German lockdown restrictions set to continue

Chris Scicluna

Treasury yields open the week lower amidst slight risk-off tone as German heads toward extended lockdown and Turkey’s central bank governor is sacked
Despite the Fed’s announcement that it would allow the Supplementary Leverage Ratio (SLR) exemption applying to financial institutions’ Treasury holdings to expire at the end of this month as scheduled, the 10Y UST yield ended Friday just a basis point higher than a day earlier at 1.72% – albeit a 14-month high – and the S&P500 closed down less than 0.1%. And, if anything, markets have reopened today with a slight risk-off bias perhaps reflecting the resurgence of coronavirus cases in Europe – which today seem likely to result in Germany’s lockdown restrictions being extended by another four weeks – and the weekend’s events in Turkey, where the lira is currently down about 8% against the dollar following President Erdogan’s sacking of the central bank’s governor (the lira initially opened down as much as 15% but regained some ground after Finance Minister Elvan pledged to prioritize the achievement of price stability). Of particular note, the 10Y UST has rallied 5bps to 1.67%, thus returning to where it had traded ahead of Friday’s Fed announcement, which has underpinned a decline in bond yields across the Asia-Pacific region.

Equity markets have had a mixed start to the week, however. In Japan, the TOPIX declined 1.1% while the Nikkei225 has fallen roughly twice as much as investors continue to digest Friday’s BoJ decision to suspend ETF purchases tracking the latter. The 10Y JGB yield fell more than 2bps to less than 0.08%. By contrast, after slumping 2.6% on Friday amidst the fractious US-China meetings held in Alaska, China’s CSI300 began the week with an advance of 1.0%. Meanwhile, in Australia, the ASX200 increased 0.7% even as the much-awaited rollout of the coronavirus vaccine in Sydney was interrupted by an ongoing weather event that is now expected to result in a one-in-50-years flood. The 10Y ACGB yield fell 4bps to 1.73%, dragged lower by the slide in UST yields.

A relatively quiet week ahead ahead in Japan, with the flash PMIs and Tokyo inflation data the focus
In an otherwise quiet start to the week, today the Cabinet Office released the final figures for its business indicators for January, which saw downwards revisions but still pointed to an upswing in the cycle after a weakening at the start of the year in response to the resurgence in the pandemic. Perhaps not surprisingly give recent hard data revisions, the coincident index was revised down 1.4pts to 90.3. But that still left it up 2.9pts from December’s reading and the best since February 2020. And while the leading index was revised down 0.6pts to 98.5, this was nonetheless still up 0.8pts from December and the highest reading since October 2018.

Looking ahead, there are only a limited number of economic reports scheduled in Japan over the remainder of the week. Tomorrow’s nationwide department store sales for February will doubtless remain very soft given the impact of restrictions on trading activity. Following Friday’s national CPI data for February, the BoJ will release its underlying inflation measures, which will likely continue to point to broad-based stability in prices. On Wednesday, the flash PMIs for March should point to the economy ending the quarter on a slightly firmer note thanks to falling coronavirus cases and the staged easing of trading restrictions across those prefectures that had been subject to a state of emergency. In addition, the BoJ will release the services PPI for February. The final release this week will be Friday’s advance March CPI reading for the Tokyo area, which is unlikely to point to any material upturn in core inflation.

China’s prime lending rates steady for an 11th month; no major Chinese data ahead this week
There were no major economic reports in China today, but the PBoC confirmed that the 1-year and 5-year loan prime rates – which provide the benchmark for corporate and housing loans respectively – would remain at 4.85% and 4.65% respectively. This was no surprise, as the rates key off the 1-year MLF rate, which has been held at 2.95% since last April. The only diary entry in China over the remainder of this week is corporate profit data for the year to February, which will be released on Saturday.

German policymakers to meet today to discuss tightening of containment measures; Lagarde to urge euro area leaders to deliver swifter stimulus; flash PMIs to suggest little improvement in economic conditions at end-Q1
With a third wave of pandemic seemingly now well underway, and after France and Italy recently extended their containment measures, attention today will be on Germany where Chancellor Merkel will meet with regional leaders to discuss whether similar tightening of restrictions is now required in the euro area’s largest member state, adding to the downside risks to the outlook for the region’s GDP in Q2. Reports suggest that Merkel will propose and extension and modest tightening of containment measures through to 18 April. The other main set-piece event in the euro area will come at the end of the week, with EU leaders meeting at their latest European Council meeting. ECB President Lagarde is likely to urge the Euro Summit to get a move on implementing the €750bn recovery funds and adding stimulus to a fiscal policy region which pales into insignificance with that being delivered on the other side of the Atlantic.

