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Dentalfloss · Jun 17, 2019

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Dentalfloss · Jun 17, 2019

Dax into the open

Dentalfloss · Jun 17, 2019

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Dentalfloss · Jun 17, 2019

Dentalfloss · Jun 17, 2019

Good Morning: The Long & the Short of it and The Bigger Picture - 17 June 2019 - ADM ISI

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Ostwald, Marc

08:39 (7 minutes ago)

to Marc

- Quiet start to week statistically, busier in event terms as pre-FOMC
vigil sets in; digesting Singapore Exports, Turkey downgrade, UK BCC
forecast update; awaiting US NY Fed & NAHB surveys; ECB Sintra Forum

- Singapore Electronics Exports slide send dire signal for tech and
telecoms sector worldwide

- US: NY Fed seen slipping from stronger than expected May outturn;
MBA Mortgage Applications hint at upside risks for NAHB survey

- Fed: has the FOMC painted itself into a corner?

- Charts: Singapore Electronics Exports; China Iron Ore Port Inventories

- Audio preview:
https://www.mixcloud.com/MOstwaldADM/adm-isi-morning-call-17-june-2019/

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** EVENTS PREVIEW **
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The day's statistical schedule is modest, being about digesting the Singapore Exports report (headline better than expected, but sliding) ahead of US NY Fed Manufacturing and NAHB Housing Market surveys (previewed briefly below). The events schedule is very busy, with the ECB's annual central bank policy forum in Sintra taking top billing, with both Draghi & Carney speaking today. Elsewhere there is the Paris Air Show, Bonn hosts the UN Climate Change conference and Unica holds its annual ethanol conference, all of which may spawn sector specific market moving headlines. But the pre-FOMC vigil is likely to keep activity levels subdued. In the latter respect, the key question is whether the Fed has painted itself into a corner. or in other words, if they are not going to deliver the sort of dovish message that markets have run away with themselves in discounting, then they should have leant rather more heavily against the market move; on the other hand, if the message is dovish (leaving aside that this is fully discounted) are they nothing more than the poodle of Trump and market tantrums? Returning to those Singapore Exports, the slide in Electronics Exports (-31.4% y/y) was the worst since end 2008, i.e. the height of the global financial crisis, and as a generally very reliable proxy for the semiconductor and telecoms sectors worldwide, this bodes extraordinarily poorly.

RECAP: The Week Ahead Preview

- There is no doubt that the FOMC meeting takes top billing in the week ahead, even if trade tensions and geo-politics continue to provide much of the mood music for financial markets. The statistical schedule is none too onerous, featuring a raft of US Housing data, UK Retail Sales and gamut of inflation indicators, 'flash' G7 PMIs and numerous national & regional surveys, Japanese Trade and Canadian CPI & Retail Sales. The BoJ and BoE are expected to hold policy rates, but Norges Bank is seen hiking a further 25 bps to 1.25%, and the ECB holds its Jackson Hole equivalent policy conference in Sintra, Portugal. Meanwhile in the EM space rates in Brazil, Colombia, Morocco, Mozambique, Paraguay and Taiwan are seen on hold; Bank Indonesia may well signal it is ready to start an easing cycle, having hiked rates 175 bps to 6.0% in 2018 to shore up a very wobbly IDR, while Philippines BSP is seen cutting rates a further 25 bps. On the political front, a close eye will be kept on tensions in the Persian Gulf, noises from the US and China on trade ahead of the 28/29 June G20 meeting, EU/Italy tensions, while the UK Conservative Party MPs will whittle down the candidates for next leader to two, from which the party membership will then select the next PM. Turkey, following on from the Moody's ratings downgrade to a very lowly B1, also holds a re-run of the Istanbul mayoral election on Sunday 23 June. Euro area bond supply is plentiful with Italy (Zeros, I-L) and Germany (30-yr) accompanying multi-maturity auctions in Belgium, France & Spain, while the UK sells a new 10-yr, and the US offers 5-yr TIPS.

