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Week in Focus – Week Commencing 14th May 2018

Key Events

Sunday: Deadline to form Italian government

Monday: OPEC Monthly Report

Tuesday: RBA Minutes, UK Labour Market Data, German ZEW, EZ GDP (2nd reading), US Retail Sales, US TIC Flows

Wednesday: Japan GDP (Prelim), EZ CPI (Final), US Building Permits, Housing Starts, Industrial Production

Thursday: Australia Labour Market Data

Friday:  Japan CPI, Canada CPI

 

North America

NAFTA DEAL (soft ‘deadline’ 17 May): US House Speaker Paul Ryan this week said that NAFTA negotiators have until 17 May to reach a final deal if US lawmakers are to pass legislation before the new Congress is sworn in (the Trade Promotion Authority allows for an expedited passage of the trade agreement via an ‘up and down’ vote free of amendments). If a deal is reached, the Trump Administration would give 90 days’ notice to lawmakers of its intention to sign a deal, and the details of the deal would need to be published within 30 days. However, some note that the US has been flexible with ‘deadlines’ in the past, and the well-documented issues around auto content rules (which are said to be the major stumbling block) suggests that the risk are skewed towards the ‘deadline’ being missed: the Washington Post on Thursday reported “two weeks ago, White House officials were optimistic about prospects for a breakthrough in the talks, a senior administration official said. While U.S. officials have not abandoned hope, they acknowledge that the odds of quickly reaching a deal.”

US RETAIL SALES (Tue): The Street looks for US retail sales to rise 0.4% MM in April (vs previous 0.6%) and the control group to rise by 0.3% MM (vs previous 0.4%). Analysts are expecting the slight cooling in the pace of growth to be attributed to softer vehicle sales, though the rise in gasoline prices will perhaps offset some of that weakness. Retail sales growth in Q1 slowed to around 1.0% annualised, according to Capital Economics. “Nonetheless, with incomes boosted by the recent tax cuts and a strong labour market, the conditions are in place for spending growth to pick up again in the second quarter.”

CANADA CPI (Fri): A hefty rise in gasoline prices is expected to drive CPI growth higher in March. Analysts at RBC look for a rise of 0.4%, which would keep the YY rate steady at 2.3%. The Bank says that food and transportation are likely to be a modest addition in the month, though the effect is not large, while a trend-like increase in the ex-food and energy measure would see it rise above 2% for the first time in over a year (to 2.1%). RBC adds that a similar trend-like gain for the BoC’s core measures (common, trimmed and median – the average of which hit 2.00% in March) should see that average stable around current levels. RBC notes that BoC communication around the April MPR emphasized its 1% to 3% target band, and “this is highly suggestive that it would not react strongly to perceived temporary increases in (underlying) inflation above the 2% midpoint,” according to RBC.

CANADA RETAIL SALES (Fri): RBC expects retail sales to rise by 0.6% MM in March, buoyed by a rise in auto sales. “The key feature of the February report was the sharp (1.3%) downward revision to the December level of retail volumes, which after roughly flat readings in January and February are tracking sharply negative for Q1 as a whole (-5.2% annualized based on our assumed 0.5% volume increase in March),” RBC writes. “This is driving a sharp slowing in forecasted household consumption growth in Q1, to 0.5% annualized from 3.5% in 2017 as a whole. We do expect a bounceback in consumption in the rest of 2018, averaging ~2%”.

Europe/UK

ITALIAN POLITICS: Italian politics will likely remain a key focus for the region at the start of the week in the wake of last week’s ongoing difficulties in bringing all parties together to form a government. In terms of the latest state of play (at the time of writing), last Thursday saw the 5SM and League claim that they have made significant steps to form a government with Sunday being set as a potential deadline to announce a leader. With it currently deemed that Di Maio or Salvini are unlikely to announce themselves as PM, it is currently unclear as to who exactly will take the helm but sources late last week suggested that they could be leaning towards an independent figure. If this fails to materialise, then President Mattarella will likely appoint his own selection. However, this appointment would have to be ratified by Parliament; something that 5SM and the League have said they would reject; thus making the prospect of fresh elections more unlikely.