Data-wise, the euro area calendar this week focuses on sentiment surveys, which are likely to continue to paint a picture of optimism in manufacturing but continued unease in services. In particular, the preliminary PMIs for March, which will be published on Wednesday, are expected to show the headline euro area manufacturing index move broadly sideways in March from a three-year high of 57.9 last month, with strong growth in Germany in particular. In contrast, the euro area services PMI is expected to remain below the key 50 expansion/contraction level having been little changed at 45.7 in February. Meanwhile, the European Commission’s preliminary estimate of consumer confidence is expected to remain close to February’s reading of -14.8, suggesting continued unease about the economic outlook.

UK inflation, retail sales, flash PMIs and labour market data lie ahead
The coming week brings a number of top-tier economic data out of the UK, including the latest labour market report tomorrow, inflation figures and the flash PMIs on Wednesday followed by official retail sales figures on Friday. The labour market report is expected to show that the ILO unemployment rate rose just 0.1ppt in the three months to January to 5.2% – still the highest level since September 2015 – and that the pace of decline in employment accelerated in the three months to January to more than 200k. Composition effects would then also likely see a further pickup in wage growth close to 5.0%3M/Y. But ongoing support from the Job Retention Scheme should have left the number of payrolls little changed last month. In terms of inflation, the headline CPI rate is expected to edge up 0.1ppt to a seven-month high of 0.8%Y/Y in February thanks to further upward pressure from rising energy prices, while the core measure is expected to remain unchanged at 1.4%Y/Y. Retail sales, meanwhile, are likely to have risen more than 1.0%M/M in February, after plummeting 8.8%M/M in January due to the tighter lockdown measures. Survey-wise, the preliminary manufacturing and services sector PMIs for March will likely be little changed from February although we expect the composite PMI to pop back above the key 50 level for the first time since December, from 49.6 in December.

Existing home sales data ahead in the US today; more February indicators due later in the week
Last week saw a number of US activity indicators – retail sales, industrial production and housing starts – impacted by the challenging weather conditions faced in February. And that theme is likely to continue this week, beginning with today’s existing home sales report. Daiwa America Chief Economist Mike Moran expects that home sales likely fell almost 4%M/M in February, with softness in pending home sales already pointed to a peaking of activity before the poor weather arrived. Tomorrow, new home sales are likely to have suffered a similar fate in February. On Wednesday, Mike expects that poor weather will likely be shown to have also weighed on orders for durable goods, with a decline of around 1%M/M anticipated despite the brisk underlying recovery underway in the manufacturing sector. On Thursday, an upward revision to inventories is likely to drive a modest 0.2ppt upward revision to GDP growth in Q4 from the current estimate of 4.1%AR.

The week will end on Friday with news on personal income, consumer spending, the core PCE deflator and merchandise trade for February, and well as the final results of the University of Michigan’s consumer survey for March. After being pumped up by stimulus payments in January, personal income will have fallen steeply in February while Mike expects a 0.7%M/M decline in spending. A likely 0.1%M/M increase in the core PCE deflator will do no more than leave annual inflation steady at a low 1.5%Y/Y. Meanwhile, a slightly wider merchandise trade deficit but a modest upward revision to consumer sentiment (the latter thanks to the passage of Biden’s American Rescue Plan) seems likely.

Aside from the economic data, following last week’s FOMC meeting there are a large number of Fed speaking engagements this week, with most focus likely to be on Chair Powell’s CARES Act testimony tomorrow alongside Treasury Secretary Yellen before the House Financial Services Committee (followed a day later by the same before the Senate Banking Committee).

Australian economic diary unlikely to move markets this week
There were no economic reports released in Australia today and the reports due later in the week are not ones that are typically followed closely by the market. Following tomorrow’s weekly ANZ-Roy Morgan consumer confidence reading, a truncated diary concluded on Wednesday with the release of the flash Markit PMIs for March and the preliminary release of merchandise trade data for February.

Kiwi consumer confidence dips slightly in Q1; trade data the highlight of a sparse diary
The Westpac consumer confidence index fell a modest 0.8pts to 105.2 in Q1, thus leaving the index somewhat below its long-run average. That said, a net 20.1% of respondents continue to foresee mainly good economic times over the coming five years. Looking ahead, the only economic data of any note over the remainder of this week is the merchandise trade report for February, released on Wednesday. 

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