Week in Focus; week commencing 29 April 2019
- Sunday: Spanish Election.
- Monday: EZ consumer confidence; US PCE/personal spending.
- Tuesday: German unemployment; EZ flash Q1 GDP, regional EZ CPIs; Canada GDP; US consumer confidence, pending home sales, Chicago PMI; NZ employment.
- Wednesday: Europe Labour Day Holiday; UK, US mfg PMI; US ADP employment, construction spending, ISM mfg, FOMC.
- Thursday: China Caixin mfg PMI; EZ mfg PMI; UK construction PMI; BOE QIR; US factory orders.
- Friday: UK, US Services PMI; EZ CPI; US nonfarm payrolls, ISM non-mfg.
SPANISH ELECTION (SUNDAY):
Spanish elections are to be held on Sunday April 28th. Parliament was dissolved on 5th March after a failure to pass a national budget for the third year running. Thus far, polling has not forecast a majority for any single party, however the incumbent government (PSOE) lead polls by a large margin. As such, probabilities have swung towards a similar Governmental format to that which is currently in place. The growth of the far-right VOX party has thrown a spanner in the works, however; they are seen by some as the ‘king-makers’ in the upcoming elections, so the possibility of a centre-right/right/far-right (or even political deadlock) cannot be discounted. Analysts at Morgan Stanley see political upheaval potentially having a negative effect on sentiment “especially if Spain's sovereign rating cycle were to be delayed as a consequence”, and TD Securities has set its base-case at no majority being found, with or without coalitions, but expect a limited follow-through to capital markets.
FOMC PREVIEW (WEDNESDAY):
Money markets pricing implies no chance of a hike, with a very small (2.5%) possibility of a rate cut. The general message from the central bank is likely to remain one of patience, but there are some risks that it may revise parts of its statement to reflect the stronger growth and softer inflation since its last policy meeting in March. "Recent comments from Chicago Fed President Evans about the possibility of cutting rates if inflation and inflation expectations decline further have received considerable attention in markets, and Chairman Powell will surely be asked about the threshold for a cut," Goldman Sachs says; in the bank's view, the bar for a 'recalibration' rate cut is higher than market pricing implies. "We continue to think that the next move is instead more likely to be a hike, though not until 2020Q4." In addition to looking for clues about both the possibility of rate cuts if inflation declines further or growth falters, there will be a focus on the Fed's policy framework review: "We continue to expect the review to lead to the adoption of a fuzzy average inflation target," Goldman says, "peeking ahead to the Chicago conference on the framework in early June, we expect presenters from academia at key sessions to endorse transparency in Fed communication and the dot plot in particular, to make a case for price level targeting, and to argue for the effectiveness of QE as a policy tool."
US LABOUR MARKET DATA (FRIDAY):
The Street expects 180k jobs to be added to the US economy in April, vs the 196k added in March. Capital Economics says its model signals a more modest 165k to be added, with survey-based hiring indicators and contraction in temporary help employment signalling a broader slowdown. "Although the monthly gain in payroll employment rebounded to 196k in March, following a probably weather-related 33k increase in February, the trend growth rate appears to be slowing." The consultancy notes the three-month average gain declined to a 16-month low last month (at 180k), and it's also notable that the alternative household survey measure shows a more pronounced drop off in employment growth, CE warns. "Although the household survey is more volatile than the payroll survey from month-to-month and can sometimes give false signals, as it did in 2013, it is arguably more useful in identifying major cyclical shifts," and CE explains that it is a result of the payroll measure relying on a birth-death model adjustment that, even with improvements to the methodology, can struggle to keep up in real-time during downturns. Capital Economics also attributes the slowdown to weakness in global manufacturing conditions, which is also affecting the US. Elsewhere, the employment sub-indices in Markit PMIs has also weakened to two-year lows in April, although the ISM's manufacturing gauge showed a large rebound in March. That said, it is worth noting that during the survey week, initial jobless claims data printed a fresh cyclical low (193k), hinting at possible upside to the consensus view.
