Trade headlines remain the primary focus with Sunday’s announcement from President Trump that the U.S. would delay raising tariffs on China to 25% due to “substantial progress” on “important structural issues”. Officials from both sides last week, noted progress on discussions, with President Trump reiterating possibly extending the March 1st deadline and meeting China’s President Xi next month to complete the agreement. Chinese officials extended their stay in Washington D.C. late in the week on the back of the talks.
The promise of a China/U.S. trade deal continues to help prop up equity markets. All three major U.S. stock indices closed the week higher, with the S&P 500 rising for the fourth consecutive week closing around 2,792.62. Similarly,10-year Treasury yields edged higher hovering around 2.654% at the close.
A slew of key events and major data releases are on the docket for the week both domestically and beyond. In the U.S., things kick off on Tuesday with all eyes on FOMC Chairman Powell as he testifies before Congress on monetary policy and provides an overview on the economy. On the data front, the Fed’s preferred measure of inflation, the Personal Consumption Expenditure index, Q4 U.S. GDP, housing and manufacturing data will all be closely monitored. For now, benign inflation coupled with political uncertainty has largely kept the Fed on hold.
Outside the U.S., manufacturing data out of China, U.K., Japan, and Germany, as well as GDP data for both Canada and Switzerland, will be watched given global growth concerns. Inflation data is also set to be released for a number of major regions including the EU and Canada.
In the U.K., Brexit jitters will take center stage once again as U.K. PM Theresa May will speak early in the week regarding any progress on her exit plan. The U.K. parliament will then debate her proposal on Wednesday. At the time, lawmakers will also have the opportunity to suggest alternatives that may be tested with a series of votes.
I. U.S. Economic Data/Markets
- U.S. Markit manufacturing PMI fell to a 17-month low with a reading of 53.7.
- January’s level was at 54.9.
- A level above 50 indicates improving conditions.
- Philadelphia Fed Manufacturing index dropped to -4.1 from 17, the first negative reading since May 2016. Analysts were expected a reading of about 14.
- Indexes for new orders and shipments dropped.
- Durable Goods data rose 1.2% seasonally adjusted m-o-m in December, outside of transportation orders, orders grew a mere 0.1%.
- Slowing global growth, trade tensions, tighter financial conditions, and a relatively stronger USD are attributes to the weaker U.S. goods numbers.
- New orders for non-defense goods, excluding aircrafts, declined 0.7% in December.
- U.S. Existing Home Sales dropped to a three-year low dropping by 1.2% last month to a seasonally adjusted annual rate of 4.94 million units in January, versus expectations of 5.0 million units.
- Fed Official Bullard suggested that the Fed may be nearing the end of its rate hike policy and winding down its balance sheet.
- Bullard has had a more dovish view and believed that the current level of rates are too high.
- FOMC Minutes from January’s Fed meeting reaffirmed the Fed’s patient stance largely due to economic and political uncertainty as opposed to officials’ economic outlook deteriorating. Other takeaways included:
- Many officials were inclined to stop winding down the bank’s $4 trillion portfolio this year and expect a plan to be outlined soon.
- Concerns regarding the flattening yield curve or, rather, how spreads between short and long-term rates have narrowed.
- Weaker global growth and lower oil prices may continue to keep inflation from rising.
- Officials were split as to whether the economy will warrant a rate hike this year, while others felt inflation will likely remain benign and that no rate hikes would be needed.
- The dovish sentiment supported all three major U.S. equity indices on the day of its release.
- FOMC Official John Williams suggested that a different outlook either to inflation or growth would need to arise to prompt the Fed to raise rates in an interview last week.
- Believes the Fed could continue to shrink its balance sheet well into next year.
- The balance sheet wind down could stop, once reserves get to around $1 trillion, current reserves are about $600 billion north off those levels.
II. Other
- Trade Talks
- President Trump suggested extending the March 1st deadline regarding a trade resolution with China on the back of discussions progressing.
- China has offered to stop providing government subsidies that can distort prices and put U.S. competitors at a disadvantage, although details have yet to be disclosed.
- Trump also threatened tariffs on European automobiles if a trade deal cannot be reached with the EU.
- President Trump suggested extending the March 1st deadline regarding a trade resolution with China on the back of discussions progressing.
- U.K. Unemployment remained at historical lows at 4%, the lowest since 1975.
- Weekly average earnings were up by 3.4% (adjusted for inflation) for the 2018 calendar year, the highest since March 2011.
- Japan’s trade deficit widened in January coming in around $12.8 billion, a 49.2% increase from a year ago.
- Exports declined for a second consecutive month, with exports from China dropping 17.4%, the sharpest drop since January 2016.
- January exports rose 9.1% y-o-y, up from December’s drop at 4.4% and beating estimates of a 3.2% drop.
- Imports declined 1.5% beating forecasts of a 10% drop and December’s 7.6% decline.
- Despite the relatively upbeat data, the Chinese New Year holiday which kicked off earlier this month may skew results as companies may place rush orders ahead of the holidays.
- Eurozone’s composite Markit PMI rose to 51.4 from a reading of 51 in January.
- While the service sector grew the manufacturing sector decreased for the first time since June 2013 largely driven by weak demand and a drop in new orders.
- It was the highest reading in three months.
- Similarly, Germany’s composite PMI was higher (52.7 versus January’s reading of 52.1) due to the services industry as manufacturing dropped for a second consecutive month.
- Manufacturing fell to 47.6, a 74-month low.
- Services increased to 55.1, a five-month high.
Key data/events this week:
- JPY Leading Economic Index (Monday)
- U.S. Chicago Fed National Activity Index
- Dallas Fed Manufacturing Index
- German Consumer Confidence (Tuesday)
- U.K. Inflation report hearings
- U.K. PM Theresa May speaks
- U.S. Building Permits/Housing Starts/S&P Case-Shiller Home Price Indices/Housing Price Index
- FOMC Chair Powell speaks
- U.S. Consumer Confidence
- NZ Trade Data
- Swiss ZEW Survey (Wednesday)
- EU Consumer Confidence/Business Climate/Economic Sentiment
- U.S. Durable Goods
- FOMC Chair Powell speaks
- CAD CPI
- U.S. Factory Orders
- U.S. Pending Home Sales
- U.K. Parliament debates on Brexit
- JPY Retail Sales/Industrial Production/Foreign investments
- U.K. consumer confidence (Thursday)
- CNY PMI
- Swiss GDP
- German CPI
- U.S. Q4 GDP
- U.S. Personal Consumption Expenditure Prices QoQ
- JPY CPI
- CNY Caixin PMI (Friday)
- German Unemployment Data
- U.K./EU/German/U.S. Markit Manufacturing PMI
- EU CPI
- U.S. Personal Consumption Expenditure Prices MoM/YoY
- U.S. Personal Spending
- CAD Q4 GDP
- U.S. ISM Manufacturing PMI
- U.S. ISM Prices Paid