- Friday's US Retail Sales and Industrial Production are unlikely to unseat the Fed majority view that the US economy is in 'a good place', above all pointing to the likelihood a solid contribution to Q2 GDP from Personal Consumption (a key Fed assumption), even if Business Capex will likely be a drag. Inflation is clearly erring to the downside of the Fed's target, while the Fed will be cautious in over-interpreting one month's labour data. At the time of writing markets attribute a 23% probability of a a rate cut at this week's meeting, but an 87.5% probability for the 31 July FOMC meeting. As ever, initial reaction will be to the to the Fed's 'dot plot' update, which previously anticipated no rate moves in 2019, and a rate hike in 2020. The hard-line doves (Bullard, Kashkari) are likely to anticipate a cut in rates this year, but this will probably not shift the 2019 median, though the majority will probably remove the expected hike in 2020 (even hard-line hawks such as George and Mester), thus flattening the trajectory, but not to the extent that markets are discounting. The question then is what happens to the forecasts for the economy (March: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf ), with GDP and Unemployment forecasts likely to be held or tweaked fractionally weaker, but some potential for more meaningful (downward) revisions to PCE deflator forecasts. In broad terms, the risk is that the 'dot plot' and forecast revisions are far more marginal than markets expect (i.e. are hoping for), but the press conference will underline concerns about downside risks to their outlook from external trade tensions, and weaker growth outlooks. It does appear likely that the majority on the FOMC will probably rather not want to pre-judge the outcome of the G20 meeting, above all knowing that, what at the moment appears to be an unlikely positive outcome would set off a very sharp rally in risk assets, which a rate cut would only serve to exacerbate.

- As far as US statistics go, the NAHB Housing Index may prove to be stronger than the forecast of 67 vs. May 66, if the surge in MBA Mortgage Applications is any guide; Housing Starts and Permits are seen little changed, while Existing Home Sales are expected to rise a modest 1.4% m/m to a 5.27 Mln SAAR pace. NY and Philly Fed surveys are expected to pull back from unexpected gains in May, while the June US flash PMIs are seen little changed at a lowly 50.5 and 51.0 respectively. All of which seems unlikely to stir markets, though nearly all of these items are volatile in m/m terms, and often produce outliers; the latest TIC portfolio data will doubtless generate a rash of headlines about any shifts in China and Japan's US Treasury holdings.

Surveys dominate in the Euro area, kicking off with the ZEW survey, with both Current Situation and Expectations seen falling modestly further, despite a modest, though choppy uptick in the DAX over the past month. Flash PMIs for France, Germany and Eurozone are seen fractionally higher, i.e. signalling still rather dire conditions in German Manufacturing, but a solid pace of Services activity, while a very modest pace of growth is seen for both sectors in France. Eurozone CPI is expected to be unrevised at a lowly 1.2% y/y headline and 0.8% y/y, with perhaps a little downside risk due to the downward revision to French HICP, and per se continuing to pile the pressure on the ECB in policy response terms. Even if the riposte to that is that with rates being negative for as long as they have been, and the huge extant volume of QE, why should 'more of the same' produce a different outcome?

In the UK, headline and core CPI are seen slipping to 2.0% and 1.7% respectively, with PPI seen up marginally in m/m terms, but Input falling sharply to 0.8% y/y due to energy related base effects, while PPI Output signals no pipeline pressures, and House Prices seen dipping to just 1.1%. Retail Sales are expected to fall for a second month (-0.5% m/m), with base effects from last year's Royal Wedding dragging the y/y rate back down to a rather more trend representative 2.7% y/y from 5.2% in April, which in turn underline that Q2 GDP will at best scratch out a marginal gain. The CBI Industrial Trends survey and the PSNB Budget data area also on tap.

Over in Japan, national CPI is forecast to echo already published data for Tokyo, with headline seen dipping to 0.7% y/y from 0.9%, and core-core CPI to 0.5% y/y from 0.6%. Of rather greater significance will be the latest Trade data, which is forecast to show Exports sliding by 7.7% y/y (April -2.4%), which would be the sixth consecutive fall, with Imports seen at 0.2% y/y (April 6.4%), and a close eye will also be kept on the Reuters monthly Tankan (last Mfg DI 12) and 'flash' Manufacturing PMI (last 49.8). After a rough patch in Q1 (part weather, part oil sector related), Canada's economy is showing sings of getting some traction, with this week's Retail Sales seen building on March's excellent 1.1% m/m with a 0.3% m/m rise, and 0.6% m/ ex-Autos, and Manufacturing Sales also expected to build on March's 2.1% m/m with a rise of 0.6%, while all CPI measures are forecast to remain nailed close to the BoC's target of 2.0%. That Australia's housing market is deep in the doldrums is well known, and the expected -2.6% q/q -6.9% y/y on Q1 House Prices would merely reaffirm what has been seen in monthly house price data. The only other item of note statistically will be the JODI Oil Output and Exports data for April.

