Original insights into market moving news

Week in Focus; week commencing 13 May 2019


Headline retail sales growth may be hindered by the drop in April's light vehicle sales, which declined by 1mln units sequentially to 16.4mln annualised. Excluding the autos component, the rise in gasoline prices may present some upside. After March's decent performance for the retail control group (ex-autos, gas, building), there may be some give-back in April, with the pace of growth expected to ease. "Chain store sales continued to re-accelerate in recent weeks and aggregate income trends remain supportive of robust spending growth," RBC says, "this will kick off in 2Q where we expect real consumer spending to clock in close to 4% annualized – offsetting the soft 1-handle spending growth number from 1Q."


The Y/Y rate of industrial production is seen paring to 6.5% in April, from 8.5% previously. Citi notes that coal consumption of power plants fell by over 5% in the month, while the PMI production sub-component eased in the April too. Citi also says that the shift of CNY-holidays boosted industrial production in March, and as a result, might contribute to the April correction. Fixed asset investment is see rising 6.4% Y/Y in April, from a prior pace of 6.3%. “Infrastructure investment should continue to recover as the policy efforts came through,” Citi writes, “whole property investment may still show its resilience following the earlier strong new starts.” Retail sales in the month are seen at 8.6% Y/Y, paring 0.1ppts from March’s pace; sales of passenger vehicles (the largest component of the index) fell at a rate of 28% Y/Y in April, “nevertheless,” Citi says, “the cuts to personal income tax and VAT should help boost consumer spending.”


Germany narrowly avoided a technical recession in Q4, and the Street looks for Q119 GDP to print 0.4% Q/Q (prev. 0.0%) and 0.7% Y/Y (prev. 0.6%). The data is likely to be supported by industrial production figures, which surprised to the upside last week. “There are also indications that there was stronger support from the services sector than previously anticipated,” HSBC writes. “The services PMI rose by almost 5 points in Q1 after a weak H2 2018, and total retail sales are likely to show an even stronger Q/Q gain.” HSBC also argues that consumer spending will likely have benefited from the fiscal loosening at the start of the year. While HSBC notes that overall economic activity in Germany was more resilient in Q1 than surveys had signalled, it still thinks it is too soon to declare the start of a sustained recovery: “New industrial orders saw the worst quarterly decline since the GFC in Q1, indicating some structural weakness in the industrial sector, which will continue to weigh on overall growth.” The bank also cites Bundesbank commentary, which has hinted that a likely rebound in Q1 was driven by temporary factors. “Hence there is some scope for revisions and upcoming volatility (probably related to inventories) in German GDP data,” adding that it is sticking to its 0.5% forecast for German 2019 GDP, “as there is the risk of payback for this stronger-than-anticipated activity figure in H2 2019, however, there are clearly upside risks to our 2019 forecast from a stronger start.”


Aside from any pickup in Brexit related commentary this week, Tuesday sees the release of the latest UK Labour market report. Headline average earnings are expected to remain at 3.5% with the ex-bonus figure forecast to tick lower to 3.3% from 3.4%; analysts at RBC believe that wage growth in the UK has peaked and forecast a slight moderation in the coming months. From a broader perspective, the bank also highlights that “the very large monthly gain of 244k in January is still being captured in the ONS’s rolling three-month employment growth estimate”, which should ensure an “impressive rate of job growth in the latest labour market report”. However, the Canadian bank cautions that this effect will drop out next month.


Analysts at RBC look for headline CPI at 0.4% M/M in April, the pace cooling slightly from two consecutive 0.7% M/M prints. The rise in gas prices is still likely to be the driver, RBC says, and food inflation should moderate on base effects. There may be some uncertainty presented by the new rent methodology that official data will use, RBC notes, pointing out that the three most recent monthly rises (0.3 to 0.9%) the highest in over a decade. The Y/Y rate might rise to 2.0% on the back of continued moderation in year-ago gas price declines. Regarding the BOC's preferred measures of inflation (median, common, trimmed), the metrics received quite a bit of attention in March data given the tight range it has found itself in over the last year or so, and RBC says that easier base effects hint at some risk of another rise, but the bank thinks it's more likely there is little change from last month's average of the three measures (at 1.97%).


