Week in Focus; week commencing 11 February 2019
US CONSUMER PRICES AND RETAIL SALES
Hard data will finally be on the slate, with the release of the January inflation report (Weds) and the long-awaited December retail sales report (Thurs - NOTE: the January data will be out between the 15-21 Feb). Headline MM CPI is likely to contract by 0.1%, analysts believe, with the YY rate seen coming in at 2.1% (vs 2.2% previously). The core measure, however, is seen steady at 0.2% MM. The headline is likely to have been hit by the fall in retail gasoline prices, which fell by around 5% in the month of January. On the other side of the coin, analysts have drawn attention to decent weekly chain-store sales data, as well as income growth continuing to tick up, which is likely to support core inflation. Indeed, this should also be a supportive factor for retail sales data on Thursday, and rose to a clip of 9.3% YY at the tail-end of the holiday shopping season (it has now reverted back to a trend rate), suggesting that the US consumer went into 2019 with a respectable degree of momentum. As an aside, analysts have suggested that the December retail sales data may be subject to distortions based on the US government shutdown impacting sampling.
Last week saw yet another week pass by with not much in the way of meaningful progress as the stalemate between the UK and EU shows no sign of abating any time soon. The Irish backstop remains the key sticking point in negotiations with PM May under increasing pressure to gain some form of concession from the EU. As such, May set up an Alternative Arrangements Working Group consisting of several UK Tory MPs tasked with finding a resolution to the ongoing saga. In terms of the EU perspective, EU Chief Brexit Negotiator Barnier stated that the EU is ready to work on alternative solutions to the backstop during transition, however, as it stands, he believes the current backstop is the only operational solution to Irish border issue and there is to be no reopening of the withdrawal agreement. At the time of writing, UK PM May is yet to find any alternative solution that hasn’t already been rejected by the EU and, as such, was unable to put a specific proposal to the EU other than requesting that the backstop must change. This led tempers to boil over in EU circles with European Council President Tusk last week proclaiming that there is a “special place in hell” for "those who promoted Brexit without even a sketch of a plan of how to carry it out safely". Given Tusk’s frustrations with the serving UK government, he lent some support to the Labour Party’s latest ‘five-point plan’ which Tusk deemed as a promising way out of the current impasse. In terms of Corbyn’s plan, the most appealing aspect from an EU perspective would be the intention for the UK to remain in the Customs Union and alignment to the Single Market. At the time of writing, it is yet to be seen how much traction Corbyn’s plan will get in the UK, particularly given the inevitable opposition UK PM May will face from her own party. This all takes place in the run up to next week’s Meaningful Vote scheduled for February 14th. After May’s historic 230 margin vote defeat last month and the lack of progress since the prior vote, it will be virtually impossible for May to pass her current plan without any major revision. As such, there was speculation last week that the vote could be delayed until the week commencing Feb 25th, however, at the current rate of ‘progress’ even a delay in the vote might do little to alter a successful passage in Parliament. In the event that May’s deal is once again resoundingly rejected by Parliament, Corbyn’s ‘plan’ might garner further traction, particularly as May will most likely require Labour votes in the passage of any deal, however, this will naturally lead to even greater factions within her own party. T-minus 7 weeks to Brexit.
UK CPI/GDP/RETAIL SALES
Aside from Brexit, this week sees a raft of tier 1 data from the UK with growth (Mon), production (Mon), inflation (wed) and retail sales (Fri) metrics all due for release. In terms of the highlights, GDP on Monday will see the release of prelim data for Q4 with Q/Q expected to fall to 0.3% from 0.6% seen in Q3, Y/Y expected at 1.4% vs. Exp. 1.5%. Ahead of the release, RBC note “two-thirds of the quarterly picture already in place” and as such, they look for a below consensus print of 0.2% Q/Q. RBC also cite recent survey data, noting “he latest IHS/Markit data pointed to growth coming to a near-standstill in the early months of 2019 as a combination of external (slowing global and euro area growth) and domestic (Brexit uncertainty) factors drag on activity”. On the inflation front, headline CPI is forecast to tick lower to 2.0% from 2.1% with the core reading expected to remain at 1.9%. Oxford Economics attribute the potential decline to the headline to “lower petrol prices and the implementation of Ofgem’s price cap on domestic energy bills”. In terms of retail sales, the consultancy looks for “a rebound in retail sales in January, after December’s sharp drop”. Nonetheless, given events in Westminster and has been the case for many a month, UK macro data is likely to continue to take a back seat to the latest (potential) Brexit developments.
The RBNZ will maintain rates at 1.75% next week, analysts forecast, given that its previous statement indicated that it will remain on hold through 2020, with only a gradual trajectory of hikes seen after that point. "Recent data shows the New Zealand economy lost momentum in late-2018, and the exchange rate is higher than the RBNZ expected," Westpac writes. "We expect the RBNZ to react by adopting a more dovish stance." Westpac argues that the OCR forecast will see the central bank pushing back its hiking trajectory further, or perhaps not pencilling in any hikes at all. "The statement will reintroduce strictly neutral language along the lines of the next move being either up or down," Westpac believes.
The Riksbank will conclude its policy meeting on Wednesday with rates widely expected to be kept on hold at -0.25%, with analysts expecting the central bank to signal its first hike for 2019 in H2. Data has been on the lighter side since the December meeting, but the effect of slowing global growth has been seen in PMI surveys, which showed a drop to two-year lows (services PMI at 54.1, manufacturing PMI at 51.5). As such, analysts at SEB expect the Riksbank to lower growth forecasts marginally, even though most indicators are still in growth territory. SEB also expects a revision lower to the Riksbank’s CPIF ex-energy forecasts, despite CPIF and CPIF ex-energy falling exactly in-line with the Riksbank’s estimates to 2.2% and 1.5% respectively, as large contributions from international travels and vegetables (almost 0.3%-points) “raise some question marks about the underlying trend”, but sees a slightly higher forecast for CPIF due to higher electricity prices. On the rate path, both SEB expects a reiteration that “the next rate rise will probably occur during the second half of 2019” – others, like the folks at Citi, expects the next rise to be in September, shadowing the ECB. Others, like Nordea, see the rate hike coming at the end of the year. On reinvestments, ING expects the central bank to announce that “QE reinvestments will be extended to the end of 2020, though probably at a reduced rate.”