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by Charalambos Pissouros

Weekly Outlook: Mar 25 – Mar 29: Brexit, RBNZ Decision and More Trade Talks

Brexit will stay in the spotlight for another week, as a third “meaningful vote” on the withdrawal agreement could take place on Tuesday or Wednesday. With regards to central bank decisions, the torch will be passed to the RBNZ during the early Asian morning Wednesday, with investors eager to find out whether Governor Orr will stick to his guns and note that the next move in interest rates could be either up or down. On Thursday, US Trade Rep. Lighthizer and Treasury Secretary Mnuchin will travel to China for another round of trade negotiations.

On Monday, the only noteworthy piece of data on the calendar is the German Ifo survey for March. The forecasts suggest that the current assessment index slid to 102.9 from 103.4, but the expectations one rose to 94.0 from 93.8. The business climate index is expected to have risen to 98.7 from 98.5. The case for a decline in current assessment and a rise in expectations is supported by the ZEW survey for the month, the indices of which moved in a similar fashion.

Tuesday is relatively light as well in terms of economic data, with only a few releases worth mentioning. During the early Asian morning, New Zealand’s trade balance for February is coming out, with the nation’s trade deficit expected to have narrowed on a mom basis. Later in the day, from the US, we get building permits and housing starts both for February, as well as the Conference Board consumer confidence index for March. Building permits are forecast to have fallen 1.3% mom after rising 1.4% in January. Housing starts are also expected to have slid (-0.8% mom from +18.6). As far as the CB index is concerned, consensus is for a rise to 132.0 from 131.4.

Having said all that, the day could be marked by developments surrounding politics, and specifically the Brexit landscape, as a third “meaningful vote” on the withdrawal agreement could take place. Market chatter suggests that the UK Parliament will likely vote on Tuesday or Wednesday. Last week, at the summit in Brussels, EU leaders agreed to offer the UK an unconditional Brexit extension up until April 12th. If UK lawmakers support the withdrawal agreement this week, then the date will be pushed to May 22nd, in order to finalize the exit. If the deal gets rejected, the UK will have to offer a new plan on how to move forward or exit with no treaty.

In our view, even if it is now confirmed that we are not headed towards a no-deal Brexit this Friday, the picture does not get any brighter. We believe that this is a “kicking the can down the road" decision. The DUP is still not backing the withdrawal accord, and thus we see the chances of a positive vote in Parliament as very slim. The Prime Minister herself hinted on Friday that the vote could not even happen if there is not enough support. With PM May also noting that Article 50 should not be revoked, we believe that the risk of exiting in a chaotic manner was just pushed back by two weeks. Unless another alternative, like a snap election or second referendum, gets Parliamentary approval, something that may open the door for a longer extension. That said, consent from all EU 27 members would still be needed. All of them would have to judge any such alternative as credible before a longer delay takes flesh.

On Wednesday, during the early Asian morning, the Reserve Bank of New Zealand is set to announce its interest rate decision. This would be one of the “smaller” meetings that are not accompanied by updated economic projections, neither a press conference by Governor Adrian Orr. Therefore, if the Bank holds off from acting on rates as it is widely expected, all the attention is likely to fall on the meeting statement.

At the February meeting, the Bank maintained interest rates unchanged at +1.75%, while in the accompanying statement, Governor Orr reiterated that rates are expected to stay at this level through 2019 and 2020, bringing back the part saying that the direction of the next move could be either up or down. What’s more, in the quarterly Monetary Policy Statement, officials pushed back the timing of when they expect interest rates to start rising, from Q3 2020 to Q1 2021. A 25bps rate increase is now seen in Q2 of 2021.

RBNZ interest rates New Zealand

Since then, the only top tier data we got was the Q4 GDP. The qoq growth rate came in line with market consensus of +0.6%, which is double than the +0.3% for Q3. Although the Kiwi gained at the time of the release, a +0.6% growth rate is below the Bank’s own forecast for the last quarter of 2018, which is at +0.8% qoq.  Yes, the Bank could acknowledge the better-than-previously economic performance, but it is unlikely to alter its broader view with regards to future policy actions. We expect Governor Orr to stick to his guns and point that the “next OCR move could be up or down.”

As for Wednesday’s releases, we have trade data for January from both the US and Canada, as well as the US current account balance for Q4. Expectations are for the US trade deficit to have widened somewhat, to USD 60bn from USD 59.8bn in December, while the Canadian one is anticipated to have narrowed to CAD 2.8bn from CAD 4.6bn. No forecast is currently available for the US current account balance.

