Original insights into market moving news

RANsquawk Week in Focus; week commencing 25 February 2019


Fed Chair Powell will deliver his semi-annual testimony to US lawmakers (Senate Banking Panel on 26 Feb, House Financial Service Committee on 27 Feb). The market will be attentive to commentary around balance sheet normalisation, and the Fed's patient approach to lifting rates. Powell has typically avoided rocking the boat at these sorts of events, and as such, we expect he will echo the key messages of the recent Fed meeting minutes, which were net/net neutral. The minutes suggested that there is a consensus view on the FOMC that the balance sheet run-off will conclude this year. Crucially, although US surprise indices and GDP trackers have been heading south, the FOMC still does not foresee any rate cuts this year; on the contrary, the message seems to be that if the economy evolves in line with the Fed's projections (made in December, and to be updated at its next policy meeting in March), then rate hikes may still be on the agenda. Therefore Powell will likely reiterate the data-dependent stance of the central bank. Given his testimony will be in a political arena, the Fed chair will almost inevitably face questions about the independence of the central bank (which he will likely defend again).


US President Trump will meet with North Korean leader Kim 27-28 February. The US objectives have been to improve relations between the US/NK in order that a lasting peace can be achieved on the Korean Peninsula; that necessarily means the denuclearisation of North Korea. The US seems flexible on timing; US President Trump himself this week said that he has no pressing time schedule for the denuclearisation of North Korea, provided that no nuclear testing is carried out. Thus far, there have been talks between the US Special Representative to North Korea Stephen Biegun and his NK counterpart Kim Hyok Chol, according to NK News. The initial indications suggest that both sides are yet to reach a consensus on the US demand that NK denuclearise (the US was also looking for NK to publish a list of scientists involved in the nuclear programme, Stratfor reported). "Talks between US and North Korean officials are intended to establish a framework for the meeting between President Trump and North Korean leader Kim Jong Un in Vietnam," Stratfor writes, noting that as a background, "US national security adviser Bolton has said Washington might consider sanctions relief for North Korea if the sides can achieve a significant breakthrough at the summit. Secretary of State Mike Pompeo subsequently echoed Bolton's remarks by saying that a positive outcome of the meeting might lead to a reprieve, although verification would be required." Given that there are no missiles flying over the APAC region at the moment, it remains to be seen what sort of an impact the meeting will have on the market. Any positive outcome would likely be political ammunition for Trump heading into the election season; any lack of progress will likely be explained away by the slow pace of diplomatic negotiations, and will likely be underscored with language signalling talks are to continue.


Reports have suggested that US Special Counsel Mueller may release his Russia Probe report next week. Politico reported that the public release of the Mueller report could be a market-moving event, "especially if it seems like there is enough damaging material to warrant impeachment proceedings in the House," adding that "US President Trump would read that as the market freaking out that he could leave office, but it would really be fear of political chaos and uncertainty."


As another week passes by in the Brexit saga, market participants have been presented very little in the way of clarity on what exact form Brexit will take. Unsurprisingly, the EU continue to remain adamant that the Withdrawal Agreement will not be re-opened but instead, could consider a "parallel declaration" or "interpretive instrument" on the Irish border to break the impasse, according to EU diplomats. The prospect of this was met with a relatively lukewarm reception by Eurosceptics, with arch-Brexiteer Rees-Mogg suggesting that unless assurances on the Irish backstop are included in the Withdrawal Agreement “it will not butter many parsnips,”. At the time of writing, Brexit Secretary Barclay and EU Chief Negotiator Barnier are yet to strike a Brexit deal but are to hold further talks next week. The matter of parliamentary arithmetic was brought even further into question last week after three remain-leaning Conservatives defected to the newly-formed ‘Independent Group’ along with eight opposition Labour MPs, albeit the defectors might have opposed May’s deal regardless of their political colours. Looking ahead, this week has been touted as yet another vital one for the Brexit process with Feb 26th set to see UK PM May make a statement to Parliament on her progress on Brexit before allowing lawmakers to debate the matter the following day. However, expectations for anything in the way of a meaningful update were dampened on Thursday 21st after a UK government official was reported as suggesting that “getting a Brexit deal next week is unlikely and the UK is a long way from getting what it needs on the backstop”. As such, the lack of progress might see MPs attempt to force the hand of PM May with reports last week noting a group of 100 moderate Tory MPs are prepared to rebel against the Government to force her to delay Brexit if she cannot reach a deal. This is potentially indicative of their support for the proposed Cooper amendment which is designed to ensure legal safeguards to Prevent the UK leaving with EU without a deal. However, on the other side of the argument, Eurosceptic Conservative MPs have reportedly warned they will seek to “end the government” if PM May delays the UK’s departure from the EU. Therefore, if May is unable to present a credible deal to Parliament next week, she will be under fierce pressure from both Brexiteers and Remainers to heed to their demands. If this is the case, it could likely put a nail in the coffin for May’s touted strategy of waiting until the 21-22nd March Eurogroup meeting to force the hand of EU leaders to strike a deal on her terms.