Next week’s Aussie jobs report for April will receive more focus than usual given that the RBA "will be paying close attention to developments in the labour market at its upcoming meetings" and thus the next few releases will be critical in determining the timing of potential policy easing. The Q1 Wage Price Index will be released on Wednesday (UK time) with Y/Y rate forecast to be remain at 2.3%, and the quarterly figure expected to tick up to 0.6% from 0.5%, while on Thursday, the employment change is seen at 15k (prev. 25.7k, range 5k-25k, 3M average 23.7k), the unemployment rate is expected to tick up to 5.1% from 5.0% (range 4.9%-5.1%) and the participation rate is set to remain at 65.7% (range 65.5%-65.7%). Westpac’s Jobs Index now suggest that employment growth should slow to around annualised rate of 2% in Q3, which points to an employment rise of +10k. With this forecast, Westpac notes that if the participation rate was unchanged, it would imply 17.8k rise in the labour force, lifting the unemployment rate. Meanwhile, ANZ’s forecasts are in-fitting with market consensus, although the bank struggles to see a rate cut in the near term from a small rise in the unemployment rate, “It will probably take more than this for the RBA to move, given the likely one-off impact of the election which will add thousands of (temporary) jobs” the bank says. Further, ANZ echoes Westpac’s thoughts by stating that a number jobs releases will be needed to establish a trend; thus, an August cut seems more likely than June or July.


Mexico's central bank is likely to keep rates unchanged at 8.25%. The tone of the meeting may be dovish, given the weakness of recent activity data, which some analysts suggest could put easing back on the agenda sooner than most are anticipating -- Capital Economics, for instance, sees it in the next few meetings, and an easing bias to be seen from the central bank by the end of the year.


The Trump administration will, by 18 May, make its decision on whether to raise tariffs on EU cars and car parts. US trade policymakers on 17 February submitted their investigation to the President, under the Section 232 rules (the effect of imports on national security), and the three-month window for Trump to make his decision comes ahead of the EU elections (23-26 May). Goldman Sachs analysts note that the 18 May is a ‘soft deadline’, noting that while the law governing the Section 232 process requires a decision within 90 days of receiving the report, the President is likely to be able to delay the decision further. The bank believes that Trump has three options: 1) to impose tariffs, 2) decline to impose tariffs, 3) delay the decision pending further negotiations. The legislation requires a President to have made a decision on these by 18 May, but there is also optionality to negotiate with trading partners to limit imports of the product in question, GS says, and if after 180 days an effective agreement has not been reached, then the President can take action to restrict the imports or impose tariffs; effectively, this leaves Trump with scope to delay the decision, which GS says seems to be the base case; this is based on the premises that the White House can then take the maximum amount of time to make the decision, the President continues to be focussed on the economic and financial market impacts of policy actions, and implementing tariffs in the near-term could sink the passage of the USMCA in congress. Goldman says that postponing the decision would prolong uncertainty regarding the outlook for auto tariffs and the broader US/EU and US/Japan trade negotiations, and overall, therefore, there is a low probability that the administration will impose tariffs this month.


Analysts at Nordea look for CPIF to print 2.1% Y/Y in April, in line with the Riksbank's forecast, but Nordea says risks may be skewed to the downside since prices for imported goods and services may have bounced less than projected. The upside driver is likely to have been foreign travel in April, due to Easter price hikes, though there is some uncertainty here given the new methodology to calculate the component, as well as seasonality around Easter. "Considering the weak SEK, prices for clothing and footwear have been surprisingly low in the beginning of the year," Nordea says, "much suggest that these prices, and prices for other imported goods and services, will rise in April and in the coming months." The bank has assumed a weaker SEK rate than in its previous inflation forecasts. The bank expects the data to reiterate its view that the next Riksbank rate hike remains a long way off.