Week in Focus; week commencing 28 January 2019
US/CHINA TRADE TALKS
Ahead of US/China trade talks on 30-31 January in Washington, there have been mixed signals from officials on the progress made, though there are some encouraging signs. Commerce Secretary Ross this week said the sides remained “miles and miles” apart, which injected jitters into risk assets, despite him adding that there was a “fair chance” a deal could be reached. Remarks from the National Economic Council director Kudlow suggested that the President was optimistic about the trade talks. Trump himself said the talks were going “very well,” and again said that Beijing wants to strike a deal to end the trade war, adding that the US is doing “very well in the negotiations”; this was a line echoed by Treasury Secretary Mnuchin subsequently. The signals suggest both sides want (perhaps need) a deal: the Chinese delegation will arrive early in Washington, and will be attended by key vice ministers, including the vice commerce minister Wang and vice finance minister Liao (who arrive on 28 January), paving the way for Vice Premier Liu’s arrival later in the week. The data seems to suggest that the impact of the trade war is exacting its toll – certainly evident in Chinese and European economic metrics, though visibility around the US data is clouded on account of the government shutdown. And this week, the IMF has cut its global growth view this year, largely influenced by trade, which also cast a shadow over risk assets, and again highlighting the market’s sensitivity to global growth concerns. Ahead of the Democrat Primary season, some argue that Trump will need to demonstrate notable victories to build momentum into his 2020 election campaign; that could mean a deal with China, the re-opening of the US government (and by extension a fulfilling of his campaign pledge to build a wall on the US/Mexico border), as well as a willingness to demonstrate a positive influence on the global stage (think events in Venezuela, coming in a week where US officials were absent from the globalist WEF at Davos) could represent the low hanging fruit for the US President. Both nations have indicated they will issue statement at the conclusion of the talks; a joint statement would likely be interpreted as very market-friendly; on the other hand, separate statements with conflicting accounts of key outcomes could shake market sentiment, as it did after the sides met at the G20 in Buenos Aires.
US JANUARY EMPLOYMENT SITUATION REPORT
In view of the US government shutdown, which has resulted in the delay of key US economic releases, the Bureau of Labor Statistics’ monthly Employment Situation Report may take more importance than usual given it offers hard-data insight into the economy at a time when visibility is poor. The consensus expects a trend-like 183k nonfarm payrolls to be added in January, while average hourly earnings are expected to print 0.3% M/M and 3.2% Y/Y, matching December’s pace. The key question going into the data is the extent to which the government shutdown has impacted hiring. Capital Economics notes that a bill has already been passed guaranteeing back pay for government workers currently furloughed by the shutdown when the government reopens, and accordingly, says the data will be unaffected. “January’s labour market data will only be partly affected by the ongoing Federal shutdown, which has resulted in 800k federal employees missing a pay cheque this month. Of those affected, close to 420k are working without pay while roughly 380k workers have been furloughed,” The BLS has stated that, as far as the payroll employment tally goes, ‘because these employees will receive pay for the reference period, they will be counted as employed’. That means even the furloughed workers should be counted as employed in the payroll survey.” The consultancy still notes that a significant number of jobs are contingent upon Federal contracts, so an indirect hit to the private payrolls component is still a possibility. However, it says that other labour market indicators augur well for the release: “Temporary help employment remains elevated and the Markit manufacturing PMI employment index rebounded in January. Although the fall in the Markit employment index for the larger services sector points to a decline in jobs growth, last month’s bumper 312k payroll gain was always going to be unsustainable.” But CapEco says that one area which may see the impact of the shutdown could be the jobless rate (consensus looks for a 0.1ppt rise to 4.0%), since it affects the alternative household survey measure of employment, which feeds into the calculation of the headline unemployment rate. “According to the BLS, the federal employees working without pay will be counted as employed, but the 380k furloughed workers will be classified as ‘unemployed on temporary layoff’ until they receive their back pay. That means the unemployment rate will artificially rise as those furloughed workers will drop out of the household measure of employment but are counted as part of the active labour force,” as occurred during the government shutdown of 2013.
FOMC JANUARY MEETING
The potential impact of the Fed’s first meeting of 2019 has been mitigated by the remarks from officials since the December meeting, with officials pivoting towards the message of patience in normalising rates, and an emphasis on data-dependence. Money markets imply there is a fewer than 3% chance the Fed will lift rates at the January meeting from the current 2.25-2.50%; there is a similar probability implied for the Fed to lift rates to 2.75-3.00% by the end of this year, as the FOMC forecast in its December projections (NOTE: there will be no updated projections at the January meeting). “Almost all Fed officials highlighted the importance of patience in adjusting their policy stance, including Chairman Powell, Vice Chairman Clarida, and New York Fed President Williams,” Goldman Sachs observes. “Most officials echoed Vice Chairman Clarida’s remark that it is ‘especially important’ to be data dependent at this stage of the hiking cycle. While a few Fed officials mentioned that the current funds rate is still below their estimates of the neutral rate, both Chairman Powell and Vice Chairman Clarida said that the upper limit of the target range for the funds rate is at the lower end of the range of FOMC member estimates.” On the balance sheet normalisation, officials have indicated that they are monitoring the current gradual wind down, and seem amenable to adjusting the pace of the run-off should conditions warrant. Notably, Powell said he would “not hesitate” to make tweaks if the situation required, which was a significant deviation from his line at the December policy meeting, where he said the run-off was on auto-pilot. This week, the WSJ, citing sources, said that officials were weighing an earlier than anticipated end to the portfolio run-off, which Powell will no doubt be quizzed on. There has also been a lot of chatter about financial market tightness. “Officials either explicitly acknowledged the likely negative impact of tightening financial conditions on the growth outlook, or emphasized that financial markets are signalling ‘concern about downside risks’ that required close attention,” Goldman notes, and “a few Fed officials suggested that recent financial market volatility could have incidental benefits in the form of lower valuations and less risk-taking by market participants.” Elsewhere, officials seem to harbour no concerns on the inflation backdrop, which allows the central bank to take a patient approach. It is worth noting that while the meeting will be digested lesser than usual fanfare (especially so amid the government shutdown and trade talks with China, which are likely to be a bigger catalyst for any market moves), there is the possibility for some surprises, given that Chair Powell will now deliver a press conference after every policy meeting.
