECB’s latest policy meeting on Wednesday. At last month’s meeting, the ECB revised down significantly its forecasts for GDP and inflation. And so, the Governing Council amended its forward guidance to make clear that its key interest rates are expected “to remain at their present levels at least through the end of 2019”. And it also confirmed its intention to hold a new round of quarterly targeted long-term refinancing operations (TLTRO-III), starting in September 2019 and ending in March 2021. The maturity of each operation will be two years, half that of the previous TLTRO-II programme, while counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 28 February 2019 at a rate indexed to the refi rate over the life of each operation.

Other precise details of the TLTROs‑III, including the incentives for credit conditions to remain favourable, were to be announced in due course. However, we do not expect to receive this additional information after the Governing Council meeting, which looks likely to be relatively unenlightening. Draghi will no doubt emphasise that the Governing Council remains alive to the downside risks to the economic outlook, but there will probably be no signal of any further action over the near term. Nevertheless, in the post-meeting press conference, Draghi will likely be probed about his statement in his Frankfurt speech in late March, that “if necessary” the ECB would consider measures to “preserve the favourable implications of negative rates for the economy while mitigating the side effects”, which suggested that the Governing Council could at some point introduce a tiered interest rate system on similar lines to those conducted by the BoJ and SNB if the deposit rate was sustained at the current level or below throughout next year or beyond.

It should also be a relatively uneventful week for new economic data from the euro area, with the region’s IP figures for February on Friday arguably most noteworthy. With German IP having fallen in February when construction is excluded, we are likely to see a drop in aggregate euro area production on the same basis. That, however, should be considered payback for the marked increase in January, with the 1.4%M/M rise that month representing the strongest for fourteen months. Indeed, the equivalent figures from France and Italy (due Wednesday) are similarly expected to report a decline in output following strong growth at the start of the year.

Following last week’s subdued German manufacturing output figures, this morning’s trade data from the largest euro area member state also might have appeared disappointing. The value of exports decreased by 1.3%M/M in February, the worst reading in twelve months, while imports were down a steeper 1.6%M/M, the most since August. However, the seasonally adjusted trade surplus remained unchanged, at €18.7bn, very close to the average of the past six months. Of course, with the flow of global trade in February disrupted by the Lunar New Year holidays, the numbers might be taken with a pinch of salt and not necessarily indicative of any new loss of momentum. Indeed, looking through the monthly volatility, in February exports were up a still-respectable 1.3%3M/3M, while imports rose 0.5%3M/3M, both little changed from January. And from the perspective of net trade, the figures so far appear to be consistent with a positive contribution to GDP growth in Q1, which would be a change for the better from each of the four quarters last year, when the contribution were negative or zero.

This morning also brought the latest Bank of France business confidence survey. And while last week’s INSEE and PMI indicators signalled a very slight improvement in March, today’s survey suggested that conditions remained steady at the end of the first quarter. In particular, the headline manufacturing index was unchanged at 100 in March, bang in line with the long-run average. The equivalent indices for services and construction also moved sideways at 101 and 106 respectively. While the manufacturing and services indices were on average in Q1 slightly lower than the average in Q4, the Bank of France assessed today’s survey to be consistent with GDP growth of 0.3%Q/Q unchanged from the rates seen in H218 and in line with our own forecast for Q1.

Meanwhile, the back end of the week will also bring final readings of March CPI from Germany and France (Thursday) and Spain (Friday). These figures are likely to confirm the flash estimates, showing that on an EU-harmonised measure German and French CPI eased 0.3ppt to 1.4%Y/Y and 1.3%Y/Y respectively, while Spanish inflation rose 0.2ppt to 1.3%Y/Y. Supply-wise, Germany will sell 2030 linkers tomorrow and 5Y bonds on Wednesday.

All eyes in the coming week should be on Wednesday evening’s special EU summit to discuss the UK's request for an extension of the Article 50 deadline beyond this Friday. At the end of last week, Theresa May repeated last month’s request for a postponement to 30 June at the latest. But, in order to reduce the risk of generating repeated bouts of uncertainty through a series of short extensions, EU President Tusk has reportedly proposed a longer 'flextension', with a delay perhaps of up to a year, but shorter if the UK approves the Withdrawal Agreement before that time. France, Spain and Belgium, and to some extent the European Commission, however, all appear sceptical of the merits of the longer extension, wary of infecting the EU's processes with the UK's political poison.

As leaders want to avoid being blamed for a damaging no-deal Brexit, not least out of solidarity for Ireland and to avoid the significant adverse economic shock that would arise, we see only a minimal risk that the request for a Brexit delay to be refused this week. But the Summit negotiations will not be straight forward, and the precise extension end-date will clearly be argued over, as will the conditions, which are likely to include an assurance that the UK won’t obstruct EU decision-making over the period concerned (e.g. by committing to vote with the majority of member states on key decisions). Ultimately, we would view a longer extension as more constructive, pushing out the potential cliff edge further into the future and thus removing the near-term risk of a disorderly no-deal Brexit.

