Original insights into market moving news

Week in Focus; week commencing 4 March 2019


The National People's Congress will get underway on 5 March and will last for approximately 10 days (2019 government work report will be released on 5 March, 2019 Fiscal Budget Report on 6 March; attention will be on the MOF, PBOC and NDRC press conferences, which have no set time yet, but usually take place in the first week; finally, Premier Li will hold a press conference on 15 March). "We should expect the Government Work Report, delivered by Premier Li Keqiang, and Fiscal Budget Report, which will contain more details about macroeconomic policies and reform objectives for 2019," HSBC said. The market primarily will be focussed on the 2019 economic targets: GDP growth objective is likely to be set at "6.0% to 6.5%" vs "around 6.5%" in 2018 (and an actual 6.6%); the CPI target is expected to be unchanged at 3% (vs 2.1% actual in 2018); "steady growth" forecast is expected to be maintained for M2 growth and TSF growth; the fiscal deficit is seen forecast at 3.0% of GDP vs 2.6% 2018 target; finally, the jobless rate target is seen maintained at beneath 5.5%, and urban job creation is expected to target "at least 11mln" again. "Beijing to step up fiscal easing at next week's NPC to stabilise growth," HSBC says, "selective credit easing for private businesses to continue, watch out for more reforms of the financial sector and opening up measures - these will help to create a more level playing field for businesses, and sustain China's growth in the long run."


After curtailing its QE programme in December, ECB policymakers have been dealt a slew of discouraging economic developments which have subsequently raised serious questions about its normalisation process. This culminated in the Bank being forced to acknowledge that risks to the growth outlook have now ‘moved to the downside’ after previously seeing them as ‘tilted to the downside’. This sentiment is expected to be reflected in the latest round of staff projections, with the ECB widely expected to cut its inflation and growth expectations. UBS expects 2019 growth to be lowered to 1.3% from 1.7%, 2020 lowered to 1.6% from 1.7% and 2021 unchanged at 1.5%. From an inflation perspective, the Swiss bank looks for 2019 inflation to be cut to 1.4% from 1.6%, 2020 reduced to 1.6% from 1.7% and 2021 unchanged at 1.8%. Speculation has been rife over whether the ECB will need to offer a new TLTRO to deal with the transition of policy normalisation and shield some of the more fragile Eurozone economies (particularly Italy) this year. Source reports have painted a relatively mixed picture with one report suggesting that TLTROs are seen as a priority, while another stated that the Governing Council sees no urgent need to unveil a fresh funding, questioning the necessity in doing so at all. The account of the January meeting revealed that at the time, policymakers perceived any new TLTRO should serve policy objectives, and any decision should not be taken hastily. Since then, ECB’s Nowotny has noted that he expects any decisions on any new funding operations to come later than March, while also suggesting a TLTRO might not even be needed. With this in mind, ING suggests that discussions are likely ongoing but will not be concluded next week, adding that April will be where the real action is. From a  rates perspective, the Bank continues to stick to its current guidance of key rates “to remain at present levels at least through the summer of 2019”. Despite markets only pricing in only a circa 50% chance of a 10bps deposit rate hike this year, markets are unlikely to see an adjustment to rates guidance until the matter of TLTROs is cleared up. UBS tout the June meeting as a more opportune time for the Bank to shift its stance on rates at which point, the ECB could conclude that rates will stay on hold to at least 2020. Interestingly, UBS also floats the potential idea of a tiered deposit rate to alleviate the pressure on banks.


Following the blockbuster 304k nonfarm payrolls added in January, the Street looks for a sub-trend 170k in February (six-month average payroll addition is 232k, 12-month average 234k). BofAML's data analytics signal looks for 212k job gains, and the bank says that "given that the payroll tracker tends to be smoother than the month-to-month changes in the BLS data, we see some risk that the BLS payroll estimate could come in somewhat weaker as the data have tended to mean revert back towards the longer-run trend." However, it sees other metrics in the Employment Situation Report tightening (for instance, it expects the jobless rate to fall 0.2ppts to 3.8%), and offers three reasons: 1) the forecast for job gains remains above 'breakeven levels' (the amount of job creation needed to keep the unemployment rate unchanged). 22) the bank sees scope for the participation rate to modestly soften in February after January's unexpected rise, which would put downward pressure on the unemployment rate, 3) based on BLS guidance on the government shutdown, BofAML estimates that it boosted the jobless rate by at least 0.05ppts in the last report, which the bank believes will fully reverse in February, since the shutdown ended on 25 January. BofAML also sees wage growth ticking up by 0.3% MM (in line with the consensus 0.3% M/M); "If our forecast proves correct," BofAML says, "the Y/Y should move up to 3.4% from 3.2% [cons 3.3%], marking the strongest wage gain seen in the current business cycle, and supports our outlook for wage growth to gradually track higher this year." 


The Canadian jobs report for Feb is set for release at the same time as its US counterpart (Friday, 1330 GMT). The consensus view looks for around 11k jobs to be added, mean-reverting after January's stellar 66.8k. The consensus does, however, see the jobless rate falling by 0.1ppts to 5.7%, seemingly on technical factors relating to changes in technical factors relating to youth and workers aged over 65 - both of those group's saw large gains in the January report, and some desks have seen these moves as exaggerated by seasonal adjustment factors. HSBC therefore looks for seasonal factors to drive declines in those categories in the February data, with the dip in the labour force participation raising downside risks for the jobless rate.


