Good Morning: The Long & the Short of it and The Bigger Picture - 14 January 2019 - ADM ISI
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Ostwald, Marc
08:25 (15 minutes ago)
to Marc
- Digesting weak China trade data, but focus likely on politics as statement
from UK PM May this afternoon ahead of Brexit tomorrow, and as US govt
shutdown still shows no sign of resolution
- China Trade: clearly weak, but closer inspection reveals incorrect
assumptions, domestic / sector specific factors as significant as
trade war factors
- Week Ahead: relatively busy week for data in China, US, UK, along with
German GDP and Japan Orders; plenty of Fed speak and even more politics;
US corporate earnings season gets under way with raft of financials
- Charts/Tables: S&P 500 profits forecasts, Asia stock indices & China
commodities trade (source: Reuters / Refinitiv)
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** EVENTS PREVIEW **
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Asia dominates an otherwise quite modest schedule of data and events to start the week, with the focus on digesting the China Trade and Indian WPI data ahead of Indian CPI, with Japan on holiday, and any news relating to measures the Chinese authorities are planning to implement to boost its stuttering economy also in view. But with Tuesday's UK parliamentary vote on Brexit looming (amid weekend reports of a delay in Brexit and a statement on Brexit to parliament this afternoon), and any developments in the longest ever US govt shutdown, it is likely that politics will once again rule the roost in terms of market moving headlines. European political developments have hardly been encouraging either, be that the latest round of 'gilets jaunes' protests in France, or the stabbing of the long serving and immensely popular mayor of Gdansk, who is in a critical condition.
The headline China Trade data were clearly considerably worse than forecasters, with both exports and imports posting falls as against projections of modest gains. However as the week ahead preview noted below, the forecasts were predicated on assumptions about soybean and other agri imports, which are more likely to show up in the January trade data. Meanwhile the 'levelling off' of exports to beat trade tariffs proved more substantial, and the impact of the slide in commodity prices (and the rebound in the CNY vs. the USD) was also very evident. Indeed the real story when looking through the various commodity components (ex. Agri) is that the weakness in Copper and Iron Steel owed far more to weak margins and environmental and related quality controls, than trade wars, with the 7.8% y/y 2018 growth in exports slower than 2018, but nevertheless still solid given all the headwinds. Indeed the continued strength in energy imports (and product exports) along with Aluminium exports really does emphasize that framing an analysis of this month's in "trade wars" terms is far too narrow a perspective, which is both glib and myopic, particularly as anticipation of trade tariffs has clearly been heavily distorting this data series for nearly months, thus rendering any typical seasonal patterns irrelevant. It should also be noted that raw materials prices should get an overall boost, as a rush of more than CNY 1.0 Trln of railway projects have been approved in the past months, which will also result in a rush of municipal bond issuance.
RECAP - The Week Ahead - Preview: 14 to 18 January 2019
It will be a busy week for major data in the UK and US, even though the US Retail Sales and some housing data will not be published due to the govt shutdown, with China Trade, German preliminary 2018 GDP and Japan Orders also due. Tuesday evening's UK parliament vote on the Brexit 'deal' gets top billing in event terms, with a raft of Fed speakers accompanying the latest Beige Book, an testimony from both Draghi and Carney also on the central bank speakers' schedule. Progress on US China Trade talks and just as importantly US EU talks will be carefully monitored, as will the latest OPEC monthly Oil Market Report. The US Q4 earnings season gets underway, with financials as ever dominating the first salvo of reports, while a more modest week awaits in terms of govt bond auctions, with the US selling 10-yr TIPS, Germany 30-yr, Spain offering a variety of 2 to 10-yr Bonos, while a 15 yr syndicated sale may materialize for Italy, though there is talk that this may not appear until early February.
== Chinese Trade data gets the week under way, and is forecast to show a further deceleration in export growth to just 3.0% y/y vs. Nov 5.4%, and a modest bounce in Imports to 4.9% y/y from Nov 3.0%, which implies a wider Trade surplus of $51.6 Bln. The forecasts assume some easing in US imports of consumer goods as the rush to beat tariffs levels off, while Chinese imports of agricultural and energy goods are seen boosting imports, though the fall in commodity & energy prices may provide a hefty offset. Monetary and Lending aggregates, Auto Sales and Property Prices are also due, as a relatively early Lunar New year on the 25th January looms in the headlights.
