Week in Focus – Week Commencing 30th April 2018
Monday: German CPI (Prelim), US PCE
Tuesday: RBA Rate Decision, UK Manufacturing PMI, Canadian GDP, US ISM Manufacturing
Wednesday: NZ Labour Market, China Caixin Manufacturing PMI, EZ Manufacturing PMI, EZ GDP, UK Construction PMI, US ADP Employment, US Refunding announcement, FOMC Decision
Thursday: Caixin China Services PMI, Norges Bank rate decision, EZ CPI (Prelim), UK Services PMI, US Trade Balance, ISM Non-Manufacturing
Friday: RBA SoMP, EZ Services PMI, US NFP
ISM Surveys: Both the manufacturing (Tuesday, 1500BST) and the non-manufacturing (Thursday, 1500 BST) are on the slate for release. The Street looks for the manufacturing survey to cool slightly to 58.6 from 59.3, while the non-manufacturing survey headline is seen moderating a touch to 58.4 from 58.8. Given it is a week when payrolls are released, the manufacturing survey’s employment sub-component will be eyed (previous 57.3, no forecasts), though the non-manufacturing data will be released after the Employment Situation Report.
Treasury Quarterly Refunding (Weds, 1330BST): The key question heading into next week’s Quarterly Refunding Announcement is to what extent policymakers will act pre-emptively to meet the rising financing need of the next couple years, Wells Fargo says. Wells estimates that the Treasury’s financing need for the April-December period will be approximately $720bln, though its base case into next week’s refunding remains for $630bln to be announced in net coupon issuance, and $554 billion in net T-bill issuance (in calendar year 2018). “To meet this need, the Treasury could increase auctions at its next couple of refunding meetings, or it could pause at this meeting to evaluate different funding options and provide guidance to markets in a lead up to more aggressive changes at the August refunding.” Attention will be on any hints that Treasury will meet some of this financing need with new securities, which would alleviate some of the pressure to ramp up bill supply and/or coupon auctions, Wells says; “Potential options include another 5-year TIPS maturity or introducing new 2-month, or 20-year Treasury securities.”
FOMC (Weds, 1900BST): The FOMC is widely expected to keep policy unchanged at its May meeting, with money markets pricing a mere c.7% probability of a hike, according to the CME’s data, and generally, the tone of Fedspeak hasn’t signalled that a hike will be forthcoming in May. There is probably a higher chance that the meeting will be a damp squib, given that there will be no post-meeting press conference with chair Powell, nor is there any updated economic forecasts. Attention will therefore fall on the FOMC’s statement: the March meeting made clear that while some participants are worried about policy risks from overheating, Powell, as well as other FOMC participants, are data in dependent mode, and are not eager to prejudge the effects of fiscal stimulus, UBS says, and “moving at a non-press conference meeting would signal just the opposite.” UBS says that incoming data since the March meeting is unlikely to have altered the Committee’s view too much regarding economic fundamentals. “The labour market was strong on average in the first quarter, and the Fed is now accustomed to fading Q1 GDP wherever it lands. The YY pace of core inflation has accelerated as expected.” UBS says that on balance, there is little reason for the FOMC’s forecasts to shift, and it expects the statement to reflect that stability, with little change to the first paragraph (which describes recent data) and the second paragraph (which describes the economic outlook). And accordingly, the fourth paragraph (detailing the policy outlook) will also likely be unchanged.
Employment Situation Report (Friday 1330 BST):O. The jobless rate is seen ticking down 0.1ppts to 4.0%. Average earnings are seen rising 2.7% YY, matching the pace of the March rise; the MM rate is seen at 0.2%, a toucher easier than the 0.3% seen previously. Nevertheless, Capital Economics posits that, if the medians are realised, it would still be consistent with a solid run of wage growth in recent months, with hourly earnings growth on a 3m/3m basis at the best levels in a decade, and the consultancy says this will keep the FOMC on its hiking trajectory.
This week sees somewhat of a pick-up in EZ data with PMIs (Wednesday), GDP (Wednesday, 1000 BST) and CPI (Thursday, 1000BST) from the region all due for release. This week’s PMI figures from the region are the final prints for the month of April and, as such, are set to take somewhat of a backseat on the data front with manufacturing (Wed) and services (Fri) expected to be unrevised at 56.0 and 55.0 respectively. As such, focus for the region on Wednesday will more likely fall on the Q1 prelim EZ GDP prints with Q/Q expected to slip to 0.4% from 0.6% and Y/Y expected to decline to 2.5% from 2.7% in the wake of some of the adverse economic conditions endured during Q1. That said, RBC mainly attributes that slowdown to “weather related factors, in particular a cold snap that affected much of Northern Europe, rather than heralding a more permanent slowdown”. However, Oxford Economics argues that “it looks certain that the economy has passed its growth peak as last year’s boost from global trade fades and trade worries begin to take their toll”.