Bay Street looks for rates to be held at 1.75% at the statement-only meeting on Wednesday 6 March. Much will depend on the GDP report (1 March) which RBC sees coming in slightly below the BOC's 1.3% expectation. "BOC concerns about the housing market taking longer to stabilise and how consumption is responding to higher interest rates remain," RBC says, "it is also too early be definitive on how the desired rotation to investment and net exports is progressing." The bank notes that Q4 current account data suggest a deterioration of the latter, though RBC says it may be a function of oil production cuts in Alberta. Looking ahead, RBC sees the BOC keep rates unchanged in the first half of the year on the back of sub-trend GDP in Q4 2018 and Q1 2019. "Ultimately, we expect a pick-up in growth afterwards leading to a 25bp hike in each of Q3 and Q4," RBC says. It is also worth pointing out that Dep Gov Patterson will deliver the usual economic progress report that follows non-Monetary Policy Report meetings the following day.


The RBA is unanimously seen holding rates at the all time low of 1.50%; ten of 37 economists polled see at least one cut by the end of 2020. The RBA’s previous meeting saw a less dovish statement than many had expected, as the central bank stood firm with its rhetoric of “no strong case for near-term move in rates” in the face of faltering housing prices down under. Since then, the headline grabber has been commentary from Governor Lowe, who said “rates could move in either direction” depending on inflation (which is currently well below the RBA’s target of 2-3% at 1.8%) and the labour market. This came alongside similar sentiments via the RBA minutes, which stated that should house prices fall much further, lower GDP growth, higher unemployment and lower inflation would likely be seen. Westpac suggests this was a “significant warning around the policy outlook” and negatively revised their GDP forecasts for 2019 and 2020 to 2.2% (vs. prev. 2.6%) and the bank now also expects a 25bps rate cut in August, followed by another in November. This was corroborated by dismal housing finance and construction figures for December (-6.1% vs. exp. -2.8% and -3.1% vs. exp. 0.4% respectively), and because of the market reverberations Lowe’s comments made last time round, a speech scheduled for the Governor after the decision will be of particular focus should dovish tones be struck once again. ING, however, does not share this downbeat view; the bank points to strong January labour market data, which saw employment change markedly beat expectations of 15.2k at 39.1k whilst pointing out “the rise in the participation rate suggests that people are encouraged by their job prospects, and making themselves available for work”. Further positivity can also be drawn from improving Q4 CapEx figures (2.0% vs. exp. 0.5%) and moderating global trade tensions. As such ING states that the RBA rates are “not going anywhere, up or down, anytime soon”.


The consensus looks for Aussie growth to print 0.5% Q/Q in Q4 2018. Analysts at Westpac note that the Aussie economy lost momentum in the second half of the year (in H1 2018, annualised growth was running at a 4.0% clip, but that eased to around 1.0% in H2 2018 due to the slowdown in the housing sector, while lending conditions tightened, and wage growth failed to bounce). Westpac sees growth coming in at 0.2% Q/Q and 2.4% Y/Y; the bank points out that there was weakness in December on the back of unfavourable weather conditions in NSW, which hampered construction activity, while exports likely stalled.


The Turkish central bank is seen holding its one-week repo rate at 24.00%, likely due to the recent upside in inflation. Some are still looking for the central bank to begin trimming rates in 2019, possibly as soon as April. "The bank's track record since 2011 demonstrates that it has a clear preference for keeping the real policy rate as close to zero as possible, except during times of sharp lira depreciation and rising financial stability risks," HSBC posits, adding that it sees no reason to believe that this bias has changed, "so we expect discussions regarding policy easing to intensify going forward."


Another busy week in Westminster with UK assets comforted by attempts from UK lawmakers to remove the possibility of a no deal Brexit. To recap, Labour shifted their Brexit position in the early stages of last week by putting their weight behind the prospect of a People’s Vote, should Labour’s own Brexit plan be rejected (which it was on Wednesday). The move taken by Labour saw a slight turning of the tide in Westminster with Brexiteers more anxious over whether or not the already undesired Brexit plan could be watered down further or the UK’s departure from the EU reversed if they don’t put their weight behind PM May’s plan. With momentum behind Remainers and those wanting to avert a no deal Brexit in the HoC, May announced on Tuesday that if her plan is to be voted down once again on March 12th, a vote will take place on the House’s view on a no deal Brexit (perhaps on 13th March), and if that is rejected, a vote will follow on 14th March on an extension of Article 50; an option which received Parliamentary backing  There was a report towards the end of last week suggesting that Labour could ultimately back PM May’s plan if she then puts the plan to the people thereafter, however, the threat of prospect of potentially reversing Brexit would likely see objections from arch Brexiteers and thus appears to be somewhat of a non-starter. Before all of the above potentially plays out, UK AG Cox is still in the process of trying to squeeze anything he can out of the EU on the Irish backstop in order to try and secure as many votes as possible for the current plan. As per recent communications from the EU, it is highly unlikely that the Withdrawal Agreement will be reopened, instead, Cox is looking to get assurance written in a codicil, however, this will be unlikely to include any potential end-date for the backstop. Whether this will be enough to swing the Parliamentary maths in favour of the government, remains to be seen, however, if Cox feels that he has secured something substantive, then Parliament could potentially vote on the matter before March 12th. In terms of a market outlook, Goldman Sachs last week stated that they believe the GBP rally has further room to run as Brexit hedges are unwound, even as bets on the currency’s appreciation have become an increasingly crowded trade.