Week Ahead: China returns, lots of macro events and Brexit

We saw a U-turn in risk-sensitive assets in mid-week as stocks, crude oil and commodity dollars all fell after a bright start. The “risk-off” trade continued to dominate the agenda on Friday when this report was written, with US indices hitting new lows on the week. Investors are concerned by growing evidence of a slowdown in global economy. We have seen several major central banks turn dovish at the same time over the past few days. This is probably alarming some investors, which may explain why stocks have failed to sustain their rally. At the same time, though, this is good news for bond prices and noninterest-bearing and low-yielding assets such as gold and silver. After the Fed’s dovish turn last week, we have seen the RBA deliver a dovish outlook on interest rates earlier this week, while the BoE indicated on Thursday that monetary policy in the UK will remain accommodative for even longer due to Brexit uncertainty. A few weeks ago, the ECB appeared a tad more dovish than expected.

Next week could be even more volatile given that China will return after being out in observance of the spring festival for the whole of this week. In addition, there will be lots of potentially market-moving data to look forward to, not least growth figures from Germany. On top of this, Brexit will remain in focus as a desperate UK Prime Minister Theresa May struggles to re-negotiate the withdrawal agreement with the EU leaders. The European Commission President Jean-Claude Juncker has ruled out legally-binding changes to the backstop clause. Instead, Mr Juncker has indicated that the EU would be open to making small changes in the non-binding future relations document that goes with the withdrawal agreement. It remains difficult to predict what will happen next, but evidently things don’t look great. Mrs May is likely to put any deal she manages to re-negotiate with the EU to a vote in the Commons towards the end of the month. 

With that in mind, it is difficult to see how the pound will react to next week’s upcoming macro pointers from the UK. But other currencies, stocks and commodities could move sharply next week. We have lots to look forward to. Below is a summary of the highlights: 

Monday: UK GDP (both monthly and quarterly), manufacturing production and business investment 

• The above UK data should provide us with further clues how the Brexit uncertainty is impacting the economy.
• So far, we have seen only mixed signals from the economy, although the more up-to-date PMI data suggests businesses and individuals are delaying their purchasing plans as the Brexit debate enters crucial stage with the March 29 exit date fast approaching.
• This week saw the BoE publish weak forecasts on GDP, but the pound quickly rebounded as investors realised the Bank’s forecasts were plucked out of thin air. Brexit uncertainty is making it VERY difficult to predict what might happen to the economy with any degree of confidence.

Tuesday: A quiet day for data, but the markets could remain volatile nonetheless given the sharp falls we saw in equity markets towards the end of this week. 

Wednesday: RBNZ, UK and US CPI data 

• The Reserve Bank of New Zealand (RBNZ) policy decision will take place in the early hours of Wednesday (01:00 GMT) and will be followed one hour later by the RBNZ press conference and the Bank’s quarterly release of NZ inflation expectations data for the current quarter.
• The RBNZ is highly likely to keep monetary policy unchanged and hold interest rates at the current level of 1.75%, where they have been since November 2016. Prior to that, the RBNZ had been on a policy loosening cycle that re-started in June 2015, after it had somewhat prematurely started a hiking cycle in 2014.
• Recent data from New Zealand has been poor:
  • The fourth quarter employment data surprised to the downside on Wednesday, despite it consistently beating expectations in the prior quarters. Employment rose by only 0.1% rather than 0.3% expected while the unemployment rate jumped to 4.3% from an upwardly revised 4.0% in Q3.
  • The latest CPI estimate was 0.1% q/q which was actually a tad higher than expected (flat)
  • The most recent GDP estimate was +0.3% for Q3 rather than +0.6% expected and compared with +1.0% in Q2.
  • Quarterly headline retail sales were flat in Q3, compared to a 1.0% rise expected. Core sales were up 0.4%, but this measure also missed expectations quite badly.
• Given the above overall weak-than-expected data, and a slowing Chinese economy, the RBNZ is likely to be a bit more dovish than expected at this meeting. The central bank will also be aware that several other central banks have also turned dovish recently, not least the Fed and the RBA. So, it wouldn’t want to be the odd one out, and irrationally cause the exchange rate to appreciate. The NZD/USD and other kiwi crosses could therefore drop.

 

• UK CPI will also be released on Wednesday. Although important, in the grand scheme of things, not many people will pay much attention to it because of Brexit, as mentioned above. Anyway, headline CPI is expected to have eased to +1.9% from +2.1% previously while core CPI is expected to have remained unchanged at +1.9%. 
• US CPI will be very important for the dollar given that the Fed has turned “data-dependant.”
  • We have seen the dollar react positively to last week’s NFP and ISM manufacturing PMI data, although the rally has faded somewhat by the end of this week.
  • If CPI were to disappoint expectations, then the greenback could come under renewed pressure given that the Dollar Index has now reached the 96.70 resistance level again.
  • Headline CPI is seen rising 0.1% in January after its 0.1% drop the month before, while core CPI is expected to have risen by another 0.2% month-over-month.

Thursday: Important macro numbers from China and Germany could exacerbate growth fears or potentially ease concerns in the unlikely event we see positive surprises.

• Japan’s GDP (released late in the day on Wednesday) is not usually too important but because of recent worries over global growth, any surprises here could see risk assets take another hit. Analysts expect Japan’s economy to have expanded 0.4% in Q4 vs. a surprisingly large 0.6% contraction in Q3. A second quarter of negative growth would mean recession.
• China’s trade data is always important, but more so now than usual because of concerns over the world’s second largest economy.
  • The focus will be both on the imports and exports figures with so much attention being on China recently. The imports data will give us an indication of the health of the domestic economy, while the exports data will reveal a snapshot of the level of demand from the rest of the world for Chinese goods.
  • Sentiment is quite negative, so the bigger surprise would be if the data were to beat expectations.
• German and Eurozone GDP estimates may garner a lot of attention on Thursday – for all the wrong reasons.
  • German GDP contracted by 0.2% in the third quarter of 2018, and some commentators think the Eurozone’s largest economy may have fallen in a technical recession in Q4. However, the consensus forecasts point to a modest 0.1% rebound in growth. Needless to say, another contraction could send EU stocks and euro both sharply lower.
  • Eurozone GDP will be released slightly later in the day, and this will most likely be a non-event as we will already have the German GDP to take into account. Growth in the single currency bloc is expected to have expanded by 0.2% again, similar to Q3.
• US retail sales are expected to have remained flat month-over-month on the core front but rose 0.1% on the headline front.

 

Friday: Quieter day for data with Chinese CPI, UK retail sales and US industrial production being the highlights. We doubt any of these figures will be market-moving.