Original insights into market moving news

RANsquawk Week in Focus; week commencing 24th June 2019

  • SUN: Istabul Election re-run
  • MON: German Ifo Survey
  • TUE: RBNZ Monetary Policy meeting, Hungarian Central Bank Monetary Policy meeting, US Consumer Confidence, New Home Sales, Meeting minutes
  • WED: US Durable Goods
  • THU: Banxico Monetary Policy meeting, US GDP Final, Core PCE (Final), EZ Sentiment
  • FRI: G20, Japanese CPI and Unemployment, UK GDP, US Consumption and Uni. Of Michigan



The highly anticipated “extended” meeting which is due to take place between Presidents Trump and Xi will set the tone of global trade (the meeting will likely take place on the Saturday, after the official G20 meetings). Expectations that any deal can be struck are low, as has been hinted in recent commentary from both sides. Any progress will be framed in the context of a potential FOMC reaction, after Fed chair Powell has said that a deterioration in the trade landscape that impacts the economy would see the Fed provide more accommodation (note: Powell suggested that it wouldn’t be made solely on the basis of trade progress, other factors would also be considered). Nevertheless, the meeting is expected to result in a truce, at the very least, and subsequently talks should be able to be brought back on track; signs of this have already been seen, as the two sides have resumed contact to prepare the grounds for a meeting at the G20 (Trump has also spoken with Xi, according to reports).


The RBNZ is expected to keep the Overnight Cash Rate unchanged at 1.50%, following a cut of 25bps at its previous meeting. At that meeting, the central bank said the outlook was finely balanced between having to cut a further time at some point, or leaving the rate at 1.50% for an extended period, as it is in “data watching mode.” Indeed, the recent GDP print for Q1 was solid (0.6% Q/Q vs RBNZ forecast of 0.4%), after fiscal policy support, and while there are questions whether it will be enough to bring core inflation back to target, that argument could be for future meetings; additionally, the labour market appears fragile at the moment, with analysts seeing some deterioration in the months ahead, as hinted by recent business surveys. While some desks have argued that global factors may have contributed to the case to fire another cut, it might not be enough for the RBNZ to move the dial. With that said, recent dovish pivots by the FOMC and ECB have seen the “QE trade” (lower USD, higher equities, lower yields, tighter credit spreads) come back into fashion, and this could lead to upside for activity currencies, like the NZD, which could provide challenges for the RBNZ, with some suggesting it might result in the central bank needing to lower rates more quickly, to a lower level than it had previously planned. Nevertheless, for next week’s meeting, analysts at ING do not anticipate a back-to-back cut, especially since RBNZ’s Assistant Governor Hawkesby ruled it out recently; however, ING says that with the balance of risks skewed towards economic weakness, its expects one more 25bp cut in Q3. 


Headline durable goods orders are seen rebounding to 0.2% M/M in May, from -2.1% in April. Aircraft orders might weigh, since Boeing did not register any orders in May, which may mean the headline is more a Boeing story than indicative of underlying trends. Manufacturing surveys have edged lower recently, and there has been some attention on the collapse of the Empire Fed and Philly Fed surveys; analysts have suggested that this was due to the fact that the survey periods coincided with escalating trade tensions, and since then, steel and aluminium tariffs have been lifted off of Canada and Mexico, while Mexico has also seen off additional tariff threats. Some desks are sanguine that ISM manufacturing new orders augurs well for the months ahead. The durables survey saw some heavy seasonality in April, which should also provide some positives for the non-defence ex-air measure, which desks often see as a proxy for capex.


The Business Outlook Survey will help to shape expectations ahead of the 10th July BOC meeting. The survey period is from early May to early June, and as such may capture some of the more negative aspects of trade war escalation during the period. However, US tariffs on Canadian (and Mexican) steel and aluminium imports were also lifted in the window, which may help to offset some of the negativity; desks have observed that the manufacturing PMI fell into contraction in May (49.1 was the lowest since December 2015), and RBC thinks this will be consistent with the aggregate BOS indicator falling from -0.6 to -2.0. "Capacity pressure indicators softened markedly in Q1 but may be supported by further easing of Alberta’s production curtailments in Q2," the bank writes, "however, at the same time, the output gap is estimated to have widened further leading into it (-0.75% in Q1)." Labour market indicators are seen holding up.


Rebalancing flows could be apparent between 24-28th June. One theory is that with volatility declining in developed market equities, funds might rebalance by selling investment grade bonds (including govvies) and buying DM equities. Nomura estimates that such a rebalancing is unlikely to be large this month (it estimates around USD 9bln at most), though says that it could increase if volatility falls further in the week. “It will be important to watch whether bond-selling by risk parity funds helps cool DM bond markets, which are currently experiencing a melt-up,” Nomura says.


Turkey will rerun the Istanbul elections on Sunday 23rd June, after President Erdogan advocated a do-over of the March results, where his AKP party narrowly lost (by 14k) the precinct to the opposition CHP party. Turkish press has noted that the AKP Party attempted to make President Erdogan less visible officials believed that the CHP candidate will have troubles in consolidating votes if Erdogan is out of the scene. However, after weeks of keeping a low profile, the President re-imposed himself on campaign. Party insiders noted that the President’s “uncompromising” approach had become a liability. Internal party polling showed that CHP candidate Imamoglu is slightly ahead, which prompted the President to intervene, sources said. Turkish press Al-Monitor notes that if the CHP candidate wins and is allowed to take over the city’s local administration, the President can still use his control “to besiege the CHP mayor, and paralyze his projects to some extent”. IFI has highlighted three scenarios: 1) opposition candidate Imamoglu wins indisputably, 2) AKP candidate Yildirim wins, 3) a slim victory for Imamoglu. The analysts highlight that scenario three would carry the most risk as it offers scope for Erdogan’s AKP party to contest, which could lead to another election. Scenario one would be the best outcome, IFI thinks, although “Erdogan has staked his reputation on this not being the case and seems to want to win Istanbul at any cost” the analysts caveat. Thus, risk for USDTRY could be skewed to the upside.