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Dentalfloss · May 13, 2019

Good Morning: The Long & the Short of it and The Bigger Picture - 13 May 2019 - ADM ISI

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Ostwald, Marc

08:47 (1 hour ago)

to Marc

- Quiet start to the week in terms of scheduled data and events: digesting
Norway GDP, awaiting India CPI and Fed speak; weekend news flow on US
China trade and 'sabotage' oil tanker 'attacks the talking points

- Week Ahead: US and China dominate data schedule, plenty of Fed speak,
political risks still dominant; oil also looking to monthly OPEC report

- Charts CNY spot/1-yr NDF, CNH and Brent, CFTC positioning

- Morning preview audio version:
https://www.mixcloud.com/MOstwaldADM/adm-isi-morning-call-13-may-2019/

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** EVENTS PREVIEW **
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The week gets off to a fairly subdued start in terms of scheduled data and events, with no G7 data, and otherwise just the slightly weaker than expected Norwegian Q1 GDP to digest ahead of Indian CPI, while the events schedule has some Fed speak from Rosengren and Clarida, with only a smattering of corporate earnings. As such it is and will be the political backdrop which continues to dominate, and markets would do well (even if they more than likely will not) to consider how the 'positivism' of their reaction function continues to be wrong footed, the latest example being Friday's recovery in response to the Trump tweets on China trade negotiations. Be that as it may, the weekend headlines on US/China trade negotiations on balance point to a hardening of positions, even if one can put a positive spin on the willingness to keep talking, but the point remains there is nothing scheduled currently, and Trump has imposed a one month deadline. The FX market is probably overjoyed that at least CNY/CNH spot and NDF price action is trending and volatile, even if the fact that the 1 yr NDF is leading the move tends to suggest that the move is far more speculative, rather than being engineered by the Chinese authorities. We have been here many times before, and those suggesting that a break of the key spot CNY rate of 7.00 is imminent are again plentiful. The question is thus: 'is really different this time?' The other focal point are the "sabotage attacks" on four oil tankers (2 of which were Saudi owned) close to the UAE coast over the weekend, which has seen Brent oil future break its recent downtrend. However there appears to be a very high volume of fake news surrounding this, and actual concrete evidence is notable by its absence - see Twitter feeds from Reuters Amina Bakr @Amena__Bakr and Tankertrackers.com's Samir Madani @Samir_Madani for updates.

RECAP: The Week Ahead - Preview: 13 to 17 May 2019

- For all that the new week brings plenty of major data, above all from the US and China, and as much as there will be a lot of Fed, ECB and other central bank speakers, it is clear that US/China trade talks remain front and centre for financial markets, with the Brexit impasse also getting an honourable mention, along with renewed tensions in and economic challenges for the Italian governing coalition. The flow of corporate earnings will still be plentiful, but starts to ease off in the US. Govt bond supply picks up in the Eurozone to a total of around EUR 17.0 Bln, mostly from France and Italy, along with an as ever tiny 30 yr sale in Germany, as the UK launches a new 2054 conventional Gilt via a syndicated sale. Oil markets will eminently be keeping a close eye on those US/China trade talks and how China responds to the latest US tariff increase, above all its implications for the global growth outlook and by extension oil demand. But it also has the latest monthly OPEC Oil Market Report to digest, as well as watching for any fall-out and/ or disruption from the Houston Ship Canal closure on Friday (due to a tanker/barge collision), and indeed the major storms on the US Gulf coast over the weekend. It will also be pondering the dispatch of further US military/defence capabilities to the Persian Gulf.

- For the US, Retail Sales gets top billing with 0.2% m/m headline expected, following on from March's 1.2% m/m (strongest in 18 months), with weak Auto Sales a drag as reflected in forecasts of 0.7% m/m ex-Autos, with core measures seen 0.3%/0.4% after a jump of 0.9%/1.0% in March. This would represent a break from the sharp swings seen in the prior four months, and suggest that Q2 Personal Consumption should be rather more robust than the rather sluggish 1.2% SAAR seen in Q1. If the array of manufacturing surveys and Orders data are any guide, then Industrial Production is unlikely to better an expected flat m/m following March's 0.1% m/m, with the NY and Philly Fed May manufacturing surveys seen at the lower end of recent ranges at 8.0 and 10.0 respectively. By contrast housing sector data are anticipated to show some improvement, with the NAHB survey eking out a further small gain to 64 from 63, and Housing Starts to pick up 6.2% m/m to 1.209 Mln SAAR, in part seasonal, but also reflecting continued strength in Permits (last 1.269 Mln, exp. 1.290 Mln). Business Inventories and preliminary Michigan Sentiment are also due.

