BMA Market Insights: Brexit Deadline Looms; ECB Takes Center Stage


The March U.S. jobs report hit the sweet spot for the markets late last week. The report reflected a rebound in the jobs market, underpinning economic growth. However, the data was not strong enough to prompt the Federal Reserve to consider hiking interest rates. The report ultimately delivered a Goldilocks scenario: the better-than-expected data alleviated fears of a recession, and it reinforced the Fed’s current patient stance regarding monetary policy (see more below).

Positive market sentiment also emanated from upbeat comments by President Trump who noted that Sino-U.S. trade talks were within the final stages and that an agreement may be reached within the next four weeks. Outstanding issues remain, however, including the protection of U.S. intellectual property and an enforcement mechanism regarding the trade agreement.  

On the flip side, trade discussions surrounding Brexit made little progress last week as the current Brexit deadline of April 12th looms this week. The U.K. Parliament did not come to any consensus regarding the divorce agreement, and the standstill prompted PM Theresa May to ask the EU for yet another withdrawal extension, until June 30th. The U.K. would then partake in the European Parliament elections scheduled for May. It is uncertain if the extension will be granted, with some members of the EU bloc, including France, questioning if there is sufficient reasoning to support the delay. 

All three major U.S. stock indices ended the week in positive territory on the back of strong Chinese manufacturing data, U.S. jobs growth, and fears of a global economic slowdown may be overblown. The S&P 500 edged near highs not seen since last October and closed the week around 2,892.74. Similarly, Treasury yields bounced higher across the curve, over the week. The 10-year and 2-year Treasury yields traded around 2.501% and 2.345% respectively on Friday. 

This week, any progress in the aforementioned trade negotiations will be closely monitored. Trade data will also be in focus given trade balance releases for Germany, the U.K., and China. 

Central bank officials will also take center stage, starting with the Bank of Japan’s Governor Kuroda who is scheduled to speak mid-week. Later on Wednesday, the European Central Bank is meant to convene and while monetary policy is expected to remain unchanged, recent weak data from the Eurozone, German 10-year bund yields falling below 0.0%, and Brexit uncertainty will all weigh on ECB officials. The market will pay close attention to any further details surrounding the targeted long-term refinancing operations, (i.e., a QE mechanism that is meant to incentivize banks to lend), and President Draghi’s post-meeting press conference. 

At home, a few Fed officials are scheduled to speak throughout the week.  The market will keenly await the release of the FOMC minutes from the Fed’s March meeting and inflation data, both to be released on Wednesday. 

I.   U.S. Economic Data/Markets

  • March unemployment data surprised to the upside as the economy added 196k jobs versus predictions of 175k. Other takeaways included:
    • The unemployment rate held steady at 3.8%, a touch above the 49-year low level of 3.7% reached last fall.
    • Average hourly earnings increased 3.2% y-o-y, outpacing the rate of price increases – the CPI index increased 1.5% y-o-y in February.
    • Job gains were led by the healthcare, leisure and hospitality sectors. The manufacturing sector saw its first decline in employment since July 2017.
    • Labor force participation rate ticked lower to 63%, a 0.2% point drop from the prior month.
  • ISM Non-Manufacturing fell to levels not seen since August 2017, to 56.1%.
    • A drop in production, new and export orders weighed on the data.
  • Durable goods fell 1.6% in February, after three successive months of increased orders.
    • The drop was largely due to a drop in aircraft orders.
    • Durable-goods orders for January was revised down to a 0.1% increase from a previous estimate of 0.3%.
  • March Manufacturing PMI had a reading of 52.4, down from 53.0 in February, largely due to a slower rise in output.
  • March ISM Manufacturing came in at 55.3%,  rebounding from February’s two-years lows of 54.2%. New orders rose nearly 2%.
  • February Retail Sales surprised to the downside falling 0.2% versus expectations of a rise of 0.3%.

II.  Non-U.S. Economics

  • Eurozone Economics
    • Composite PMI for March declined to 51.6 from 51.9 in the previous month but came in slightly stronger than the earlier flash reading of 51.3.
    • Retail Sales beat expectations increasing by 0.4% in February versus growth forecasts of  0.3%.
    • Inflation continued to remain below the ECB’s target of around 2%.
      • March CPI rose 1.4% y-o-y, down from the 1.5% reading in February. Core CPI was closer to 0.8% y-o-y, down from 1% the previous month.
    • Markit Manufacturing PMI dropped to 47.5 in March, the lowest reading since April 2013. February’s reading was at 49.3.
      • Anything below 50 indicates a contraction in activity. March’s rate is the lowest since April 2013 and partly stemmed from weak levels of new orders.
    • German Industrial Production increased by 0.7% in February largely on the back of construction activity.
    • Germany’s Markit Manufacturing PMI fell to an 80-month low reading of 44.1, down from 47.6 in February. It was the third consecutive month with a reading below 50.
    • Germany Factory Orders surprised to the downside, falling 4.2% in February, average forecasts expected a slight rise.
      • Domestic orders dropped 1.6%, while foreign orders fell 6%.
  • U.K. Economic data
    • Markit Manufacturing PMI came in higher-than-expected at 55.1 versus estimates of 51. An increase in stockpiling with inventory levels of raw materials jumping higher contributed to the data. Respondents to the survey largely wanted to increase their stockpiles ahead of Brexit, according to the report.
  • Chinese Economic data
    • Caixin Services PMI hit a 14-month high.
      • The index in March rose to 54.4 from 51.1 in February.
      • Increase in new export orders, growing the strongest rates since December 2017 drove the data.
    • Caixin Manufacturing surprised to the upside in March coming in at 50.8 versus expectations of 49.9.  
      • A reading above 50 indicates an expansion, March’s level reflected the fastest expansion in eight months.
      • New orders climbed their highest levels in four months.
  • Canadian Economic data
    • March Employment report surprised to the downside with 7.2k jobs lost versus expectations of a 1k gain.
    • March Markit Manufacturing PMI fell to 50.5 in March from 52.6 in February. Weak production growth with output volumes increasing at the slowest pace in over two years contributed to the data.

Key data/events this week:

  • German Trade Data (Monday)
  • U.S. Factory Orders
  • Swiss Unemployment Rate (Tuesday)
  • GBP Retail Sales
  • Fed Official Clarida Speaks
  • J{PY Machine Orders
  • BoJ Kuroda Speaks (Wednesday)
  • GBP Industrial Production/Manufacturing Production/Trade Balance/GDP
  • ECB Rate Decision
  • U.S. CPI/FOMC Minutes
  • Fed Official  Quarles Speaks
  • CNY PPI/CPI (Thursday)
  • German CPI
  • U.S. PPI
  • CNY Trade Data (Friday)
  • EU Industrial Production
  • U.S. Export/Import Price  Index