Morning comment: Brexit chaos, BoJ flow of funds, RBA minutes & Aussie house prices

Chris Scicluna
Emily Nicol
Mantas Vanagas

Equity markets in the US and Europe yesterday followed the positive trend set earlier in the day in Asia, albeit somewhat less vigorously, with the S&P500 eventually closing with a 0.4% gain on Monday following an earlier 0.3% advance in Europe’s Stoxx600. US credit spreads tightened fractionally while Treasury yields nudged slightly higher (with 10Y UST yields moving back up to 2.60%). But given their strong gains yesterday, and in the absence of any significant local or global news, the key Asian bourses have generally moved fractionally lower today. Losses of less than ½% were seen across most markets (with Japan’s TOPIX and China’s CSI300 down 0.2% and 0.5% respectively) as investors now await direction from the Fed following the conclusion of the FOMC meeting tomorrow.

In Australia, there were no surprises either from the minutes of this month’s RBA Board meeting – whereby “members agreed that there was no case for a near-term adjustment in policy” – or confirmation that home prices had on average declined in the final quarter of last year at the sharpest rates on the fifteen-year series (detail on all this below). Nevertheless, while predictable, those releases fueled investor expectations that the next move in rates will be a cut, with Aussie bond yields fell 4-5bps across the curve, pushing 3Y yields below the 1.50% RBA cash rate for the first time in 2½ years. In Japan, meanwhile, the JGB curve flattened slightly after a decent 20Y auction, while the BoJ published its flow-of-funds data for Q418, which, among other things, shone light on the central bank’s footprint in the markets for JGBs and T-bills, as well as flagging developments in household financial assets (detail on this too below).

Moving westwards, after yesterday’s announcement by the UK Parliamentary Speaker, which seemingly left Theresa May’s plans for a further Brexit vote today or tomorrow in tatters, Sterling recovered a little ground overnight ahead of statement in response by the Government later today. Data-wise, meanwhile, the latest labour market report, due this morning, will also be closely watched by the BoE ahead of Thursday’s MPC announcement, with the ECB likewise to take a close look at the latest euro area labour cost figures. And in the US, factory orders figures are due as the Fed’s two-day policy meeting gets underway.

To the extent that it ever had one (and evidence repeatedly suggests that it never did) the Government’s Brexit strategy is in tatters after Parliamentary Speaker Bercow’s statement yesterday afternoon seemingly stymied Theresa May’s plans to hold a third meaningful vote on her deal before Thursday’s EU Summit. Bercow ruled that the PM could only seek a further vote in the House of Commons on a proposition that is “not the same or substantially the same” as was voted upon last week. Brexit Secretary Steve Barclay – who last week voted against the very Government motion that he himself had advocated in the preceding Parliamentary debate to illustrate Theresa May’s marked loss of authority – will make a statement to the House of Commons today in response to Bercow’s announcement, supposedly setting out how Government plans to proceed.

Theresa May would seem to have a number of options ahead. She could plough on regardless and try to persuade the Speaker to allow her to present her deal to Parliament again, arguing that any new concessions to Northern Ireland resulting from her negotiations with the DUP over recent days do represent a substantially different proposition. That approach might be most in character, but might similarly fail to get the Speaker’s approval.

Alternatively, the PM could turn over a new leaf, finally acknowledge her minority position in Parliament and take a more co-operative approach to Brexit, either agreeing to drop her redlines and agree to renegotiate the Political Declaration on the future relationship (the only part of the deal that the EU will be willing to reopen) to leave open the possibility of a softer Brexit (e.g. based on a permanent customs union or a closer Norway-plus arrangement). Similarly, she might agree to submit her deal to Parliament for approval only subject to a confirmatory second referendum. However, such a more collegiate approach would seem to be highly out of character for May, and dynamite for the Conservative Party.

Finally, May could take more drastic action and seek to ‘prorogue’ Parliament, bringing an end to the current term and setting in train a new session in which the Prime Minister’s deal would, incongruously, take pride and place in the Queen’s Speech. Given the Government’s minority position, and the extent to which it would be entirely motivated by an attempt to bypass Parliamentary process, however, the Queen would not be amused by such a manoeuvre, which would only deepen the current constitutional mess. So, while May might be tempted, we would find it most unlikely.

Therefore, the most likely scenario is perhaps that Theresa May will fail to do anything meaningful before Thursday’s summit, where her destiny will be entirely in the hands of the other EU leaders. It will be up to them to decide whether, and if so, how long to extend the Article 50 deadline. May’s preferred three-month extension would now seem highly unrealistic, and she is bound to be in for further humiliation in Brussels. But while there is a range of scenarios for how the Summit might play out, as emphasised by a Leave-supporting minister last night, it still seems inconceivable that both Government and Parliament won’t next week take the necessary action to amend  the Withdrawal Act and avoid a no-deal Brexit on 29 March.

Data-wise, today will bring the latest UK labour market figures. Recent surveys have suggested a significant loss of momentum in the jobs market since the beginning of the year.  But today’s data are expected to show headline employment and wage growth easing only slightly from the relatively strong figures registered at the end of last year. And the unemployment rate is likely to remain unchanged at 4.0%, still the lowest level since mid-1970s and seemingly impervious to the ongoing political crisis.

