All eyes are on key data out of China, the world’s second largest economy, this week. First quarter GDP data, retail sales, and industrial production will be scrutinized, particularly as slowing economic global growth and trade uncertainty have largely driven the markets’ moves in 2019. Further, manufacturing data out of the EU will shed some light regarding the bloc’s economic health.
Recent weak economic data from the EU, however, prompted the European Central Bank to keep its key policy rate unchanged last week. The bank continued to mull alternative stimulus measures including a two-tiered system for bank reserves and how it may employ Targeted Long-term Refinancing Operations within the financial system (see more below).
Given the recent sluggish global economic data, it came as no surprise when the International Monetary Fund slashed its outlook for global economic growth in 2019 to 3.3% from a previous estimate of 3.5% in January. The deteriorating outlook spanned across developed economies, including the U.S. and emerging markets. The IMF also expected a decline in trade growth of about 0.6%. While trade tensions topped the list of the IMF’s concerns, other risks to the global economic health included: tighter financial conditions, greater political uncertainty, and a fall in business confidence, particularly in Europe.
Trade jitters surrounding Brexit continued to linger as the U.K. received an extension on its withdrawal from the EU. PM Theresa May and Parliament officials have until October 31st to come to a consensus. Although, the extension comes with strings attached as the EU laid out certain stipulations surrounding the extension (see more below).
On the brighter side, trade discussions between China and the U.S. inched forward. While enforcing the ultimate agreement has been an outstanding issue, both sides agreed to create enforcement offices to monitor compliance of the agreement.
Robust Chinese trade and lending data served as a boon to the markets towards the end of the week. Equity markets also got a boost from better-than-expected earnings data from bank juggernauts JP Morgan and Wells Fargo. The S&P 500 moved above the 2,900 key level, the first time in six months, closing the week at 2,907.4. Similarly, U.S. Treasury yields rallied, with the 10-year yield hovering near 2.562% late Friday.
Finally, oil prices also gained traction over the week, hitting five-month highs as crude closed the five-day period around $64.08. Oil prices jumped higher on the momentum from the aforementioned Chinese economic data that signaled a potential pickup in energy demand. Further, prices were fundamentally supported from a tightening of oil supply by the Organization of the Petroleum Exporting Countries. In other energy news, Chevron’s $33 billion acquisition Anadarko placed on the company on the heels of Exxon as one of the largest publicly traded oil producers.
This week, outside of the key economic releases out of China, retail sales data will also be in focus for the U.K., Canada, and the U.S. Other major domestic economic releases include: Fed’s Beige Book, Philadelphia Fed Manufacturing and Housing Starts towards the end of the week. Any further surprises in first-quarter earnings will likely generate market volatility. Trade volumes will thin late in the week, given the Good Friday holiday.
I. U.S. Economic Data/Markets
- Import prices increased by 0.6%, and for the third consecutive month in March on the back of higher energy prices. Exports also rose by about 0.7%, beating expectations of a 0.2% increase.
- March PPI surprised to the upside by increasing 0.6%, largely due to higher gasoline prices, versus estimates of 0.3%. Core PPI (stripping food and energy) was flat on the month.
- Fed Official Quarles emphasized the need for the private sector to help accelerate the transition away from LIBOR.
- Fed officials are scrutinizing the bank’s plans regarding the move away from LIBOR.
- Noted that LIBOR’s potential replacement SOFR (secured overnight funding rate) does not arise overnight and can take decades to develop.
- FOMC Minutes reflected that the Fed will likely keep the rate unchanged this year on the back of the economic global slowdown coupled with uncertainty surrounding trade and muted inflation. Other takeaways from the minutes included:
- Concerns surrounding weakness in the housing sector, business spending and consumer sentiment.
- Views for Fed funds range could change depending on incoming data.
- Regarding the balance sheet, the Fed may need to resume purchasing Treasury securities after it winds down its portfolio in September.
- Reserves on the balance sheet could dwindle to the point that they become scarce enough to prop up the overnight rate banks charge – effectively raising the Fed’s policy rate. Officials saw little benefit in having reserves fall to such a point and discussed allowing the balance sheet to grow again relatively soon after its runoff.
- March CPI increased by 1.9% y-o-y, largely due to higher prices in food, gasoline, and rents. Core CPI (excluding food and energy) was up by 2% y-o-y.
- Fed Official Clarida noted that the unemployment rate could drop further, without inciting inflation concern, given the traditional link between falling unemployment and rising inflation has weakened.
- The number of workers returning to the labor force (e.g. those who were retired, or discouraged from seeking work) has surprised officials and suggest there is a larger workforce population to draw upon.
- Factory Orders fell 0.5% in February largely due to weak orders for machinery, transportation equipment, and computers and electronic products.
II. Trade
- Brexit – The EU gave the U.K. yet another extension to come to an agreement regarding a Brexit proposal. U.K. PM May and Parliament will have until October 31st or sooner to come to an agreement.
