Equity markets begin the week on softer note despite upbeat Powell comments
With bond investors somewhat shrugging off another firmer-than-expected US PPI report, albeit leaving the 10Y UST up 4bps at 1.66%, Wall Street made new highs on Friday with a late rally eventually delivering the S&P500 a solid 0.8% gain. In an interview aired over the weekend, Fed Chair Powell told the CBS’s ‘60 minutes’ Programme that the US economy was at an inflection point, adding that “We feel like we’re at a place where the economy is about to start growing much more quickly and job creation coming in much more quickly,”. However, lest bond markets get too worried about potential inflation risks, Powell cautioned that the pandemic continued to pose downside risks to the outlook. So, while Treasury yields initially reopened slightly higher today, as we write the 10Y UST is trading near Friday’s close.
Meanwhile, US equity futures have weakened slightly, with equity investors perhaps worried about the broadening third wave of coronavirus cases that could delay economic recovery and so challenge the markets current lofty valuation. While the recent focus has been mainly on rising virus cases in Europe, the uptrend has been much more marked in Asia, albeit largely driven by India where case numbers are hitting record highs. And so perhaps not surprisingly, markets in the Asia-Pacific region have largely begun the week on the back foot, especially in India (where stocks are down almost 3%) and also in China, where the CSI300 is down more than 1.5% ahead of Friday’s release of Q1 GDP figures. In Japan, which today mimicked the US and printed an upside surprise in its March producer price inflation data, the TOPIX declined a modest 0.25% but the 10Y JGB yield was little changed at 0.10%.
Government bonds have opened a touch firmer and equities are weaker in the euro area, where the focus at the start of the week will be German politics, with Merkel’s CDU set to decide whether to back conservative CSU leader Markus Soeder as its candidate for Chancellor in September’s general elections rather than its own leader, the Merkel-continuity guy Armin Laschet. The opinion polls strongly suggest that the centre-right CDU/CSU alliance would fare far better if the popular Soeder gets the nod over the struggling Laschet. Indeed, Laschet could risk a humiliating outcome in the autumn.
Japan’s goods PPI inflation hits a 14-month high; machine orders, BoJ Regional Economic Report and Reuters Tankan ahead
A relatively quiet week for data in Japan began today with the BoJ releasing its goods PPI for March. Following on from Friday’s upside surprise in the US, Japan’s goods PPI increased 0.8%M/M – double the consensus expectation. Combined with the impact of base effects and an upward revision to February’s outcome, this meant that the index increased 1.0%Y/Y – also double the consensus expectation – following a 0.6%Y/Y decline in February. This marks the fastest pace of inflation since January 2020. And with base effects set to be even stronger next month as last year’s April slump in commodity prices rolls out of the calculation, annual inflation will likely soon approach 3%Y/Y, if but temporarily.
While prices for scrap and waste – always volatile from month to month – contributed to this outcome with an outsized 8.1%M/M increase in March, the PPI for manufactured goods still increased a strong 0.7%M/M, lifting annual inflation to 1.6%Y/Y from an upwardly-revised -0.1%Y/Y previously. The key drivers of the increase in prices for manufactured goods were familiar: namely, a further 5.9%M/M increase in the price of energy products (which are now up 9.8%Y/Y) and a further 4.5%M/M increase in the price of non-ferrous metals (which are now up 28.7%Y/Y). More generally, the recent weakening of the yen is also contributing to price increases across a broader set of goods. Final good prices increased 0.7%M/M in March, led by a 1.9%M/M increase in prices for imported products. Final consumer goods prices increased 1.0%M/M – also led by a 1.9%M/M increase in prices for imports – lifting annual inflation to 1.3%Y/Y from -0.8%Y/Y previously. Measured in yen, import prices increased a sizeable 3.8%M/M in March and so were up 5.6%Y/Y. Indeed, import prices have increased more than 14% over the past four months alone.
In other news, the BoJ reported that total bank lending increased 6.3%Y/Y in March, up 0.1ppts from February. Growth in lending by the major city banks was stable at 6.7%Y/Y, but growth at regional and shinkin banks increased 0.1ppts apiece to 5.2%Y/Y and 8.6%Y/Y respectively. On the other side of the ledger, while bank deposits increased a solid ¥6.2bn in March, base effects meant that annual growth slowed 0.1ppts to 9.9%Y/Y after reaching at least a three-decade high a month earlier. Japanese firms will be hoping that improving economic conditions and confidence causes households to adopt a less cautious stance over coming months.