As the clock ticks down to March 29th, we this week saw a lack of any noteworthy progress for the UK in trying to secure its exit from the EU, with attention now moving on Tuesday’s Parliamentary showdown. In terms of the developments, the EU continued to reiterate that it is simply unwilling to renegotiate with the UK with little expected from discussions unless the UK is willing to shift its red lines. Back home, UK opposition leader Corbyn has continued to refuse to engage in discussions with PM May as he ponders his next move whilst leading his equally fractured party with some Labour MPs attempting to pivot Parliament towards voting for a softer Brexit. Fears of a potentially softer Brexit or no Brexit has seen a cooling in the rhetoric of some arch-Brexiteers with reports suggesting Former Foreign Minister Johnson could back May’s plan (subject to a time-limited backstop), whilst ERG head Rees-Mogg has stated that a reformed Brexit deal could win over critics. This has all come in the run up to Tuesday 29th (1900GMT) which will see UK lawmakers vote on a series of potential amendments to UK PM May’s Brexit deal with the aim of unlocking the currently Parliamentary deadlock (albeit the deal will also ultimately require endorsement from the EU lawmakers). In terms of what’s on the table, at the time of writing, 14 amendments have thus far been proposed (subject to change) with not all of them due to be voted upon. Please see below for a breakdown of the key amendments which could ultimately shape the course of Brexit (via Politics Home):
- Corbyn amendment (A): Avoid a no-deal Brexit through Labour Brexit plan or a second referendum
- Creasy amendment (B) - Delay Article 50 and set up a ‘citizen’s assembly’ to figure out Brexit
- Benn amendment (C) - Let MPs cast ‘indicative’ votes on four different Brexit options
- Reeves amendment (D) - extending Article 50 to take no-deal off the table
- Cooper amendment (E) - Allow parliamentary time for MPs to vote on a bill extending Article 50
- Grieve amendment (F) - Give MPs six days in charge of the Commons agenda so they can tell ministers how to proceed
- Field amendment (G) - indicative votes on seven Brexit options
- Spelman amendment (H) - cross-party bid to object to no-deal Brexit
- Murrison amendment (I) - one more go at curbing the Northern Ireland backstop
- Cable amendment (K) - Lib Dem push to rule out no-deal and get a second referendum
- Brake amendment (L) - Lib Dem bid to form a super-committee controlling Commons Brexit business
- AXED: Official ‘People’s Vote’ amendment
As mentioned above, not all of the amendments will be voted on and the outcome of Tuesday will largely depend on how much cross-party support various propositions receive. Overall, RBC concludes that they “think the current process could be a very meaningful turning point in the Brexit process by either directing the government directly to follow a certain path or, indeed, wrestling away the government’s power of steering the process entirely”. As such, the Canadian bank suggests “that any of those moves would potentially leave a meaningful impact on markets, strengthening the currency and putting upwards pressure on Gilt yields”.
The coming week sees a slew of tier one data releases from the Eurozone, with growth (Q4 prelim) and inflation (Jan) metrics the focus. From a growth perspective, market consensus looks for Q/Q growth of 0.2% (Prev. 0.2%) and Y/Y 1.2% (Prev. 1.6%). Given last week’s updated assessment from the ECB, which saw the central bank now classify risks surrounding the Euro Area growth outlook as ‘tilted to the downside’ (Prev. ‘moving to the downside’), market participants will be eyeing the data to see how fragile a condition the EZ economy closed the year out and thus how soft a footing it is entering 2019. Fears have been compounded by particularly by soft data with December PMI metrics from Markit leading IHS Chief Economist Williamson to conclude “the data are consistent with eurozone GDP rising by just under 0.3% in the fourth quarter, but with quarterly growth momentum slowing to 0.15% in December”. With Q4 data from Germany not available until 14th February, markets will use the release as an opportunity to assess how meaningful a rebound the domestic economy staged from its 0.2% contraction in Q3 (note 2018 German GDP growth suggests a recession has been avoided). Participants will also be looking to garner information on the extent of the impact of the ‘Yellow Vest’ movement in France and whether Italy entered a technical recession in the second half of 2018. On the inflation front, Y/Y CPI is expected to tick lower to 1.4% from 1.6% with the Y/Y core reading set to remain at 1.1% and thus will likely place further pressure on Draghi et al to reconsider the pace of their policy normalisation with the central bank continuing to fall short of their near to 2% inflation goal.
Analysts at RBC forecast Canadian GDP growth of 0.1% M/M in November, which would mean the pace of growth eased form the 0.3% M/M in October. “The Canada Post strike in the month should detract about 0.1ppts, expected to come through the transportation/warehousing category,” RBC writes, “softer wholesale and manufacturing sales reports for the month should also weigh, with the GDP components expected to be down 1.0% and 0.5%, respectively.” RBC also draws attention to the possibility that the oil and gas extraction category could be hit by the voluntary curtailments in November, though points out that the rig count data suggests that this may be more of an issue in December. RBC’s models currently track Q4 GDP at 1.1% annualised, but says there are some modest downside risks to that forecast.