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by Charalambos Pissouros

Weekly Outlook: April 08 – April 12: Brexit Deadline, ECB Meeting, US Inflation Data

This week will be a critical one with regards to Brexit. On Wednesday, EU officials will hold an emergency summit to discuss the matter and investors will be sitting on the edge of their seats in anticipation of whether the EU will allow another extension to the Article 50 in order to avoid a disorderly divorce on Friday. With regards to central banks, the ECB decides on monetary policy and we expect Draghi and co. to reiterate that the risks surrounding the Euro area outlook remain to the downside. We also get inflation data from the US, China, Norway and Sweden.

Monday and Tuesday appear to be relatively light days in terms of economic data and releases. Thus, with Friday, the new Brexit day, drawing closer, investors’ attention is likely to stay fixed on headlines and developments surrounding that front.

Just for the record, today, we have the US factory orders for February, as well as Canada’s housing starts for March and building permits for February. US factory orders are anticipated to have declined 0.5% mom after rising just 0.1% in January, while no forecasts are currently available for the Canadian data. On Tuesday, we only get the US JOLTs Job Openings for February, and the consensus suggests a modest slowdown, to 7.57mn from 7.58mn in January.

On Wednesday, the spotlight is likely to fall on an emergency EU summit dedicated on Brexit. With her deal being defeated thrice in Parliament, and MPs themselves failing to agree on any alternative, UK PM Theresa May decided on Friday to officially request from the EU another extension to Article 50, up until June 30th.  However, EU officials insisted that she has to present a viable plan on how the UK intends to move forward before another delay takes flesh, while according to what was agreed when the first extension was given, another delay should be a longer one, perhaps until the end of the year.

Thus, having in mind that there was no material progress in the talks between the government and the Labour Party (at least up until the time of writing), we see the case of Theresa May presenting a clear roadmap on Wednesday as a difficult task, while the hard stance from German, French and Dutch officials allows little room for another extension approval at the summit. Remember that consent from all 27 EU member-states is needed for that to happen. Unless EU officials soften their stance, or the UK finds a credible last-ditch strategy on how to move forward, the risk of a no-deal Brexit on Friday remains well on the table, despite UK lawmakers’ attempts to avert such an outcome.

Apart from the summit, we also have an ECB policy decision. At their last gathering, ECB officials pushed back their interest-rate forward guidance, noting that rates are likely to remain at current levels “at least through the end of 2019”, while they announced a new series of TLTROs, starting in September and ending in March 2021. What’s more, at the press conference, ECB President Draghi reiterated that the risk surrounding the bloc’s growth outlook are “still tilted to the downside”, even after proceeding with the aforementioned policy moves and even after the Bank slashed both its GDP and inflation projections.

ECB interest rates

Since then, Eurozone data continued to disappoint, with the bloc’s manufacturing PMI for March sliding further into the contractionary territory and hitting its lowest since January 2013. This pulled the composite index back down to 51.3 from 51.9. With regards to inflation, preliminary data showed that the headline CPI slowed to +1.4% yoy in March from +1.5%, but most importantly, the core rate slid to +0.8% yoy from +1.0%. All this suggests that the Bank will continue assessing the risks surrounding the Euro area economic outlook as being tilted to the downside, while following recent comments by President Draghi that policymakers could delay a rate hike even further if needed, investors may be eager to find out whether another push-back in the rate guidance will materialize at this meeting. Having said that though, we believe that Draghi and co. will refrain from doing so. After all, they changed their guidance just last month. Officials may prefer to wait for a while more, and perhaps assess whether they should delay raising rates further at the June gathering, when they will have the new staff macroeconomic projections in hand.

As for Wednesday’s data, during the European morning, Norway’s CPIs for March are coming out. The headline rate is forecast to have declined for the third consecutive month, but to have stayed well above the 2% inflation target of the Norges Bank. Specifically, it is expected to have declined to +2.8% yoy from 3.0%. The core rate is forecast to have slid as well, to +2.4% yoy from +2.6%, but this is following a surge from January’s 2.1%. At their latest meeting, Norges Bank policymakers decided to raise interest rates to +1.00% from +0.75% and noted that their current assessment suggests that the policy rate will most likely be increased again “in the course of the next half-year”.  In our view, although the CPI forecasts suggest that both rates would be slightly below the Norges Bank’s own projections for the month, we doubt that they will be enough to alter officials’ thinking around monetary policy. We believe that policymakers may prefer to wait for more data before they start examining whether they should change (or not) their guidance.