To support her case in Brussels, Theresa May will point to ongoing talks between the Government and Labour party to try to find an agreement, as well as a fall-back option for a further round of indicative votes in the House of Commons if – as we expect – she and Labour leader Corbyn are unable to reach an agreement. At the same time, MPs hope to be able to constrain May’s freedom of manoeuvre at the Summit through the ‘Cooper-Letwin bill, whose passage through Parliament will resume today. If that bill gains royal assent tonight, events in the UK Parliament tomorrow and Thursday might also be watched for a barometer of the political pressures on Theresa May related to the Brexit delay. While in theory that might raise risks of an accidental no-deal Brexit, in practice it seems more likely to compel May to accept whatever EU leaders offer in terms of an Article 50 extension.

The most notable data release in the UK economic calendar this week is Wednesday’s short-term output indicators, including a monthly GDP estimate for February. GDP rose by 0.5%M/M in January, reversing a drop of a similar magnitude in December, as an increase in retail and wholesale sector activity provided a boost. We expect that GDP growth will have fallen in February to zero, with the pace of growth easing in all major output components – services, IP and construction. And that would leave the 3M/3M rate unchanged at a pedestrian 0.2%Q/Q. Against the backdrop of subdued global demand and concerns over Brexit, the trade data, due on the same day, are also set to be unimpressive. In January, the headline trade deficit increased to a five-month high of £3.8bn and a similar reading is on the cards for February.

Beyond the official figures for output and trade, tomorrow will bring the BRC Retail Sales Monitor, which following a solid increase in sales at the start of the year might show that growth eased in March. And the RICS Residential Market survey (due on Thursday) seems bound to show that housing market activity remains very subdued. In the markets, tomorrow the DMO will issue 10Y Gilts.

The US economic diary this week is also relatively light. This afternoon we will receive the factory orders report for February, followed tomorrow by the JOLTS labour market data for February and the NFIB small business survey for March. Wednesday’s highlights, however, will be more closely watched, with the focus set to be on the CPI report for March and the minutes from last month’s FOMC meeting. The PPI report for March will follow on Thursday, while the week will conclude on Friday with the preliminary results of the University of Michigan’s consumer survey for April and import prices for March. In the bond market the US Treasury will auction 3Y notes tomorrow, 10Y notes on Wednesday and 30Y bonds on Thursday.

There were no economic reports in China today. Looking out of the remainder of the week the key releases this week are Thursday’s CPI and PPI reports for March, followed a day later by the external trade report for March. The latter will be of particular interest as investors seek to gauge how much of the 21%Y/Y decline in exports reported in February was accounted for by volatility associated with the LNY holiday. According to Bloomberg, analysts forecast exports to have grown about 6%Y/Y in March. The money and credit aggregates for March may also be released late in the week or perhaps over the weekend.

The only economic report released in Australia today was the ANZ’s monthly count of jobs advertised on the internet. According to the ANZ the number of job ads fell 1.7%M/M – marking the fifth consecutive decline – and were down 6.0%Y/Y. While some of the recent softening likely reflects changes in advertising techniques – especially the increasing use of social media – the decline is consistent with other indicators that suggest ongoing job growth but at a somewhat slower pace that seen in recent years.

Looking ahead to the remainder of the week, tomorrow will bring the housing finance report for February, following a day later by the Westpac consumer confidence index for April. Wednesday’s diary also includes a speech by RBA Deputy Governor Guy Debelle on “The State of the Economy”. The only other diary entry of note this week is the RBA’s semi-annual Financial Stability Review, which is released on Friday). Investors will be doubtless look closely at the Bank’s description of developments in the housing market, in particular. However, with the pace of price declines having slowed a little in recent months, the Bank will likely maintain its sanguine view of the housing market, with a measured decline in prices seen as a desirable adjustment to improve affordability following several years of extremely strong growth.

New Zealand:
There were no economic reports released in New Zealand today and the remainder of this week’s diary is relatively quiet too. The ANZ ‘Truckometer” for March will be released tomorrow, while Wednesday’s Food Price Index for March will allow analysts to finalise their estimates ahead of the following week’s Q1 CPI report – the next key event ahead of the RBNZ’s review of monetary policy on 8 May. The week concludes on Friday with the release of the Electronic Card Transactions survey and manufacturing PMI for March, alongside information on visitor and migrant arrivals during February. The REINZ housing survey for March may also make an appearance towards the end of the week.

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