EZ CPI (Wed): On the data front for the Eurozone this week, Wednesday sees the final release of the region’s April inflation statistics with Y/Y expected to be revised lower to 1.2% from 1.4% and M/M expected to print at 0.3% vs. March’s 1.0% reading. Although the figures could cause some concern in markets for the ECB’s normalisation efforts, Nordea highlight comments from ECB officials such as ECB’s Praet who “downplayed both the growth and the recent inflation slowdown, stating April’s surprising drop in core inflation reflected the timing of Easter”. As such, the flash print for May at the end of the month will be pivotal in validating or negating the claims made by Praet.

UK LABOUR MARKET (Tue): Over in the UK, Tuesday brings the release of the latest domestic labour report with focus once again set to fall on the earnings components with unemployment near historic lows. Earnings will gain extra prominence in the wake of last month’s decline in earnings and last week’s ‘confusing’ BoE release which has left traders looking for clues as to when the BoE could deliver their next 25bps hike, albeit that call is more likely to be made based on revisions to Q1 GDP. Ahead of the report, RBC note “it appears that the including bonus measure will be unchanged from last month at 2.8% 3m/y but base effects could see the ex-bonus measure slow to 2.6% 3m/y”.

Asia-Pacific

SINO-US TRADE TALKS: The main story in the Asia-Pacific region in the coming week will be trade, where focus is likely to turn to the second round of trade talks between the US and China. China’s Vice Premier, Liu He, is scheduled to travel to the US with a delegation of other Chinese officials in the coming week but the outlook doesn’t look particularly positive. The FT reported that the Trump administration is unprepared for the talks and that there are continuing rifts among those at the heart of the discussions, which could delay the discussions, an option hinted at by US Commerce Secretary Ross on Wednesday. Public hearings on Trump’s proposed Chinese tariffs are scheduled to take place in the beginning of the week and sources have said Liu doesn’t want to be in the US while the hearings are ongoing. Any delay to the talks could be perceived as negative by the markets. “What’s good for the markets, for now, is that at least they are coming to the table to talk it through,” says ING. “With both sides remaining firm on their stance, any breakthrough may appear to be a less probable proposition.”

RBA MINUTES (Tue): The RBA’s minutes are unlikely to diverge too far from the latest RBA statement. At the meeting, they kept interest rate unchanged at 1.50% and Governor Lowe said there was not a strong case for a near term move in rates. With the RBA expected to remain on hold for the foreseeable future, the minutes are not expected to have a major impact on Australian assets. On the same day, RBA Deputy Governor Debelle speaks and these comments may be more interesting given that the speech is on the outlook for the Australian economy. Debelle last spoke in the middle of April but didn’t mention monetary policy in his speech.

AUSTRALIAN LABOUR MARKET (Thu): Australia releases labour market data on Thursday and employment is expected to increase 15K, keeping the unemployment rate at 5.5%. “While it never seemed likely that the exceptionally fast pace of job creation throughout 2017 would be sustained for long in 2018, we doubt the 6,300 fall in employment in February and lacklustre 4,900 rise in March is a sign of things to come,” said Capital Economics. Looking at labour market indicators, the NAB business conditions index rose 6 point to +21, its equal highest level since the survey began in 1997 with NAB noting that employment conditions posted strong gains in the month. NAB Group Chief Economist Oster said, “The improvement in the employment index was particularly welcome in the light of the ABS reporting a slowdown in jobs growth in recent months. Historically, the NAB Survey does a good job at looking through short-term cycles in the ABS data and so we think the labour market continues to improve.”

JAPANESE GDP (Wed): Growth is expected to have stalled in Q1 after increasing 0.4% in Q4 2017. Capital Economics are even more pessimistic, forecasting growth to actually contract 0.1%, citing a fall in private consumption. “The Bank of Japan’s consumption activity index recorded a 0.4% q/q drop,” the consultancy writes,” a decline in capital goods shipments suggests that nonresidential investment may also have fallen marginally.” However, this data is backward looking and data so far in Q2 has been relatively upbeat, suggesting a return to growth in the quarter.

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China's Agriculture team getting as far away from the NYSE, just like us!! Hope you all have a good weekend, we'll… https://t.co/NsIJqCDJFE