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Good Morning: The Long & the Short of it and The Bigger Picture - 15 January 2019 - ADM ISI


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Ostwald, Marc
08:35 (7 minutes ago)

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- All eyes on Brexit vote, though plenty of news from China to digest ahead
of preliminary 2018 German GDP and US PPI; Draghi testimony and Fed
speakers; JP Morgan and Wells Fargo top US earnings run

- Germany GDP: set to slow sharply, focus on implications for Q4 GDP, but
H1 2019 set for base effect and carry over boost

- US PPI: energy to weigh heavily on headline, services (Trade, construction)
continue to pace gains in core

- China: focus on fiscal stimulus measures misplaced, as PBOC continues
to squeeze leverage and liquidity, and credit conditions still v tight

- Brexit vote: meaningful or in truth meaningless?

- Chart: Basel III capital requirements
..........................................................................

********************
** EVENTS PREVIEW **
********************

It's the Brexit vote day, though there are other items on the data and non-political events schedule which should at least attract some attention, kicking off with the preliminary 2018 German GDP estimate ahead of US PPI and tonight's Japanese Machinery Orders, while there is testimony to the EU parliament from Draghi on the ECB's annual report, as well as a number of Fed speakers. JP Morgan and Wells Fargo head the roster of US corporate earnings, as the Detroit Auto Show 2019 continues. Otherwise the overnight run of news out of China bears some scrutiny beyond markets' narrow focus on that magic word 'stimulus', in this case upping fiscal expenditure. However the December and 2018 monetary aggregates and lending data continue to signal that credit conditions remain very tight, and the PBOC's move to 'only' inject CNY 80 Bln via 7-day reverse repos (expiring just before Lunar New Year, at which point it will inject more for seasonal reasons), but at the same time confirming that it has no plans to replace the CNY 390 Bln of expiring MLF loans, means that it is on balance continuing to drain liquidity, and is seeking to offset that with the 100 bps of RRR cuts that it had already announced.

** Germany - 2018 preliminary GDP **
- Estimates for today's preliminary 2018 GDP range from 1.4% to 1.7%, with the consensus at 1.5% y/y. The question that remains open is whether Q4 GDP contracted, which based on the October and November Industrial Production looks to be yes, even if at a more marginal 0.1% q/q (vs Q3 -0.3%), though a combination of a rebound in this in December, and a rebound in Private Consumption and a solid contribution from Government spending could avoid such an outturn. However the Auto sector still looks to be struggling along with the broader Capital Goods sector, and with Construction appearing to have suffered a reactive correction to prior quarter's strength, the risks of a 'technical recession' look to be quite high. However, as previously noted, 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). But with markets now eyeing just one ECB rate hike by the end of 2020 (yes, 2020), and both France and Italy misfiring, a likely modest rebound in Germany may prove to be of limited comfort.

** U.S.A. - December PPI **
- 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 (last 1.6% m/m) as ever likely to be the major wildcard. As for the NY Fed Manufacturing survey, this is seen dipping marginally to 10.0, after it posted a steep fall to 10.9 (19 month low) in December from 23.3. But as noted previously, 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 suggests that Main Street is taking on board the gloom and doom from Wall St, even though actual business levels remain solid.

** U.K. - Brexit vote **
- There are two observations to be made: a) as noted in the week ahead there appears to be no chance that the 'deal' as agreed 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. b) The fact that Parliament will start by voting on various amendments to the deal, be that sunset clauses for the Northern Ireland 'backstop' or blocking 'no deal' Brexit, means it could be a long time before they get to the 'vote proper', which will not be the 'vote proper' because it will not be what is on offer from the EU - i.e. resulting in more gridlock. If the vote does fail, then thanks to last 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, though this could prove difficult given the proximity of the EU parliament elections in May. While this would avoid the feared debacle on 29th March, it will do nothing to change the parliamentary arithmetic, though it could possibly usher in a second referendum, which still appears a more likely outcome than a general election, which neither major party (nor the DUP) really wants, and could easily end up with yet another hung parliament.
 
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