In the US, PPI is expected to echo CPI in showing energy prices weighing heavily at the headline level, but core measures continuing to post an 'around average' rise of 0.2% m/m to push the y/y rate up to 3.0%, with Trade Services as ever the major wildcard. Industrial Production is expected to slow to 0.2% m/m after jumping 0.6% in November on utilities and mining, with Manufacturing Output projected to bounce from a flat m/m in November to 0.3%. The first of the January regional Manufacturing surveys are seen edging up modestly from weaker than expected levels. However sub-indices on activity, pricing and hiring will require attention, in so for as the headline falls in some surveys have notably disguised strength in many components (most recently the NFIB), which suggest Main Street is taking on board the gloom and doom from Wall St, even though actual business levels remain solid. The NAHB Housing Index is expected to be unchanged at its three and a half year low of 56. The UK has the full gamut of inflation data on hand, which is expected to see a modest 0.2% m/m rise in headline CPI, pushing the y/y rate down to 2.1% from 2.3%, with core unchanged at 1.8% y/y, while as elsewhere PPI Input will benefit from the slide in wholesale energy prices, with PPI Output remaining well contained. As is well documented, UK Retail Sales in the November through February period frequently see a run of outlier readings, and the consensus for -0.8% m/m reflects not only weak survey data, but also the very overstated 1.4% m/m November surge (due to Black Friday sales). The RICS House Price balance is also due and seen dropping to an even gloomier -13 from -11.
Perhaps the most closely watched item on the week's data schedule may well be the preliminary German 2018 GDP estimate, which is forecast to see a fall to 1.5% y/y vs. 2017's 2.2%, with anything weaker implying that Q4 GDP (which is not due until February) will again be negative, thus confirming that in technical terms Germany was in recession in H2 2018. However it should be noted that even if this does prove to be correct, Q1 2019 should see a substantial rebound on a combination of carry over effects and very benign base effects (due to Q1 2018 GDP) being very weak.
Japanese Private Machinery Orders should according to the consensus continue their recovery from their weather and natural disaster related collapse in September, with a 3.0% m/m increase seen following October's 7.6%. Elsewhere Swedish CPI is seen unchanged in yr/yr terms and at (2.0% headline) or near (2.1% core) the Riksbank's target. Australia's Housing Finance will also be closely monitored (exp. -1.5% m/m vs. Nov +2.2%) in the context of accelerating house price falls, and related RBA concerns about household spending and debt. India WPI and CPI are due, and should dip further on the back of a firmer INR and falling commodity / energy prices, while Canadian CPI is seen little changed at 1.9% y/y on all measure, underlining why the BoC is rather more focussed on growth, wages and exports in terms of its short to medium-term policy outlook.
== The Fed's Beige Book has perhaps rather poignancy, both in terms of whether it does offer any signals that the US economy is starting to slow in a meaningful as markets are anticipating, as well as the dearth of monthly activity reports due to the government shutdown. This will also be the final week before the FOMC goes into 'purdah' ahead of its Jan 29/30 meeting (which will have a Powell press conference as all meetings from now), and there will be a further raft of Fed speakers on hand. ECB and BoE speakers are rather less plentiful, though Draghi will testify to the European Parliament on the ECB's annual report, and BoE's Carney perhaps poignantly testifies on the BoE's latest Financial Stability report on the morning after the 'meaningful' vote on the Brexit deal. In the EM space, there are monetary policy meetings in South Africa, Turkey and Indonesia, all of which are expected to see key policy rates on hold, with forecasters divided on whether Kazakhstan's central bank will hold rates or hike 25 bps.
== At the time of writing, there appears to be chance that the 'deal' will be approved, despite the efforts of many members of PM May's Cabinet (even pro-Brexit ones) to urge their parliamentary colleagues to back it. Fundamentally the Irish border 'backstop' is the primary objection, though the truth of the matter has for a considerable period of time been that a 'No deal Brexit' (i.e. hard) has been the default position, not because that is what the majority of Parliament wants, but very simply because no option commands a majority. Thanks to the past week's votes, the government will then have to inform Parliament and the public what 'plan B' is within 72 hours, with the indications pointing to an extension of Article 50, presumably for 6 months. While this would avoid the feared debacle on 29th March, it will do nothing to change the parliamentary arithmetic, though it could usher in a second referendum, which still appears a more likely outcome than a general election, which neither major party really wants, and could easily end up with yet another hung parliament.
== As regards the US earnings season that gets under way this weeks, equity analysts have been cutting their estimates so sharply, that they are collectively the most downbeat since Q1 of 2015, which in effect has lowered the bar so heavily in terms of surprises, that the risk is now skewed heavily to positive surprises. One component that will however need to be very carefully watched is what happens with buyback and dividend announcements, in so far last year's tax cuts may well have brought forward some of these, and thus prove to have been a case of 'robbing Peter to pay Paul', perhaps all the more so given rising concerns (above all given extra emphasis by Fed's Powell recently & Brainard last year) about the rapid accumulation in recent years, and overall high levels of corporate debt, and the risks that this poses going forward.