- The new deadline averted the possibility of the U.K. leaving the bloc without a deal given the previous April 12th deadline.
- The UK will now have to hold European Parliament elections in May or face leaving on June 1st without a deal.
- If the U.K. does participate in the May elections, possible outcomes for Brexit include: a second referendum, no-deal Brexit, general election, cancel Brexit, revised deal or the unlikely possibility (since it has been rejected three times) that PM May’s proposal or some form of it gets passed through Parliament.
- EU/U.S. trade relations took a hit last week, as the Trump Administration considered hitting the bloc with about $11 billion in levies on the back of a dispute between both sides regarding U.S.-based Boeing and European based Airbus. The EU responded in kind with $12 billion of potential U.S. levies.
- Trade talks between China and the U.S. continued to progress.
- Technology sector issues including cloud computing and data handling remain at the forefront of the negotiations.
- U.S. Treasury Secretary Mnuchin said both sides agreed to create enforcement offices to monitor compliance on the ultimate agreement.
III. Non-U.S. Economics
- Eurozone Economics
- European Central Bank, as expected, left interest rates on its marginal lending facility and the deposit facility unchanged at 0%, 0.25% and -0.40%, respectively. The bank expected to leave the rate unchanged at least through 2019.
- President Draghi noted risks tilted towards the downside for the region, weak economic data coupled trade concerns have impacted sentiment. German 10-year bund yields turning negative has likely prompted the ECB to remain cautious as well.
- Draghi noted it was too early to determine whether a two-tiered system for bank reserves should be implemented to help mitigate the impact of negative rates on banks. Other central banks such as those in Switzerland and Japan employ a two-tiered system.
- Such a strategy would exempt banks in part from paying the ECB’s -0.40% charge on excess reserves thereby helping to prop up the banks’ profits.
- Information regarding Targeted Long-term Refinancing Operations, a stimulus tool the ECB by way of providing cheap funding to banks in the bloc, will be communicated in future meetings. Although Draghi noted that the pricing of the TLTROs will partly be based on the economic outlook.
- Industrial Production declined in February, by 0.3% y-o-y, less-than-expected given estimates of a 1% annual drop.
- German CPI rose 0.4%m-o-m in March, on the back of higher energy prices.
- Germany Trade slowed in February as exports and imports fell 1.3% and 1.6% respectively.
- European Central Bank, as expected, left interest rates on its marginal lending facility and the deposit facility unchanged at 0%, 0.25% and -0.40%, respectively. The bank expected to leave the rate unchanged at least through 2019.
- U.K. Economic data
- Manufacturing Production surprised to the upside with a 0.9% increase in February relative to forecasts of 0.2%.
- March Retail Sales decreased by 0.5% compared to a 2.3% increase a year ago. Uncertainty surrounding Brexit contributed to the pullback in consumer spending, according to the data.
- GDP grew 0.2% in February, in-line with consensus and compared to a 0.5% increase in January. Services largely drove the data as well as stockpiling by manufacturers given the uncertainty surrounding Brexit.
- February trade balance came in at -GBP14.1 billion versus expectations of -GBP12.9 billion with exports rising by 0.3% m-o-m while imports fell by 1.0% m-o-m.
- Bank of Japan’s Gov. Kuroda reinforced the bank’s focus on easing monetary policy to achieve its 2% inflation target. Kuroda also expressed to Parliament officials, little concern for 10-year government yields turning negative, particularly as investors globally have flocked towards safe haven assets of late.
- China Economic data
- New bank loans rebounded in March, coming in at 1.69 trillion yuan versus forecasts of 1.2 trillion yuan.
- Imports dropped in March about 7.6% y-o-y signaling weaker domestic demand. Conversely, exports rose 14.2% y-o-y beating expectations of a 7.3% increase.
- China’s surplus with the U.S. ballooned to $20.5 billion relative to February’ surplus of $14.72 billion.
- CPI rose 2.3% y-o-y in March, the quickest pace since last October. Higher food prices largely drove the data. Stripping out food, CPI increased by 1.8% y-o-y.
- PPI also increased, about 0.4% y-o-y, in line with expectations.
Key data/events this week:
- Fed Official Evans Speaks (Monday)
- GBP Unemployment/Earnings data (Tuesday)
- German/EU ZEW Economic Sentiment Survey
- U.S. Industrial Production
- JPY Trade data
- CNY Retail Sales/GDP/Industrial Production (Wednesday)
- JPY Industrial Production
- GBP Retail Price Index/PPI/CPI
- EU CPI
- U.S. Trade Balance
- CAD CPI
- Fed’s Beige Book
- AUD Unemployment (Thursday)
- German PPI
- German/EU Markit Services/Manufacturing/Composite
- CAD/U.S./GBP Retail Sales
- U.S. Philadelphia Fed Manufacturing
- JPY CPI
- U.S. Housing Starts (Friday)
