BMA Market Insights: RISK-ON FOMC Meeting And Brexit Take Center Stage


Rates and equity futures are grinding higher this morning on expectations that the Fed will keep its key policy rate unchanged at 2.25-2.50% on Wednesday. Close attention will be paid to economic forecasts and monetary policy guidance regarding the continued wind-down of the Treasury and MBS balance sheet. Minutes from the Fed’s previous meeting in January indicated that officials were split on the future path of interest rate hikes, any changes in the dot plot forecasts will be heavily scrutinized. Chairman Powell will hold a press conference post meeting. Given that the market has largely priced-in a dovish Fed, any guidance indicating otherwise will spark a rally in rates. 10-year UST is trading 1.7bps higher as of this writing.

Across the pond, the focus will remain on Brexit. The U.K. Parliament will vote on Prime Minister May’s third rendition regarding an exit plan mid-week. Members of the Eurozone bloc will also opine on extending the March 29th divorce date on Thursday – a unanimous vote is required for the extension. The Bank of England will hold its policy meeting on Thursday as well. The market largely expects the BoE to stand pat on the back of Brexit uncertainty. Outside of the aforementioned events, a slew of key economic data is on the calendar this week (see more below).

Last week, trade rhetoric took center stage. Brexit woes continued as the U.K. Parliament overwhelmingly rejected both PM Theresa May’s second proposal and the idea of a second referendum (see more below). In other trade news, U.S. Treasury Secretary Mnuchin noted that a summit between President Xi and President Trump, to signify a China-U.S. trade deal, would not happen this month. However, Chinese officials noted progress between the two sides towards the end of the week.

Upon the conclusion of China’s National People’s Congress on Friday, officials reiterated the government’s commitment to stimulate growth through lower taxes and accommodative monetary policy. The government also passed a law aimed to further open its doors to foreign investments.

Positive trade sentiment and the potential pick-up in Chinese economic growth (given the stimulus measures) propped up equity markets. Both the S&P 500 and Nasdaq closed at five-month highs at 2,822.48 and 7,688.53 respectively. Treasury yields dropped across the curve on the back of weaker U.S. economic data, with the 10-year Treasury yield hovering around 2.591%.

I.   U.S. Economic Data/Markets

  • Empire Manufacturing Index fell to 3.7 in March from 8.8 in February.
    • It is the lowest reading in about two years and undershot economists’ forecast of 10.
    • Both the new orders and shipment indices fell.
    • Third monthly reading below 10.
  • Michigan Consumer sentiment picked up for the second consecutive month in March rising to 97.8 from 93.8 in February. Analysts largely predicted a reading of 95.
  • Industrial production edged slightly higher by 0.1% in February.
    • A pick-up in utilities and mining offset the second monthly drop in manufacturing.
  • New Home Sales fell 6.9% m-o-m in January.
    • New homes sold at a seasonally adjusted annual rate of 607k in January, down from 652k in December.
  • Consumer Price Index rose for the first time in four months, by 0.2%, largely due to higher costs in  food, gasoline, and rents.
    • For the 12 months ending through February, the index rose 1.5%,the smallest increase since September 2016.
    • Core CPI (stripping out food and energy), moved 0.1% higher, the smallest increase since August 2018.
  • Retail Sales increased 2.3% y-o-y in January,  beating economists’ expectations of retail sales to be unchanged.
    • Discretionary spending and increased purchases within building materials contributed to the data.
    • December retail sales was revised down to -1.6% from -1.2%- the biggest drop since September 2009.

II.  Other

  • Brexit – The U.K. Parliament largely rejected PM May’s revised Brexit proposal (with 391 votes against and 242 in favor of the deal).  
    • Following the rejection, Parliament voted on a string of issues, which included:
      • Narrowly voted against a no-deal exit from the EU (312 versus 308), lowering the probability of a chaotic departure from the EU.
      • Overwhelmingly voted to seek a delay from Britain’s departure from the EU, which then sets the stage for May to provide a revised proposal this week. If Parliament cannot agree to a deal by March 20th, they will ask the EU for the delay, which is speculated to last until June 30. The extension requires unanimous approval from the 27 Eurozone bloc members who meet on Thursday.
      • Largely rejected the idea of a second referendum.
  • China/U.S. Trade Talks – U.S. Treasury Secretary Mnuchin noted that a summit between both President Xi and President Trump will not occur by the end of the month. The summit was largely meant to signify a deal between both sides.
    • Later in the week, Chinese officials noted discussions held between the two sides and that substantial progress had been made without disclosing any details.
  • Chinese Economic  data
    • Premier Li Keqiang reinforced the government’s commitment to pursue market reforms, cutting taxes and generally stimulating the economy at the conclusion of the National People’s Congress.
      • The government also passed a new law towards the conclusion of the National People’s Congress that addressed concerns surrounding the foreign business community, including protection of intellectual property and allowing foreign companies a more equal footing to domestic competitors.
    • China retail sales were up 8.2% for January and February, largely due to online sales.
      • Analysts expected sales growth of about 8.1%.
    • Industrial production growth slowed to 5.3% for the first two months of the year compared to the same period last year – the slowest rate of growth in 17 years. Analysts expected a 5.6% growth for that same time period.  
    • Unemployment rate rose to 5.3% in January and February, from 4.9% in December.
      • It is the highest level of unemployment seen since February 2017 unemployment level of 5.4%.
  • The Bank of Japan left its key policy rates unchanged with short-term interest rates at -0.1% and its target for 10-year JGBs at around zero.
    • The BOJ noted its plan to buy government bonds at an annual pace of ¥80 trillion ($716 billion).
    • The bank had a more dovish outlook on the economy noting weakness in both exports and production and a general slowdown in global growth.
      • Japan’s real exports dropped 5.3% in January from a month earlier.
  • Eurozone Industrial Production rose 1.4% m-o-m in January, beating expectations of 1%.
    • An increase in energy output helped offset weaker results for intermediate and capital goods production.
  • German Economic data
    • Industrial production for January surprised to the downside with a 0.8% m-o-m decline versus expectations of a 0.5% gain – in part due to challenges within the  automotive industry.
    • Trade surplus narrowed in December to EUR 18.5 billion from EUR 19.9 billion.
      • Exports were flat in December and imports rose 1.5% compared to November.

Key data/events this week:

  • JPY Industrial Production (Monday)
  • AUD RBA Minutes (Tuesday)
  • GBP Unemployment data
  • EUR/German ZEW Surveys
  • U.S. Factory Orders/Redbook Index
  • JPY BoJ Minutes
  • JPY Leading Economic Index (Wednesday)
  • German PPI
  • GBP Retail Index/PPI/CPI
  • Federal Reserve Monetary Policy Decision/Economic Projections/Post Meeting Press Conference
  • GBP U.K. Parliament Brexit Vote
  • EUR Council Meeting (Thursday)
  • AUD Unemployment Rate
  • Swiss National Bank Monetary Policy Decision
  • Bank of England Monetary Policy Decision
  • GBP Retail Sales
  • U.S. Philadelphia Fed Manufacturing Survey
  • E.U./German/U.S. Markit PMI data (Friday)
  • CAD Retail Sales
  • U.S. Existing Home Sales