While it was a quiet day for top-tier Japanese releases, the BoJ’s latest flow of funds data for Q418 still drew some attention. Given the slowdown in the pace of the central bank’s net asset purchases last year, there was particular focus on its holdings of Japanese debt securities, with its share of the market of JGBs (including T-bills) unchanged at 43% in Q418, the first time its share has not risen since Q112. But this is largely due to the BoJ reducing its total holdings of T-bills steadily over the past nine quarters, by a cumulative ¥45trn. The flip-side to that net selling has been a notable increase in the share of foreigner ownership of Japanese T-bills, with the share of the market taken by overseas investors rising in Q418 to a record high of more than 70%.

So, when stripping out T-bills, the BoJ’s holdings of JGBs continued to rise at the end of last year to ¥466trn, taking its share of the market to a new high of 46% in Q418 compared with 43% at end-2017 and just 12% before QQE was launched in Q113. But while Japanese banks continued to scale back their JGB holdings, there remained only limited portfolio rebalancing elsewhere. For example, private insurance and pension funds remained net purchasers of JGBs in Q418, with insurance firms holding around one fifth of the JGB market. And Japanese households’ and firms’ currency and deposit holdings remained near record highs at the end of last year, to account for more than 50% and 23% of their respective total financial assets.  However, with household holdings of domestic equities and shares having risen to their highest on record in Q318 (11% of total assets) the sharp correction in global markets at the end of last saw the total value of households’ financial assets fall compared with a year earlier in Q418 (1.3%Y/Y) for the first time since Q216 and by the most since Q209.

As expected, the minutes from this month’s RBA Board meeting – released today – provided no significant additional illumination regarding the policy outlook. Board members continued to assess that the current stance of monetary policy “was supporting jobs growth and a gradual lift in inflation”, in line with the Bank’s central projection, so that “there was not a strong case for a near-term adjustment in monetary policy”. That said, given current uncertainties and tensions in the outlook, the Board remains open to both policy tightening and policy easing scenarios, with the probabilities around these scenarios again assessed as “more evenly balanced than they had been over the preceding year”. It was noted that Members agreed to continue to assess the outlook “carefully”, with a clear focus on new information that might help resolve the current tensions in the domestic economic data, especially between the welcome improving trend in the labour market but somewhat slower growth in output and slow progress in lifting inflation. Given that a tightening labour market underpins the Bank’s forecast of a gradual pick-up in wage pressures and inflation, the minutes again make clear that developments in the labour market are of particular importance to the RBA. Needless to say, therefore, that focus means that Thursday’s February Labour Force survey will be scrutinised closely for any signs of emerging weakness.

Among other things, the RBA acknowledged that residential investment was expected to subtract from economic growth and the contraction “could be sharper” than expected. And on the data front, as indicated by more timely series, the ABS House Price Index reported today an unsurprising but still marked 2.4%Q/Q decline in weighted average house prices across Australia’s eight territorial capital cities in Q418. This raised the annual rate of decline to 5.1%Y/Y from 1.9%Y/Y previously. Both figures represent the sharpest quarterly and annual declines in prices on the series, which dates back some fifteen years. The average result masks significant dispersion across the various cities, however. For example, while prices fell 3.7%Q/Q and 7.8%Y/Y in Sydney and 2.4%Q/Q and 6.4%Y/Y in Melbourne, prices rose 0.7%Q/Q and 9.6%Y/Y in Hobart. In other news, the weekly ANZ-Roy Morgan consumer confidence index rose 2.4pts to 111.9, thus recovering less than half of the steep decline reported last week (and so still the second-weakest outcome recorded in the last 12 months).

Euro area:
Several euro area economic data releases are due today, including the German ZEW survey of financial market analysts, which will represent the first set of sentiment indicators for March. Given recent market developments, this is expected to signal some improvement in investor sentiment this month, which would be the first such move since the very sharp deterioration last September. Also due are euro area output figures from the construction sector. These were not particularly strong in Q4, showing an increase in production of 0.2%Q/Q, and the data for January will likely provide a mixed picture, with German national numbers having shown a modest increase of 0.2%M/M but the equivalent report from France having indicated a decline of 5.4%M/M. Finally, euro area labour costs data for Q4 will be watched closely by the ECB – the German release last week showed a slowdown in labour costs, sending the growth rate back to the bottom of the recent range, and so a similar change can thus be expected from the euro area data today.

In the US, ahead of Wednesday’s monetary policy announcement, the two-day FOMC meeting gets underway tomorrow. The data focus will be on the factory orders release for January. We have already seen that durable goods orders were up by 0.4%M/M that month following a 1.3%M/M rise in December. The increase was driven mainly by the volatile aircraft category, but there are few reasons to believe that growth in total orders will be significantly different.

New Zealand:
The Westpac consumer confidence index fell a disappointing 5.3pts to 103.8 in Q1 – almost completely erasing the pick-up that had occurred last quarter and returning the index to a level decisively below its long-term average. The present conditions index fell 3.9pts to 107.6, while the expectations index fell a steeper 6.2pts to 101.3. This result compares unfavourably with the similarly-constructed monthly ANZ-Roy Morgan consumer confidence index, which stood at a comparatively healthy 120.8 in February. The March edition of the latter survey will be released next week and may also capture reaction to last week’s terrible mass shooting in Christchurch.


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