On the inflation front, Germany kicks off proceedings on Monday with both regional and national metrics due for release with the latter set to see Y/Y remain at 1.6% and the M/M tick modestly higher to 0.5% from 0.4%. The EZ-wide report comes on Wednesday with headline CPI set to rise to 1.4% from March’s 1.3%, ahead of which, ING says that “there is not much in it to expect a sudden jump this month – or next for that matter – meaning that a dovish ECB continues to be the best bet for now”.
In the UK, April’s PMI figures (Manufacturing on Tuesday, Construction on Wednesday and Services on Thursday) will take centre-stage from a data perspective with the releases broadly set to be guided by a rebound in some of the adverse weather-effects seen in the March prints which unexpectedly knocked the construction sector into contractionary territory. More specifically, RBC states that “generally some rebound from last month’s subdued weather-disrupted March surveys is expected”. Ultimately, any reaction to the figures is likely to be relatively short-lived given last week’s lacklustre UK Q1 GDP prints. As such, even a blockbuster set of PMI figures is unlikely to reverse expectations for a BoE hike in May with the likes of UBS, RBS and JPM all downplaying their likelihood of a 25bps move by the MPC alongside their next QIR.
Norges Bank (Thursday, 0900 BST): Norway’s central bank is expected to keep rates unchanged at 0.50% at the end of its meeting next week. Like most of Europe, recent data has been weaker than expected and inflation in Q1 was softer than the Norges Bank had forecast, but analysts at Capital Economics still do not expect any change to its rate guidance: “We think that the Bank will acknowledge the weakness of recent hard data. But survey measures of activity, such as the Norges Bank’s output expectations indicator, suggest that the economy will bounce back,” and as a result, it is expected that the Norges Bank will repeat its guidance that “the key policy rate will most likely be raised after summer 2018.” CapEco also points out that the Norges Bank’s guidance and forecasts have tended to come in on the hawkish side, and given the risks of tightening policy too soon, CapEco still thinks that it will wait until Q1 2019 before raising interest rates.
RBA (Tuesday, 0530 BST): The Reserve Bank of Australia (RBA) meets on Tuesday and the central bank is expected to keep the official cash rate unchanged at 1.50% for the 19th consecutive meeting. Recent commentary from RBA officials has dampened any expectations that they could be following the Fed any time soon and hiking rates, with the latest minutes showing that the board was in agreement that there was not a strong case for a near term move in policy. Since the most recent minutes, Australia has released inflation figures for Q1, but these are unlikely to have altered the RBA’s thinking ahead of this meeting, and as such, the RBA should remain on hold. The SoMP released on Friday includes economic forecasts and Capital Economics suspects the central bank will revise lower growth but likely stick to its forecast that inflation will “rise to 2.0% by early 2019 and 2.25% by mid-2020.”
NZ Jobs (Tuesday, 2345 BST): Across the Tasman, New Zealand releases labour market data on Wednesday (Tuesday evening UK time) with the unemployment rate expected to tick lower to 4.4%, the lowest since Q4 2008. “The employment index of the ANZ business survey in March rose above its long-run average for the first time since October,” writes Capital Economics. They say this suggests that around 15K jobs were created in the quarter which would be a touch higher than the 12K created in Q4 2017.
There’s a plethora of PMI releases from across Asia throughout the week with the highlight being the Chinese Caixin Manufacturing and Services releases on Wednesday and Friday respectively. The Manufacturing reading is forecast to moderate to 50.8 from 51.0 as potential trade war fears could weigh on sentiment, with China the main irk of US President Trump. Sticking with the trade war theme, South Korea is the first major nation to release trade data this month. “Our main focus will be semiconductors, the backbone of Korea’s exports,” writes ING in a client note. “An upswing in the global electronics cycle last year boosted semiconductor exports from Korea by a whopping 57% on the year in 2017. The strength continued in 2018 with a 46% rise in the first quarter of the year.” Since then, a number of key chipmakers, who supply companies such as Apple and Samsung, have downgraded their sales forecasts, and markets will be looking for whether the announcement of trade tariffs last month will have any lingering effect on exports.