Norway CPIs inflation

From the UK, we get the industrial and manufacturing production data for February. Industrial production is expected to have slowed to +0.1% mom from +0.6%, but this would push the yoy rate a tick higher, to -0.8% from -0.9%. The manufacturing output is also expected to have slowed, to +0.2% from +0.8%, with the yoy rate rising to -0.6% from -1.1%. Nonetheless, bearing in mind the slide in the manufacturing PMI for the month, we view the risks surrounding the forecasts as tilted to the downside. The nation’s trade balance and the monthly GDP, both for February, are also due to be released. Expectations are for the UK trade deficit to have narrowed somewhat, to GBP -12.8bn from -13.1bn, while the monthly growth rate is anticipated to have declined to +0.2% mom from +0.5%. Having said all that though, with just two days before April 12th, the new Brexit date, we expect these releases to pass unnoticed. We expect GBP-traders to keep their gaze locked on headlines surrounding the political scene, and specifically the Brexit EU summit in Brussels.

UK industrial production vs manufacturing PMI

Later in the day, the US CPIs are coming out. The headline rate is expected to have rebounded to +1.8% yoy from +1.5%, but the core one is anticipated to have stayed unchanged at +2.1% yoy. At its latest meeting, the FOMC downgraded its rate path projections, scraping from its “dot plot” the 2 previously-suggested rate hikes for 2019. Officials also noted that the economic activity has slowed from its solid rate in Q4 2018, prompting market participants to turn even more pessimistic with regards to the Committee’s future actions. According to the Fed funds futures, investors currently see only a 44.5% chance for no action this year, while there is a 55.5% probability for interest rates to be lower. Specifically, there is a nearly 40% likelihood for one cut, around 13.5% for two, and even a small 2% for three. Thus, having that in mind, we doubt that a rebound in the headline CPI rate, still below the Fed’s target, would be enough to revive hike bets, especially with the core CPI staying unchanged just a tick above 2%. Decent results could just allow investors to take some of their cut bets off the table. We also get the minutes from the latest FOMC meeting, but bearing in mind that apart from the statement, we also got updated economic projections, a new “dot plot”, and a press conference by Chair Powell, we believe that there is little new information we can get.

US CPIs inflation

On Thursday, during the Asian morning, China’s CPI and PPI for March are scheduled to be released. The CPI rate is expected to have risen to +2.4% yoy from +1.5%, while the PPI is forecast to have accelerated to +0.4% yoy from +0.1%.

Later, in Europe, we get Germany’s final CPIs for March, but as it is the case most of the times, the final numbers are expected to confirm their preliminary estimates. We get inflation data for March from Sweden as well. Both the CPI and CPIF rates are expected to have ticked down to +1.8% yoy from +1.9%. The fact that both rates may slide further below the Riksbank’s inflation target is unlikely to be pleasant news for Swedish policymakers, but as we noted in the past, we prefer to pay more attention to the core CPIF metric, which excludes energy. Since the previous meeting, both January and February inflation data disappointed, with the core CPIF rate staying at +1.4% yoy. That said, GDP data showed that the economy expanded twice as fast as was anticipated in the last quarter of 2018, while Riksbank’s Deputy Governor Cecilia Skingsley noted that the plan remains for higher interest rates later this year, even with inflation below the 2% objective. So, having all that in mind, we believe that a rebound in the core CPIF rate may increase speculation for a Riksbank hike in 2019, but another slide may raise concerns on that front. Yes, Skingsely said that a hike could come even if inflation is below 2%, but an underlying rate of +1.3%, or lower, will be far from warranting such a move in our view.

Sweden CPIs inflation

In the US, the PPIs for March are due to be released. We usually use the PPIs as a gauge of where the CPIs may come in, but bearing in mind that, this time, producer prices are coming after consumer prices, we will pay less attention than usual. In any case, both the headline and core rates are expected to have held steady at +1.9% yoy and +2.5% yoy respectively.

Finally, Friday is the day when the UK could exit the EU in a disorderly manner if the UK fails to present a viable plan on how it intends to move forward and as a consequence, the EU rejects any further delay requests (See Wednesday).

As for Friday’s data, Asian time, China’s trade data for March are coming out. Expectations are for the nation’s trade surplus to have increased to USD 8.8bn from USD 4.1bn. Exports are expected to have rebounded +7.3% yoy from -20.8%, while imports are anticipated to have fallen at a slower pace than in February (-1.3% yoy from -5.2%). Following the better than expected PMIs for the month, a rebound in Chinese exports, combined with a potential rise in both the CPI and PPI rates, may ease further concerns with regards to the state of the world’s second largest economy.

China exports vs imports yoy

From the Eurozone, we get industrial production for February, while from the US, we have the preliminary UoM consumer sentiment index for April. Eurozone’s IP is expected to have declined 1.0% mom after rising 1.4% in January, while the UoM sentiment index is anticipated to have slid to 98.0 from 98.4 in March.

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