Original insights into market moving news

Week in Focus; week commencing 22 April 2019


The Street looks for US Q1 GDP at 1.8% Q/Q vs 2.2% prior, and the GDP price index is seen coming in at 1.5% Q/Q vs 1.9% prior. Analysts have noted that GDP trackers have ticked up over the course of the quarter, now tracking 2.8% (this was boosted last week from 2.4% on business inventory data). Capital Economics is more optimistic than the consensus view and looks for growth of 2.2%; “net external trade appears to have added 1.0% point to GDP growth, as exports increased by 5.0% annualised and imports contracted by 1.0%,” noting that inventories probably make a positive contribution to growth as well. Domestic demand growth has been unusually week, CE says, with consumption growth as low as 0.7%. Business investment growth has also slowed. “Despite the Federal government shutdown, a massive increase in public investment means that government expenditure probably still contributed 0.5ppts to GDP growth.” In terms of the composition of growth, other analysts have argued that inventory accumulation is not the sort of ‘good’ growth that you ideally want to drive the data higher, it will probably buffer the weakness in softer consumer spending numbers.


The US Treasury's semi-annual FX monitoring will be released in April, and identify countries that "merit close attention to their currency practices and macroeconomic policies," and countries that will make this naughty list will have to have two of the following three characteristics: a trade surplus with the US which is larger than USD 20bln; a current account surplus greater than 3%/GDP; net FX purchases by the central bank larger than 2%/GDP and persistent FX intervention (ie. buying currency in 8 of the 12 months covered by the report). China currently meets just one of these criteria (trade surplus). While there is no direct consequence if a country is added to the list, the report will be submitted to Congress, and penalties and/or sanctions could follow; it would also give US President Trump ammunition to continue his hawkish trade policy. Currently the list comprises of China, India, South Korea, Switzerland, Germany, Japan; it is unlikely that the US will take this opportunity to label any of these countries currency manipulators in this report (Japan and Taiwan come close, though), instead, there is a chance that India and Switzerland could be removed from the naughty list in the April 2019 report, given the former now only breaches one of the criteria (vs two in April 2018) now, and both have reduced FX interventions.


Australian inflation figures are due to be released on Wednesday. The street looks for the headline Y/Y to ease from 1.8% to 1.5%, after undershooting the RBA’s target band of 2-3% in 2018. The lack of price pressure mainly emanates from subdued wage growth, trouble in the housing market, retail competition and lethargic consumer spending. Hence, Westpac takes a slightly more pessimistic stance and expects the headline Y/Y figure to print at 1.4% due to receding oil prices alongside a “seasonally soft quarter”.


The central bank is very likely to keep rates unchanged at 1.75% on Wednesday. Attention will be on the BOC's (slight) tightening bias, with many expecting that this will be dropped, leaving the BOC in neutral territory. "This should sound something akin to 'the current stance of monetary policy is appropriate' while eschewing any forward guidance and emphasizing their data dependence," RBC argues. The BOC will also release its updated Monetary Policy Report, where growth forecasts are likely to be lowered (January's forecasts had pencilled in 1.7% growth in 2019; 2020 is likely to be held around the 2.0% level forecast in January). RBC also notes that the impact of higher oil prices in the intervening period -- the BoC uses a recent average over the projection horizon, which will be close to USD 15 per barrel higher on average -- should be supportive on the income front. In terms of inflation, the latest data shows two of the BOC's three measures ticking up slightly, leaving an average of the three at 1.97% (from 1.83% in the previous month). However, the BOC may look through these upticks, RBC believes, given the recent Business Outlook Survey (which highlighted slack), as well as the continued uncertainty around the housing and consumption. It is also worth keeping an eye on the BOC's estimate of the neutral rate (which was last seen somewhere between the 2.5% and 3.5% region), which could also be dialled down. The market reaction may be muted, RBC says: "Given that market pricing is currently mildly pointing to cuts, such a change should not see an outsized reaction."


The BOJ is likely to stand pat on policy, keeping rates at -10bps and the 10yr JGB yield target at around 0%. Asset purchase guidelines are also seen unchanged. This month will also include the Inflation Outlook Report which will also take the first look into FY 2021. Given the recent disinflation forces in Japan and globally, this inflation figure is expected show a pickup towards (sources stated above 1.5%) but be below the BOJ’s 2% inflation target. Sources also highlighted that FY 19 growth and inflation forecasts are expected to be cut. Analysts at SGH Macro note that given the constant CPI target-misses (Feb CPI +0.2%), there are speculations that the BOJ may adjust its 2.0% inflation target to a range of 1.5-2.0%, although their contacts in Japan do not believe that Governor Kuroda is ready for such a shift. Kuroda recently reiterated that Japan’s economy is to continue moderate expansion and momentum to reach 2% target is in place. SGH Macro believes this will again be reiterated by the governor despite the miss in forecasts.


With the central bank in the midst of policy normalisation, the Riksbank is expected to leave its repo rate unchanged at -0.25%. This comes amidst growing domestic inflation concerns, where the April 1.9% Y/Y CPI figure was 0.4ppts below the Riksbank’s forecast and has led analysts at SEB to state that the central bank will “struggle to get inflation back to target”, thus stoking suggestions of a potentially lowered inflation path at the upcoming meeting. Combining this with weak household consumption figures (Feb. 0.2% vs. prev. 0.7%), employment levelling out (Unemployment Rate (Mar) 6.9% vs. prev. 6.9%), and the normalisation pause by the Fed and ECB has led analysts at Nordea to believe that the rate path is to be pushed back by a quarter (currently forecasts a hike in H2 2019 to 0.0%, with further gradual increases to 1.0% in H1 2022), reducing the likelihood of a hike at upcoming meetings, with the next hike seen in “mid-2020 at the earliest”. Nordea analysts also anticipate some downside for the SEK due to the Riksbank’s likely premature reinvestments of proceeds of bonds maturing in 2020, which could lead to an increased 2019 balance sheet.


The Street is looking for an unchanged 24.00%. The meeting comes after reports that the CBRT has been using short-term swaps with other banks to boost its net international reserves, according to an FT report this week. There is a suggestion, therefore, that the CBRT (with its strings likely being pulled by the Turkish govt) has been attempting to boost the TRY’s value ahead of municipal elections. There has been other controversies in the run up to the meeting as well (all of which have to some degree impacted the TRY, which will therefore impact the central bank’s policymaking) – there are tensions with the US due to Turkey’s decision to buy Russian S-400 missile system, while the Istanbul mayoral elections have descended into farce. But with that said, TD Securities says that the absence of a currency shock before the meeting will leave the bank not needing to tweak policy.


The Russian central bank will likely hold rates at 7.75%. The central bank’s previous policy statement was a dovish, where members cut inflation forecasts, stating that the impact of January’s VAT hike was not as sharp as had been feared, and hinted that rates could be cut later this year. Barclays, however, expects policy easing to come in 2020, and they remain concerned about sanctions risks resurfacing, which could put the RUB under pressure. CPI is judged to be nears its peak, and the RUB has been stable, and that might be enough to prevent the CBR from easing this month.