Morning comment: Japanese survey, UKk CPI, Brexit & FOMC

Chris Scicluna
Emily Nicol
Mantas Vanagas

Wall Street closed essentially flat on Tuesday after an earlier modest rally was erased following a Bloomberg report suggesting that China was walking back some of the commitments made in tentative trade deal discussions, apparently in response to a lack of clarity regarding prospects for the US removing tariffs. As a result, a modest rise in US Treasury yields was also largely reversed, leaving the 10Y yield only a touch higher as attention turned to today’s FOMC meeting conclusion and associated Fed commentary.

The contradictory commentary regarding the state of US-China trade talks has weighed somewhat on most equity markets in Asia today, with declines of 0.5% or less seen in Singapore, Hong Kong and Australia. But a late rally in China’s CSI300 saw its earlier losses eroded to be unchanged on the day. Japan’s TOPIX bucked the trend, rising a modest 0.3% ahead of tomorrow’s holiday and despite the latest Reuters Tankan survey revealing no improvement in firms’ assessment of business conditions in March (more on this below).

While all eyes later today will be on the Fed, this morning will bring more top-tier UK data ahead of tomorrow’s BoE policy announcement, with February’s inflation release. And as Theresa May looks set to request a short extension for Article 50, the CBI’s latest manufacturing sector survey is likely to again highlight the negative impact ongoing uncertainty is having on the UK economy.

Today saw the release of the Reuters Tankan for March which, disappointingly, pointed to no improvement in sentiment over the past month and no signs that firms expect any material improvement in the near term. Indeed, the headline diffusion index (DI) for the manufacturing sector suffered a fifth consecutive decline, falling a further 3pts to +10 – the lowest reading since October 2016. Almost all industries recorded weaker conditions this month, with sentiment remaining negative in the steel and metals business for a second consecutive month and turning negative in the electrical machinery and precision machinery industries for the first time in over 2½ years. Looking ahead, the forward-looking ‘forecast’ DI fell 1pt to +11 this month, indicating that on balance manufacturers’ expect business conditions to be little changed over the coming three months. Meanwhile, after declining sharply last month, optimism amongst non-manufacturers appears to have stabilised in March. The headline DI for this sector was steady at February’s 26-month low of +22, with all sub-industries maintaining a net positive assessment of business conditions. The forecast DI improved 3pts to +23, indicating that non-manufacturers were also inclined to see no more than a marginal improvement in business conditions over the next three months.

Additional information on conditions in the manufacturing sector will be provided in Friday’s preliminary manufacturing PMI survey for March. At this stage, the results from both today’s Reuters Tankan survey and last week’s MoF/Cabinet Office Business Outlook Survey suggest that we can expect some slippage in the BoJ’s closely followed quarterly Tankan indices when that survey is next released on 1 April.

In other news, the total number of overseas visitor arrivals moderated to 2.60mn in February from 2.69mn in January, causing annual growth to slow to 3.8%Y/Y from 7.5%%Y/Y previously. However, much of the slowdown appears to reflect volatility associated with the timing of China’s Lunar New Year holiday, as growth in arrivals from China slowed to just 1.0%Y/Y from 19.3%Y/Y previously. Excluding arrivals from China, growth in arrivals strengthened to an 8-month high of 4.9%Y/Y from 3.5%Y/Y previously.

On the Brexit front, Theresa May is due this morning to write to the EU to request an extension to the Article 50 deadline. Following what, by all accounts, was an acrimonious special Cabinet meeting yesterday, reports this morning suggest that she will only seek a short delay – to June – to avoid mutiny from her Brexiter Minister colleagues. That would then allow her to try one last time to get her deal passed in Parliament next week – with some reports suggesting 28 March as the key date for a new meaningful vote. But, of course, success in such an MV3 might at this stage still seem unlikely. And so, it will be up to the EU at tomorrow’s Summit to decide the precise length and nature of any extension to grant and the next steps that May would be expected to take to earn the right to the Brexit delay. Indeed, with the EU’s Chief Negotiator yesterday calling for ‘a new political process’ to find an alternative way forward if May’s deal fails to get through the House of Commons once again, a series of non-binding ‘indicative votes’ in Parliament might also need to get underway early next week for May to demonstrate that an orderly resolution can ultimately be reached by a different route.