- On the central bank front, Japan's BoJ is expected to continue to stick with its current policy settings, while emphasizing that it stands ready to act if (external) economic risks materialize, with some market participants speculating that it might consider cutting its Call Rate (current -0.1%) and 10-yr Yield Curve Control target (current 0% +/- 20 bps) as soon as September, by between 10 and 20 bps. It will doubtless reiterate that unwarranted (unwanted) JPY strength would certainly be cause for a policy response. The key question for this meeting is whether it makes any tweaks to its current economic assessment. The BoE also meets this week, and like the BoJ is unsurprisingly expected to keep Base Rate at 0.75%, and hold its QE volume at £435 Bln. It will be recalled that at the May Q2 Inflation Report meeting, Carney suggested that markets were under-pricing its rate trajectory, and insisted that the next move in rates would be up. In the meantime, markets have started to discount the possibility of a rate cut, albeit in 2020. Given the level of Brexit related uncertainty about the economic outlook, it is tantamount to a fool's errand to try and second guess what the next move in rates might be. The only real point of interest at this meeting is whether the MPC expresses concern about the weakness in recent data, or suggests that it will likely be a transitory 'payback' for the 'hoarding' boost to Q1, though also stressing that weak Eurozone growth and trade tensions continue to be a key risk to the outlook. Both BoJ and BoE would doubtless prefer to be in Norges Bank's shoes, with inflation comfortably above target (notwithstanding the sharper than expected dip in May), and growth on a fairly solid footing, and Unemployment low, allowing it to hike rates a further 25 bps at this meeting, as it signalled last month. The key question is whether it also signals that it also brings forward the timing of the next rate cut to September, and raises the probability of a further hike in December, and sticks with the view that this would also likely be the near term peak for rates.

- Politically, both the US and China continue to dig in for a protracted trade war, and rowing back hard on the prospects for a discussion between Trump and Xi at the 28/29 June G20 meeting in Buenos Aires, which is also the Trump deadline for the next set of US tariff hikes. There appears to be an element of bluff, with both sides seemingly counting on economic headwinds forcing the other side to offer some concessions that would allow a resumption of negotiations. In both cases, the stakes are high, with obvious signs that the Chinese economy has lost considerable traction, and Trump conscious that tipping the US economy into a recession in the next 6 to 12 months would be a sure fire vote loser at next year's presidential election. Over in Europe, EU heads of state are to discuss and appoint the new heads of the EU Commission and the ECB at their two day meeting starting on Thursday, which looks like to be a tense affair, with a number of countries clearly very resistant to a Franco-German 'stitch-up', even if these members of the 'awkward squad' are definitely not pulling in the same direction. The leadership contest for the UK Conservative party should whittle down the field to two candidates, whom the party membership would then vote on. There are apparently some moves to try and avoid what could be a very divisive contest, between Mr Johnson and whoever takes second place. But as with the lack of any obvious majority in parliament in terms of the way forward in the Brexit process, it looks rather difficult to see how the Tory party could indulge in one of its not infrequent episodes of 'closing ranks' after a bout of also typical internecine warfare. What is clear is that none of the candidates is even willing to admit that whoever does take over, will be an unelected PM, still very much reliant on the DUP to prop up a minority govt, and in charge of a party that remains at war with itself. More importantly, precisely none of the candidates have offered anything new to try and break the Brexit impasse within Parliament and in terms of negotiations with the EU. Indeed all that has been offered is more of the same in the way of unicorn ideas and 'cakeism'. An outside observer would be more than justified in thinking that it may require the country to slip into a recession, perhaps quite a sharp one, to force parliament into behaving like leaders, and acting in the best (non-idealized) interests of the country.

========================== ** THE DAY AHEAD ** ===========================