BOE PREVIEW (THURSDAY):
Markets look for the BoE to stand pat on rates at 0.75% in a unanimous decision, as Brexit continues to tie the hands of policymakers. That said, the MPC is expected to maintain its current guidance that “…a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.” The May meeting and QIR was set to be the first opportunity for the MPC to assess the lay of the land after the UK’s departure from the EU on March 29th, however, a delay to 31st October (or earlier if UK lawmakers can pass the necessary legislation before then) has meant that the MPC has no greater clarity on what form Brexit will take, and thus its potential impact on the UK economy. At the time of this extension, ING abandoned its call for a 2019 rate rise (had previously pencilled in a November hike on the basis that they expected approval of a Brexit deal in March or April) after suggesting that the window for such a rate increase had now evaporated given the ongoing impasse (N.B. it also cited other global central banks turning more dovish). In terms of recent developments for the UK economy, Lloyds notes “the monthly GDP report for February showed the economy expanded 0.2% M/M following the 0.5% M/M increase in January, raising the likelihood that the economy grew at a faster rate in Q1 than the 0.3% pace currently expected by the BoE”. Lloyds looks for a potential upgrade to 2019 GDP from 1.2% to 1.4% in the accompanying QIR. On the inflation front, CPI remained at 1.9% Y/Y in March, however, since the forecasts made in the February QIR, crude prices have risen around 20% which will be a factor for consideration, and could lead to an upgrade to its inflation view. All in all, next week’s release is set to provide little in the way of fireworks, however, investors will be mindful of a recent Telegraph article suggesting that there could potentially be a split on the MPC at the May meeting with one well-placed source suggesting that at least one policymaker could make the case for a 25bps hike to the base rate.
US/CHINA TRADE TALKS (TUESDAY):
Trade talks between the world's largest two economies Will resume on Tuesday, the White House said, with US negotiators heading to Beijing with a target of reaching a draft agreement next month. The talks will cover trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases and enforcement, the White House said. The talks will reportedly be followed-up by a visit from China Vice Premier Liu He, who will travel to Washington for further talks on 8 May. On Friday, US President Trump suggested that Chinese President Xi will be visiting the White House ‘soon’. Subsequently SCMP reported that Chinese President Xi could travel to the US to sign a trade deal as soon as June, if the two sides finalise a trade deal. From a markets-perspective, there is an expectation that a trade deal can be wrapped up by the end of May, following a pushing back of the 'deadline' by end-March. Commentary from both sides continues to strike a constructive tone, however, little by way of new details has been revealed, which could explain why markets are less-response to trade headlines, of late, particularly as US earnings season gets underway, and the macro focus is now falling on global growth metrics as major central banks err dovish. There are also questions about the extent to which a trade deal is now priced into markets, with many suggesting that the lack of a market response to trade news implies a great deal is baked in already. That said, any deal would likely give risk sentiment a boost as it would removes one of the major potential sources to global growth downside; on the flip-side, it would be interesting to see how markets react to any pushing back of the trade deal timeline, or indeed, an outcome which is judged as not satisfactory.
EUROZONE GDP (TUESDAY):
Tuesday sees the flash release of Eurozone GDP for Q1, with consensus looking for Q/Q growth of 0.3% (prev. 0.2%) and 1.1% Y/Y (prev. 1.1%). Ahead of the release, RBC notes “one feature of the euro area data for the early months of 2019 is how the hard data have held up better than survey and sentiment data”. That said, despite some of the softness seen in the manufacturing sector, RBC highlights “indicators of domestic activity remain relatively healthy, in particular in Germany, and should be sufficient to support GDP growth of 0.4% Q/Q”. Ultimately, the release will be eyed for the potential impact on the ECB policy; a lacklustre reading, could see heightened focus by markets on a halt (or reversal) to the Bank’s normalisation process which could force policymakers to sweeten the terms of TLTRO offerings, push back rate guidance even further or considering a potential return to QE (arguably premature at this stage). Conversely, a better than expected outturn could grant some reprieve to policymakers, however, given that risks remain tilted to the downside for the Eurozone economy and other global central banks continue to scale back any hawkish expectations, it will likely take more than one stellar GDP report to materially change the expected course of ECB policy. Ultimately, despite the importance of this release, from a central bank perspective, investors might place more credence on the next round of staff economic projections from the ECB, due for release in June which will provide a greater roadmap of how the Bank foresees economic developments in the Eurozone.
CANADA FEBRUARY GDP (TUESDAY):
RBC Capital Markets expects Canadian GDP to rise 0.3% M/M in February, matching the pace of January's surprise rise; the bank says its forecast is consistent with its GDP tracking estimate for Q1, currently running at a clip of 1.2% - which is almost a full percentage point above the BOC's 0.3% projection from this week's MPR report. RBC sees the Feb data driven in part by declines in home re-sales and manufacturing being offset by an expected bounce-back in oil and gas production. Contrasting the difference between its GDP tracker and the BOC's forecast, RBC suggests that the BOC's projection appears to be an incorporation of softer expenditure categories into the top-line reading to reconcile discrepancies with production statistics. "Barring any downward revision to January, the BOC's Q1 projection is consistent with 0.15–0.20% declines in each of February and March GDP," RBC says.
TREASURY FX REPORT (APR):
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.