Data-wise, today will bring the release of February’s CPI figures. We expect the headline rate to have remained unchanged from the previous month, at 1.8%Y/Y. Within the major components, changes to inflation rates are set to be minimal, so we expect the core rate also to move sideways at 1.9%Y/Y. The ONS will also publish the latest official house price figures for January, set to show annual growth broadly unchanged at 2½%Y/Y. The CBI Industrial Trends Survey, which is likely to signal that manufacturers remained downbeat in the latest month against the backdrop of high Brexit uncertainty, is also due.

Of course, attention today will also be firmly on the conclusion of the FOMC’s latest two-day meeting, although the Fed is universally expected to leave its policy settings unchanged. So, most interest will be on the Fed’s revised economic forecasts and Chair Powell’s post-meeting press conference to see what meeting participants have in mind regarding policy over the remainder of this year and beyond. Certainly, we expect more dovish dot plots than the previous set issued in December, with the dots back then showing the median expectation for two interest rate hikes this year and a further 25bp hike in 2020. We expect the dots to be tightly packed this time around, with the median view likely to suggest no change to rates all year and only a modest skew to the upside. Of additional interest will be further insights into the Fed’s balance sheet plans. With Chairman Powell indicating in January that the FOMC expects to end the redemption of securities later this year, the Committee might well provide more details with specific dates and as to whether it plans to end its redemptions suddenly or to do so gradually via a taper.

Of additional interest will be further insights into the Fed’s balance sheet plans. With Chairman Powell indicating in January that the FOMC expects to end the redemption of securities later this year, the Committee might well provide more details with specific dates and as to whether it plans to end its redemptions suddenly or to do so gradually via a taper. The Committee might also indicate how the composition of the portfolio will evolve over time – officials have long planned to move to a portfolio primarily of Treasury securities – as well as the likely maturity structure of its holdings once the transition has concluded. The minutes from December’s FOMC meeting suggested two possibilities, with a focus on short-term securities that would give the Fed another tool for stimulating the economy during a downturn, or an alternative – matching the Treasury’s maturity structure – that would allow market forces to determine the shape of the yield curve and leave the Fed playing a neutral role.

Ahead of tomorrow’s very important ABS Labour Force report, today it was reported that the DEWR trend index of internet job vacancies had fallen 0.9%M/M in February following a revised 0.5%M/M decline in January (previously reported as an increase of 1.3%M/M). As a result, the index declined 2.4%Y/Y, led by a reduction in vacancies for labourers, sales people and machinery operators and drivers. The weaker trend in this index is consistent with recent readings of the ANZ job ads index, while the NAB business survey’s hiring index is also well off last year’s very high peak.

New Zealand:
Ahead of tomorrow’s national accounts, New Zealand reported a seasonally-adjusted current account deficit of NZD2.47bn in Q4 – almost identical to that reported in Q3 and slightly below market expectations. This was still a little larger than in the same quarter a year earlier, however. As a result, the deficit for the full calendar year equated to 3.7% of GDP, up 0.1ppt from that recorded in the 12-months to end-Q3. The deficit on the goods balance widened by NZD0.1bn to NZD1.0bn, while the surplus on the services balance was unchanged at an almost offsetting NZD1.1bn. As usual the key driver of the overall current account deficit was the deficit on the primary and secondary income balance – reflecting the ‘cost’ of decades of accumulated deficits – which narrowed by just NZD0.1bn to NZD2.5bn. Meanwhile, the value of New Zealand’s net international liabilities increased to 57.0% of GDP in Q4, with flow effects associated with the current account deficit strongly reinforced by valuation changes associated with the substantial weakness in global stock markets at the end of last year.

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