BMA Market Insights: Growth Forecasts Cut Globally, Sino-U.S. Trade Jitters Feed Risk OFF Sentiment

Renewed fears regarding Sino-U.S. trade tensions took center stage late last week as President Trump noted that he did not plan to meet with Chinese President Xi before the March 1st trade deadline between the two countries. U.S. officials, however, are expected in Beijing this week to continue negotiations.

Both U.S. stocks and Treasury yields fell on the back of the announcement, reflecting the markets’ Risk OFF sentiment.  The flight-to-quality positioning was also fueled by the Bank of England, Reserve Bank of Australia and the European Commission all cutting growth forecasts for 2019 (see more below).  The S&P 500 pared some of its losses on the back of strong corporate earnings on Friday. The index rose 0.05% on the week closing around 2,707.88, while the 10-year Treasury yield fell nearly six basis points over the week and hovered around 2.632%.

Separately, BB&T announced its acquisition of SunTrust Bank, which will make the newly formed entity the sixth largest U.S. retail bank. It is the largest bank merger since the 2008/09 crisis. The deal was largely driven by technology in wanting to provide better digital services through a combined effort.

This week, all eyes will be on the U.K. Parliament on the 14th as officials will once again vote on a Brexit proposal by PM Theresa May. Key economic data out of the U.K. is scheduled for throughout the week including GDP, inflation and retail sales releases. Other major non-domestic data scheduled include Chinese trade data and the EU Q4 GDP.

Closer to home, market pundits will pay close attention to trade talks, the possibility of another government shutdown, and Fed speak sprinkled throughout the week. Key data domestic releases include CPI, retail sales and the Michigan Consumer Sentiment survey.

I.   U.S. Economic Data/Markets

• New U.S. Factory Orders for November surprised to the downside, declining at 0.6% relative to expectations of a rise of 0.2%. Less demand for machinery and electrical equipment in part led to the data. The report was delayed due to the partial government shutdown.
• The trade deficit narrowed in November, dropping 11.5% to $49.3 billion on the back of declining imports. It was the first time in six months that the deficit declined.
  • Lower demand for consumers goods and for oil given higher domestic production contributed to the data.
• Federal Reserve Chairman Jerome Powell noted income inequality and sluggish productivity among the challenges facing the U.S. over the next decade at a speech last week. He called for more aggressive policies to narrow the wealth gap.
• FOMC Official Mester reinforced the Fed’s current stance of holding off on further rate hikes until there is more certainty regarding economic outlook. She noted that the economy is a “good spot” relative to the Fed’s dual mandate of price stability and maximum unemployment. Mester has generally been more hawkish than other members of the FOMC.
• Markit Services PMI data slightly dropped m-o-m in January coming in at 54.2 relative to a reading of 54.4 in December.
  • Price pressures eased in January, with the rate of input price inflation softening to a 22-month low.
  • Employment growth was the second-slowest since June 2017.

II.  Other

• Bank of England unanimously voted to keep its policy rate unchanged at 0.75%.
  • The BoE intimated that rate hikes are likely after the uncertainty surrounding Brexit is lifted. The next key Brexit date is February 14th when the U.K. Parliament will vote on PM May’s revised proposal.
    • Current levels of inflation at 2.1% is above the bank’s target of 2%.
    • Labor conditions continue to remain tight (UK Employment rate hit a record of 75.8% last month).
  • The bank also cut its growth forecasts for 2019 and 2020 to 1.2% and 1.5% respectively. In November, the bank had growth projections of 1.7% for both 2019 and 2020.  It said it would likely revise its outlook once there was greater clarity surrounding Brexit.
• U.K. retail sales fell to GBP 7.2 billion last year compared to net sales of GBP 48.5 billion in 2017, reflecting an 85% drop. Trade tensions, Brexit uncertainty, and the Italian budget crisis contributed to the data.
• Reserve Bank of Australia cuts its growth and inflation forecasts.
  • The bank cuts its GDP forecast for the year ending in June 2019 to 2.5% from a previous forecast of 3.25%.
  • Annualized CPI inflation is now expected at 1.75% by year-end, down from 2.25%.
  • Sluggish global growth, weaker domestic consumption, and uncertainty regarding the Australian housing market contributed to the bank’s outlook.
• German Industrial Production for December came in weaker-than-expected, falling for the fourth consecutive month. Production fell 0.4% from November, analysts expected a 0.8% gain. Officials provided a grim outlook, noting declining manufacturing orders and weaker business sentiment.
• European Commission cut 2019 GDP growth forecasts for the region to 1.3% from 1.9% predicted in November. Weak export demand from China, Brexit uncertainty and localized geopolitical risks (i.e. Italy’s ballooning deficit) contributed to the change in outlook.

Key data/events this week:

• GBP Q4 GDP/Manufacturing/industrial production (Monday)
• U.S. Unit  Labor Costs
• CAD Trade Data
• AUD Home Loan Data (Tuesday)
• CNY Foreign Direct Investments
• FOMC Chairman Powell Speaks
• Fed Officials Mester/George Speak
• Reserve Bank of New Zealand Rate Decision (Wednesday)
• GBP Retail Price  Index/PPI/CPI
• EUR Industrial Production
• U.S. CPI
• JPY GDP
• CNY Trade Data (Thursday)
• German/EU Q4 GDP
• U.K. Parliament Votes on Brexit
• U.S. Retail Sales
• U.S. PPI
• CNY CPI/PPI (Friday)
• GBP Retail Sales
• U.S. Industrial Production
• Fed Official Bostic Speaks
• U.S. University of Michigan Consumer Sentiment