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Good Morning: The Long & the Short of it and The Bigger Picture - 15 February 2019 - ADM ISI plus Morning Call audio file





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Ostwald, Marc
08:27 (9 minutes ago)



to Marc






- Another busy day for data, digesting China inflation and monetary
aggregates, awaiting UK Retail Sales, US NY Fed, Import Prices and
Industrial Production and some central bankers; US long weekend ahead;
US Govt shutdown avoided, but Trump 'emergency declaration' merely
shifts emphasis

- China: inflation data imply further easing likely, but lending data
underscore scale of measures already undertaken, underlying signal on
state of economy clearly poor

- UK Retail Sales: meagre rebound expected, seasonal volatility implies
scope for outlier, better to focus on 3-mth/3-mth in trend terms, and
totally subordinated to more parliamentary gridlock on Brexit

- US Fed: ending balance sheet reduction (QT) programme now front and
centre to FOMC policy debate on outlook; many moving parts to consider

- US Industrial Production: manufacturing seen mean reverting after Dec
surge; latter strength gives the lie to weak survey readings; NY Fed
also due

- Chart: Fed balance sheet

- Morning Call audio:
https://www.mixcloud.com/MOstwaldADM/adm-isi-morning-call-15-february-2019/

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** EVENTS PREVIEW **
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The current market narrative continues to be one in which concerns about the China and Euro area (above all German) picture is proving to be rather more sensitive than US (notwithstanding the colossal Dec Retail Sales outlier, which does not fit with other anecdotal evidence, Redbook Retail Sales surge and generally upbeat individual retailer reports), but that all of this is subordinate to US/China trade news, and other political themes, such as the contrasting news overnight that Trump has signed the "security bill" which avoids a renewed govt shutdown, while getting ready to declare an emergency to get his pet "Mexico wall" project funded. The US also has a long weekend the President's Day holiday on Monday. Be that as it may, the week ends with China inflation data and EU27 New Car Registrations (-4.6% y/y vs. prior -8.3%) to digest ahead of UK Retail Sales and over in the US: Industrial Production, NY Fed Empire Manufacturing survey, Import Prices and Michigan Sentiment. The events schedule is rather meagre with a smattering of central bank speak via way of Coeure and Bostic. The annual Munich Security Conference also starts today, which will doubtless only serve to underline quite deep divisions between Europe and the U.S.A., even if fear of Chinese technology does offer one area where there is common ground. On the other side of the China coin, there are the China CPI (1.7% y/y vs. expected 1.9%) and PPI (0.1% y/y vs. expected 0.3%), which eminently opens up the door for further easing, but one can argue that the colossal surge in the monetary aggregates (with the notable exception of an all-time low for M1 growth just 0.4% y/y vs. forecast 1.9%), with New Yuan Loans rising a record CNY 3.23 Trln vs. expectations of CNY 3.0 Trln and Aggregate Social Financing up a stunning CNY 4.64 Trln vs. expectations of CNY 3.31 Trln suggest much of the easing is already in progress. That said the panicky message that it sends about the China credit impulse and the weakness in the economy, when NPL rates are already is clearly not a good one.

** U.K. - Jan Retail Sales **
- The seasonally very volatile Retail Sales are projected to post a meagre 0.2% m/m increase after dropping 0.9% in Dec following the Black Friday predicated jump of 1.3% m/m in November. Per se the emphasis as ever will need to be on the 3mth/3mth comparison (last -0.2%), at least in terms of trying to extrapolate a picture on the underlying trend. Yesterday's defeat for PM May in parliament will however the focal point for UK markets.

** U.S.A. - Fed outlook **
- The key signal change this week from the Fed has been about the balance sheet reduction (QT) programme with Mester noting earlier in the week that a decision would be reached in the next few meetings. Meanwhile Brainard yesterday staked out a call for the balance sheet reduction programme to be concluded by the end of 2019, and highlighting the 'messy' Retail Sales data. The question then becomes: what pace of 'taper' might be applied and starting when. A consensus on this is still being formed, with Dallas Fed's Kaplan noting that he did not think that the QT programme was a primary factor behind the Q4 equity market sell-off, though that does not actually preclude him from supporting and end to QT, though he would clearly want a cogent economy, rather than market related rationale for such a move. It also implies that it was probably debated quite actively at January meeting, the minutes of which are due Wednesday next week, (recalling that the Dec minutes suggested that the current strategy would need to debated and probably reformulated in H1 2019, thus signalling the end of 'auto-pilot'). In those minutes, there should also be some clues offered as to how this might be interfaced with its rate policy, particularly any hints that that rates could still go up, even if QT is being wound down, which would be less 'dovish'. So this is what next week is going to have as one its major focal points (and the week) beyond the - key dates are as follows: next Friday 22nd - Clarida, Williams, NY Fed no. Simon Potter, Quarles, Bullard and Harker all speak at conferences on a) the Fed's balance sheet, and b) quantitative tools for monitoring the economy. The week after, Powell testifies on the economy and monetary policy to House and Senate committees ("Humphrey-Hawkins") on 26 & 27 February. It should be added that a look at the attached chart of the Fed's balance sheet, just how modest in proportionate terms the reduction has been, again begging the question whether G3 central banks will be able to escape the shackles of their post-GFC unconventional monetary policy measures.

** U.S.A. _ Feb NY Fed Manufacturing / Jan Industrial Production **
- In terms of Industrial Production, the broad based strength (above all Autos) outside of the resource sector that was seen in December's 10 month high of 1.1% m/m for Manufacturing is likely to dissipate, with headline Production forecast at 0.1% m/m, with Manufacturing falt m/m; the December data above all highlighted that the weaker manufacturing surveys were not the augurs of a sharp slowdown, as rather too many commentators have suggested, notwithstanding yesterday's collapse in Retail Sales. The NY Fed Manufacturing survey for February is seen recovering to 7.0 after a sharp drop in recent months from November's 21.4 to January's 3.9 will hardly assuage concerns over the economy, but then again are contextualized by the official production data that suggests the weakness is rather a bad narrative and resulting poor sentiment, which are not borne out by actual output.
 
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