Looking ahead, there are only a limited number of economic reports scheduled in Japan over the remainder of the week. Following tomorrow’s release of the monetary aggregates for March, Wednesday will bring news on machine orders during February, which may well print firmer following a long-awaited pullback in January. On Thursday, the BoJ’s Regional Economic Report will present anecdotal evidence on the economy’s recent performance while Friday’s Reuters Tankan will quantify firms’ assessment of business conditions. Considering the sizeable upward revisions that were evident in last week’s final PMI readings, the latter should point to improved conditions in both the manufacturing and non-manufacturing sectors.
China’s March activity data and Q1 GDP report the focus this week
There were no major economic reports in China today, but a number lie ahead over the remainder of this week. Tomorrow will bring news on China’s international trade performance in March, with annual growth in exports and imports sure to remain elevated due to base effects associated with last year’s heavily pandemic-impacted activity. The remainder of China’s key activity indicators for March will follow on Friday, together with the release of GDP data for Q1. As with the trade data, growth in IP, retail sales and fixed investment will be inflated due to the weak base (for example, IP fell 1.1%Y/Y in March 2020). And while quarterly GDP growth in Q1 is likely to be 1.0ppt or more slower than the 2.6%Q/Q pace in Q4, base effects mean that annual GDP growth is likely to approach 20%Y/Y, up from 6.5%Y/Y in Q4 and -6.8%Y/Y a year earlier. Meanwhile, after moving higher in February, the urban unemployment rate is likely to have declined in March. Friday will also bring news on developments in home prices during March while the PBoC’s money and credit aggregates should also be released at some point during the week.
German politics in focus; euro area retail sales likely posted modest growth in February; ECB Governing Council members to make final public comments this week ahead of next policy meeting
Today could bring clarity as to the most likely person to succeed Angela Merkel as German Chancellor in the autumn, with her CDU party set to decide on its preferred candidate for the 26 September general election. Yesterday saw both CDU leader Armin Laschet and Bavarian CSU leader Markus Soeder announce their willingness to run as candidate from the centre-right alliance of the two sister parties. And while the CDU will have the main say in determining the identity of the alliance’s candidate for Chancellor, opinion polls strongly suggest that the centre-right CDU/CSU would fare far better if the popular conservative Soeder gets the nod over the struggling Laschet, who would merely represent broad continuity from the Merkel era. Support for the CDU/CSU has dropped steadily by almost 10ppts since the start of the year to about 27% in recent polls. At the same time, the Greens have consolidated their position as the second-placed party, with average ratings up to about 22%, roughly 6ppts ahead of the centre-left SPD in third. An RTL/NTV survey last week suggested that 38% of voters nationwide could back Soeder as Chancellor compared to just 17% for Laschet – a rating that might suggest that the CDU leadership needs to plump for the CSU man to reduce risks of humiliation in the autumn.
The coming week will bring final public utterances from ECB Governing Council members ahead of next week’s policy meeting, including a ‘fireside chat’ and Q&A with Christine Lagarde on Wednesday along with commentary from several other policymakers. Just as last week’s account of the March policy meeting highlighted a range of views to suggest that the decision to accelerate purchases under the existing PEPP envelope this quarter was a compromise, we’ll likely get a range of views (including more from the uber-dove Panetta) but nothing to suggest that there will be any change of policy message next week.
The coming week should also bring few surprises in terms of economic data from the euro area, the flow of which will feature the region’s February figures for retail sales (today), IP (Wednesday) and trade (Friday), as well as final March CPI data (from Spain on Wednesday, the three largest member states on Thursday, and the region as a whole on Friday), and the ZEW investor sentiment survey (tomorrow). Today’s retail data should report growth of a little more than 1½%M/M following a steep drop of almost 6%M/M in January to leave sales still down more than 5%Y/Y. And, despite strong growth in new orders, IP is likely to have dropped a little more than 1.0%M/M to be down almost 1½%Y/Y. The final CPI figures should confirm the flash estimates, which saw headline inflation rise 0.4ppt to a fourteen-month high of 1.3%Y/Y on higher energy prices but the core rate unchanged at 0.9%Y/Y. And like last week’s Sentix survey, meanwhile, the ZEW indices should point to improved perceptions of current conditions despite recent lockdown tightening and elevated expectations of future conditions.