Tensions between Italy and the European Commission might flare up once again this week with the EC reportedly set to release a report on the nation, wherein the EU will suggest Italian plans for long term growth will fail. Furthermore, according to a draft of the report, the EC will criticize the government’s citizens income and lower pension age. As context, the fragility of the Italian economy has been a key focus for Eurozone investors with recently released Q4 GDP metrics confirming that the country entered into a technical recession. Such disappointing growth prospects and their potential follow through for 2019 has naturally lead to serious questions over the government’s 2.04% deficit/GDP target this year which is underpinned by a 1.0% growth estimate. The forecast of 1.0% is widely-accepted as too optimistic with the Italian central bank recently slashing their growth estimate for this year to 0.6% and the European Commission themselves forecasting just 0.2%. Nonetheless, the Italian administration remains defiant with PM Conte last Thursday stating that the nation’s economic fundamentals remain strong, expects H2 growth to pick up and doesn't see any necessity for a corrective budget. With the two sides seemingly at odds over the fragility of the Italian budget, the prospect of heightened tensions appears to be inevitable.


Oil traders will have an eye on weekend elections in Nigeria, where polls have put the incumbent Muhammadu Buhari slightly ahead, with former Vice President Atiku Abubakar slightly behind. This week, a Nigerian Court issued an arrest warrant for suspended Chief Justice Walter Onnoghen following his failure to appear at a hearing regarding allegations of corruption. "Onnoghen's case has drawn significant attention due to his role, which would normally include overseeing potential disputes in Nigeria's 16 Feb. elections," Stratfor reported, "as a result, supporters have said the case against him is politically motivated, with a group of militants from Nigeria's oil-rich Delta region threatening to resume attacks against oil pipelines and facilities if the trial proceeds." Oil traders will recall the 2016 attacks from the Niger Delta militants which significantly disrupted Nigerian output, which was running at a rate of 1.89mln BPD in December. The latest provides "a timely reminder that Nigerian authorities have yet to conclusively eliminate the threat posed by armed militants," PVM's analysts said, and "by consequence, the rumour mill is now in full swing that the OPEC member’s oil production is on the verge of a hiccup." The oil consultancy adds that "in any case, one thing is assured: Nigeria continues to be a hotspot of uncertainty and therefore a wildcard for the oil market."


The Street expects the rate of GDP growth to slow in Q4 to 2.5% from 3.4% in Q3. Barclays analysts note that US data has been mixed, of late. "Activity has generally surprised to the downside but the labor market data have been a touch stronger," and its economists are now tracking real GDP growth at 2% in Q4. A number of different trackers, including the Atlanta Fed and NY Fed GDP growth trackers have edged lower of late; in fact, the Atlanta Fed GDPnow model is now tracking growth for Q4 at 1.4% following soft durable goods data this week, as well as last week's retail sales data miss. In terms of the details, RBC's analysts say that real personal consumption should nevertheless look quite healthy, as should CAPEX. Downside is like to stem from inventory and trade components, which could trim 1ppts from the headline, RBC says. "What this means is that beneath the surface this should still be a rather solid GDP report, with final sales to private domestic purchasers (which excludes inventories and flips imports and export, i.e., a better gauge of domestic demand) near 3%."


Canadian CPI is seen coming in at 1.7% YY from 2.0%. Attention will also be on the BOC measures of inflation, an average of which slipped to 1.9% last month. RBC sees further downside than the consensus suggests, predicting 1.4% YY: "A further deterioration in gas prices (from -8%to -14% YY) and a partial reversal of December's 21.7% MM airfares increase are behind the latter, though food prices should also edge down from 2.9% YY." Additionally, RBC notes that the volatile airfares component will see higher than usual levels of uncertainty due to a new methodology for household rent (which accounts for around 6% of the basket) as well as updated CPI basket weights." On the BOC measures, RBC observes that an average of the three has been knocking around the 2% mark for much of last year, adding "trend-like increases a year ago in CPI-median and CPI-trim give no bias on direction for January, though they could—temporarily—edge lower in the rest of Q1."

RBC expects Canadian Q4 GDP to come in at 1.1% YY, which would be the second below trend quarter in a row. Household consumption is likely to be weighed on by higher interest rates, residential investment could therefore cut around 0.2ppts from the headline, RBC says. On the housing sector, RBC sees non-residential investment as little changed. Net trade is not seen deviating too much, though there is some uncertainty since the December merchandise trade data will not be released before the GDP report (though RBC notes it is reflected in the data)."Our forecast does not significantly differ from the BoC’s 1.3% projection in the January MPR, though we do see a slight bias to downside risks with our own call," RBC says, "For the monthly series, we expect GDP to be flat in December," adding that "lower oil rig counts weighing on oil/gas and a reversal of the transport decline from the November postal strike should be the two main impacts in the month."