On Thursday, we get preliminary inflation data for March from Germany. Expectations are for both the CPI and HICP rates to have remained unchanged at +1.5% yoy and +1.7% yoy respectively. This could raise speculation that Eurozone’s headline CPI, due out on April 1st, may hold steady as well. At their latest gathering, ECB policymakers noted that the risks surrounding Eurozone’s economic outlook remain to the downside, even after they pushed back their guidance on interest rates and announced a new round of TLTROs. On Friday, Eurozone’s preliminary PMIs showed that the bloc’s manufacturing activity contracted further in March, dragging the composite index back down to 51.3 from 51.9. Thus, even in case inflation surprised somewhat to the upside, we doubt that it could raise bets that ECB officials will be tempted to alter their language around the economy sometime soon.

German vs Eurozone CPIs inflation

In the US, the 2nd estimate of the US GDP for Q4 is coming out and expectations are for a downside revision to +2.4% qoq SAAR from the preliminary print of +2.6%. At its latest policy meeting, the Fed noted that economic activity has slowed from its solid rate, and revised its rate path down to suggest no hikes this year, and only one in 2020. That said, the market turned even more pessimistic. According to the Fed funds futures, investors see only a 40% chance of the Committee standing pat this year, while they assign a 60% probability for cuts. They fully price in a 25bps decrease in April 2020. Thus, a downside revision, combined with the Atlanta GDPNow and the New York Nowcast models, which point to much lower prints for Q1 2019, may prompt market participants to increase their cut bets. US pending home sales for February are also due to be released and the consensus is for a slowdown to +0.5% mom from +4.6% in January.

US GDP qoq SAAR

Apart from the data, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to China for another round of trade negotiations. There is also a plan for a Chinese delegation led by Vice Premier Liu He to visit the US next week. Taking into account the outcomes of previous round of talks, we may get once again “further progress” remarks, but no final accord. The sealing of a deal is expected to happen at a meeting between US President Trump and his Chinese counterpart Xi Jinping, which according to market chatter could even be pushed back to June. So, having all this in mind, it would be interesting to see whether these talks will set the stage for the Trump-Xi meeting to happen earlier than anticipated.

Finally, on Friday, during the Asian morning, we get the usual end-of-month data dump from Japan. The Tokyo CPIs for March are coming out and while no forecast is currently available for the headline rate, the core one is anticipated to have ticked down to +1.0% yoy from +1.1% in February. A slide on the Tokyo core rate could increase the chances of a similar reaction in the National core CPI rate for the month, something that would add more credence to our long-standing view that BoJ policymakers are unlikely to alter their ultra-loose policy any time soon. Employment data, retail sales and preliminary industrial production, all for February are due to be released as well. The unemployment rate is expected to have ticked down to 2.4% from 2.5%, retail sales are anticipated to have accelerated to +1.1% yoy from +0.6%, while IP is forecast to have slid at a slower pace than in January (-2.5% mom from -3.4%). 

Japan CPIs inflation

During the European morning, the 2nd estimate of the UK GDP for Q4 is coming out and is expected to confirm its initial estimate, which showed that the economy slowed to +0.2% qoq from +0.6% in Q3, with December marking a month of contraction. That said, we already got data on how the economy entered 2019. The January GDP prints showed a rebound in monthly terms, with the 3-month rolling rate ticking up to +0.5% from +0.4%. Thus, we expect this release to pass unnoticed, especially in the midst of all this uncertainty surrounding Brexit.

In the US, personal income for February and personal spending for January are due to be released, alongside the core PCE index for January. Expectations are for income to have rebounded +0.3% mom in February from -0.1% in January, which is supported by acceleration in average earnings for the month. Spending for January is also expected to have rebounded, to +0.3% mom from -0.5%, supported by the rebound in January’s retail sales. As for the core PCE index, the Fed’s favorite inflation measure, it is anticipated to have remained unchanged at +1.9% yoy. New home sales for February and the final UoM consumer sentiment index for March are also scheduled to come out.

From Canada, we have the monthly GDP rate for January, and it is expected to have risen to +0.1% mom from -0.1%. Coming on top of the upside surprise in inflation data for February, a positive monthly GDP rate following two negative ones would be pleasant news for BoC policymakers. However, we doubt that it could tempt them to switch again their stance on monetary policy. At the latest meeting, they turned dovish, altering their view for more rate increases over time and noting that “the outlook continues to warrant a policy interest rate that is below its neutral range”. They also highlighted the uncertainty surrounding the timing their future actions. Thus, we believe that they would like to see more improvement in economic data before they get confident on further rate increases again.

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