UK GDP and trade data for February likely to point to modest improvement in mid-Q1
All of this week’s UK data of note come tomorrow, with the February GDP and trade reports of most interest. With most pandemic containment measures still in effect that month, and indeed many restrictions on activity only being lifted from today (e.g. with non-essential retail reopening and outdoor dining and drinking permitted in England), overall economic activity remained subdued in February. Modest growth of about ½%M/M in GDP seems likely – with similar rates of growth in services, manufacturing and construction – seems in order, to have left GDP still down more than 8½%Y/Y. On the trade side, exports to the EU are likely to have seen a partial rebound after falling more than 40%M/M in January.
CPI, retail sales and IP reports ahead in the US this week; Powell to speak and earnings season steps up with banks and financial firms reporting
A busy week lies ahead in the US. Not only will investors need to digest a number of key economic reports, detailed below, but there will also be plenty of Fed headlines and corporate stories across the newswires too. As far as the Fed is concerned, there are a large number of Fed Presidents and Governors speaking this week, but most interest will probably centre on Wednesday’s participation by Fed Chair Powell in a moderated online Q&A hosted by the Economic Club of Washington. The Fed will also release its latest Beige Book report on Wednesday. The corporate news will likely be dominated by the quarterly earnings reports scheduled to be released by a number of the big banking and financial heavyweights, including JP Morgan Chase, Citigroup, Bank of America and Goldman Sachs.
This week’s US dataflow kicks off today with Federal budget data for March, which will likely reveal a whopping deficit, somewhere in the ballpark of $650bn, due to outlays associated with the American Rescue Plan. Tomorrow attention will turn to inflation, with the release of the CPI report for March. Here Daiwa America’s Mike Moran expects a solid rise of 0.4%M/M, not least due to a tenth consecutive increase in energy prices. Combined with the impact of base effects from last year’s pandemic-driven slump, this should lift annual inflation to around 2½%Y/Y. Following several months of no more than very modest increases, Mike expects that lower coronavirus cases and improved economic conditions will lead to a 0.2%M/M increase in the core CPI, lifting annual inflation by 0.2ppts to a still comparatively subdued 1.5%Y/Y. Import price data for March will follow on Wednesday.
On Thursday, attention will turn to the retail sales report for March, which should report a leap in spending after February’s weather-driven dip and following the receipt of household stimulus payments under President Biden’s American Rescue Plan. Indeed, Mike expects that headline spending likely increased 4.5%M/M, with ex-auto spending rising an almost equally strong 4.0%M/M. Also on Thursday, we will receive the New York and Philadelphia Fed manufacturing surveys for April, the IP report for March, the NAHB housing index for April and business inventory data for February. As far as IP is concerned, following a weather-induced slump in February, a record ISM index reading and strong employment data lead Mike to estimate a 2.0%M/M rebound in output. The week concludes on Friday with the release of the preliminary findings of the University of Michigan’s consumer sentiment index for April and housing starts and building permit data for March. Given improving labour market conditions and new highs in the stock market, the headline sentiment index will likely increase to a post-pandemic high. As with industrial production, housing starts and permits should record a large rebound from their weather-impacted February readings.
Business confidence and labour market reports take centre stage in Australia this week
There were no economic reports released in Australia today. Looking ahead, tomorrow will bring the release of the closely-followed NAB Business Survey, which in February had pointed to the best business conditions in three years. The Westpac consumer confidence index for April will follow on Wednesday, which last month was still slightly below the recent December high. However, given the focus of the RBA’s Board, undoubtedly the key release this week will be Thursday’s Labour Force survey for March. After last month’s bumper 89k gain in employment and shock drop in the unemployment rate to 5.8%, this month’s Bloomberg’s poll indicates that analysts expect a still-solid 35k lift in employment in March and a further 0.1ppt reduction in the unemployment rate to 5.7% – a level that the RBA had not expected to see until around this time next year.
RBNZ policy review the main focus in New Zealand this week
There were no economic reports in New Zealand today. Looking ahead, the key reports of interest this week are tomorrow’s key Electronic Card Transactions Survey indicator of consumer spending indicator and Friday’s manufacturing PMI (both for March). The REINZ housing report for March will likely also make an appearance later this week, providing an early read on the effectiveness of recent RBNZ and Government initiatives that aim to slow the recent rapid rise in house prices. The focus for investors will be Wednesday’s RBNZ monetary policy review. While the Bank’s prior commitment to hold policy steady for one year has now expired, this week’s meeting will almost certainly bring no change in the Bank’s key policy settings and rhetoric. So in the face of a steadily improving outlook for activity – helped by the recent announcement of a quarantine-free travel bubble with Australia – and an uplift in inflation and inflation expectations, the RBNZ will very likely retain its commitment to “maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2% target midpoint, and that employment is at or above its maximum sustainable level”.