Over in China, the key question is whether this week's data run confirms that the better than expected Q1 GDP & March activity data were a signal that the authorities' stimulus efforts of the past 6 months are getting some traction, above all the huge boost to Total Social Financing. April readings are anticipated to show a reactive correction in Industrial Production to 6.5% y/y, after surging to 8.5% y/y in March, while Retail Sales are expected to ease modestly to 8.6% y/y from 8.7%, though weak Auto Sales (-6.9% y/y) will act as a drag. Fixed Asset Investment should continue to benefit from govt infrastructure spending, and is forecast to edge up to 6.4% y/y from 6.3%. Often overlooked in this monthly 'dump' of activity data is the Surveyed Unemployment Rate, which eased back to 5.2% in March, having spiked up from 4.8% in November to 5.3% in February. But in policy terms (fiscal and/or monetary) the key remains the outcome / evolution of the USA/China trade talks.

In the UK, the March/April labour data follow on from Friday's overall disappointing run of data (above all March GDP -0.1% m/m), given that there will almost inevitably be a sharp payback in Q2 for the Q1 jump in Manufacturing. The Q1 Unemployment Rate is seen unchanged at 3.9%, while Q1 Employment growth is expected to remain robust at 141K (prior 179K), with Average Hourly Earnings expected to ease marginally to 3.4% from 3.5%, and ex-Bonus to 3.3%. But with the latest REC Employment survey for April suggesting that the labour market 'seized up' in April, any strength in this week's official data will likely represent a near term peak.

A modest week for data in the Eurozone features the preliminary estimate of German Q1 GDP, which is seen bouncing to 0.4% q/q, paced by strength in Construction and Services, but continuing to be hobbled by ongoing weakness in Manufacturing. There are a raft other national Q1 GDP readings in the Euro area and CEE, with Hungary (1.4% q/q) and Poland (1.2% q/q 4.4% y/y) expected to be the stellar performers, while auto sector woes are likely to have dampened growth in the Czech Republic (0.4% q/q), Romania (0.2% q/q) and Slovakia; Norwegian Q1 mainland GDP is expected to echo monthly readings slowing to 0.4% q/q from 0.9%. (1.2% q/q 4.4% y/y). Sweden has CPI which should rebound on headline and core measures due to Easter effects, with headline seen at 0.7% m/m 2.1% y/y (from 1.9% y/y) and CPIF ex-energy at 0.6% m/m 1.6% y/y (from 1.5%), the latter likely to be signalled out as a concern, when Riksbank governor Ingves speaks this week. The German ZEW survey is also due.

Elsewhere, Australia has both Q1 Wages, expected to edge up to 0.6% q/q for an unchanged and subdued 2.3% y/y, and the monthly labour report, which is anticipated to show an unchanged 5.0% Unemployment Rate, and headline Employment growth easing back to a very 'average' 15K, following on from March's full-time jobs (48.3K) led 25.7K. Canada has CPI, which will likely see another energy led 0.4% m/m gain to edge the y/y back up to 2.0%, with core measures also seen around the BoC's 2.0% target, where they have been for the past 15 months. Japan has its Current Account and Economy Watchers (services) Survey, which typically garner little in the way of market reaction. India will look to CPI, WPI and trade data, with CPI expected to edge up to 2.99% y/y, primarily paced by energy prices, with food price inflation very well contained for the time being. Russia publishes a flash estimate of Q1 GDP, which is seen slowing sharply to 1.2% y/y from Q4 2.7%, predicated by the jump in inflation squeezing personal income and by extension expenditure. This is likely to be transitory, and Q2 should see a sizeable rebound, in no small part aided by favourable base effects.

- There are no G10 central bank policy meetings this week, though the Bank of Canada will publish its regular review of the Canadian Financial System, with the focus above all on housing and more broadly very high levels of household, and follows some fairly sharp criticism last week of the Canadian mortgage market by governor Poloz. Fed speakers will likely underline that rates are on hold for a protracted period, though likely differ on the inflation outlook risks, and by extension the next move in rates. Some modest renewed strength in the USD index, and the risk of some major fallout for EM currencies, if US/china trade talks are not resolved amicably, will likely assure that both Bank Indonesia (6.0%) and Banco de Mexico (8.25%) keep rates on hold when they hold policy meetings this week.

- On the political / trade front, in the aftermath of last week's US/China meeting, it is now at least clear how high the bar to a deal has been raised, with US setting a 1 month deadline to reach a deal, otherwise it will raise tariffs on a further $300 Bln of Chinese imports (details due on Monday). Meanwhile China has set out its conditions for reaching a deal, with Liu He saying in an extensive interview that a) the U.S. must remove all extra tariffs, b) set targets for Chinese purchases of goods in line with real demand and c) ensure that the text of the deal is “balanced” to ensure the “dignity” of both nations. It remains to be seen what retaliatory measures to the Friday increase in US tariffs China may announce. Trump's assertion that 'there is absolutely no need to rush' and the deeply flawed idea of using tariff income to buy up excess US farm production does not bode well, even if the comments were clearly intended for the domestic audience, as the 2020 election looms. On the Brexit front, a cross party deal to get May's Withdrawal Agreement over the line looks very unlikely, the more so given that it has little chance of getting parliamentary approval, amid continued foggy speculation about when May will either stand down or forced out, though according to some weekend talk, the picture could become clearer in the coming week.