Weekly Focus: It's Showtime For ECB
Danske Markets | Sep 06, 2019 07:54AM ET
h2 Market movers ahead /h2
- In the euro area, the highlight is the ECB meeting, where the unveiling of the long-awaited stimulus package is set to take place.
- As the Fed's blackout period starts, we expect a quiet week in the US apart from CPI core figures for August.
- In the Scandi countries, we expect markets to keep a close eye on Swedish and Danish inflation figures for August, as well as on Norges Bank's latest regional network survey.
Weekly wrap-up
- A dramatic Brexit week concluded with the risk of a no-deal Brexit subsiding slightly (see Brexit Monitor - Election may lead us to the Brexit end game (but not necessarily) , 6 September).
- In Germany, we think a wait-and-see attitude on expansionary fiscal policy will prevail (see Research Germany - Loosening the brake , 5 September).
Market movers
Global
In the US, we have a quiet week ahead of us in terms of data releases. CPI core for August is due out on Thursday. In the past couple of months, CPI core has surprised on the upside but we do not think this is the beginning of a new trend given the low inflation expectations. We estimate it rose +0.2% m/m in August (2.2% y/y). On Friday, we are due to get retail sales data for August. Last month, the retail sales control group came out much stronger than we expected, indicating strong consumption growth. In light of the recession in the manufacturing sector, we intend to keep an eye on whether private consumption growth can keep up the pace. While a negative surprise is long overdue given the volatility of the time series, fundamentals still look strong and we expect an increase of 0.4% m/m.
Tomorrow (Saturday), the Fed’s blackout period starts, which means we will not get any more signals ahead of the FOMC meeting on 17-18 September.
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In the euro area, all eyes will be on the ECB meeting on Thursday, which will set the guidance for the months, and potentially years, to come. The uncertainty is not whether the ECB will announce new initiatives but how much it will deliver. We continue to expect a more dovish package than expected by other analysts. We expect (1) a 20bp rate cut in the deposit rate (main refinancing operations [MRO] and marginal lending facility [MLF] unchanged) and the extended forward guidance ‘at present or lower…well past the horizon of net asset purchases’ to remain; (2) a 12M QE restart of EUR45-60bn per month, although we acknowledge there are downside risks given recent communications; and (3) the introduction of a tiering system. See more in ECB Research - Enough talking, now is the time for action, 6 September.
Thursday also brings industrial production figures for July. We intend to look out for the release, as weak industrial production has been a vital driver of the euro area slowdown, with the print falling 2.4% y/y in June following seven consecutive months of falling production.
In the UK, focus is definitely on Brexit. The big uncertainty is whether there will be a snap election. As Parliament is prorogued next week (‘suspended’/’sent home’), Labour and the Conservatives have to reach an agreement early next week on an election day.
The problem is Prime Minister Boris Johnson wants the election before the 31 October deadline, while Jeremy Corbyn wants it afterwards. In our view, the UK is de facto already in an election campaign. We have written a comprehensive document on what an election means in terms of what really matters: the Brexit end game. See Brexit Monitor – Election may lead us to the Brexit end game (but not necessarily), 6 September.
With respect to economic data releases, some of the most important are due. The monthly GDP estimate for July was due out on Monday. Based on PMIs, we cannot rule out the UK having fallen into a ‘technical recession’ (i.e. two quarters of GDP contraction). On Tuesday, the labor market report with data for average weekly earnings and unemployment in July is due.
In China, focus remains on news regarding the trade war, where the two sides this week finally agreed on new meetings in Washington in October. However, we are not too optimistic that the deadlock can be broken, as neither the US nor China shows any signs of budging from its position.
On the data front, credit (aggregate finance) will indicate whether the recent decline in credit growth is indicative of the broad trend, or simply a kind of normalisation after the credit splurge at the start of the year. Money growth is also set for release. We expect it to continue to show fairly subdued growth, as money demand is weighed down by the headwinds to the economy caused by the trade war. We look for PPI inflation to fall further into deflation territory from -0.3% y/y to -1.0% y/y. CPI inflation has lifted recently to 2.8% due to higher food prices. However, consensus looks for a decline to 2.6% y/y.
There are no market movers in Japan next week.
Scandi
In Denmark, export figures for July are due on Monday. Exports have performed extremely well this year, though the June figures were sluggish. What will be interesting to see is whether this heralds exports finally hitting headwinds from weakened export markets, or whether it was just one of many monthly fluctuations.
We get CPI inflation figures on Tuesday. We expect an increase to 0.5% from 0.4% in July. The base effects of food prices and package holidays pull upwards as 2018’s big August declines slip out of the year-on-year rate. The 0.25 percentage point downward pull from the weight of summerhouses declining significantly this year will weigh on the August print as well and then disappear in September when the season is over. We also still have electricity prices weighing down almost -0.2 percentage points, as spot prices have declined and the PSO tariff was cut to zero in July. This is likely to rebound in October.
In Sweden, August inflation is likely to be the most important data point next week. We expect CPIF and CPIF excluding energy to print 1.4% y/y and 1.7% y/y, respectively, a tenth below the Riksbank’s new forecasts. One reason for our lower forecasts may be that we expect food prices to fall back after two months of higherthan- normal price gains. August is a month with big price changes going in opposite directions: big prices increases on clothing versus significant price cuts on charter travel and foreign airline tickets. In addition, a new chemical tax on electronics may show up in prices.
The preliminary print for Q2 GDP was -0.1% q/q seasonally adjusted and 1.4 % y/y calendar adjusted. Incoming data does not suggest any significant change to this. If anything, the Q2 current account suggests foreign trade has been slightly weaker on a quarter-on-quarter basis.
The July consumption indicator is set to bounce back sharply to 2.0% y/y on the back of car registrations (+89% y/y, a base effect due to new taxation in 2018) and retail sales (4.3% y/y, also a base effect due to sharply different weather conditions).
In Norway, Tuesday is the day to watch. The most important release is Norges Bank’s latest regional network survey, the central bank’s preferred economic indicator. Last time, the aggregated output index surprised by pointing to growth accelerating. This time, we expect to see a more obvious slowdown in export-related industries, which in isolation will pull the output index down. However, there are few signs of any softening in oil-related industries and government investment in infrastructure, investment in the power sector and a slight increase in housebuilding should prop up construction. The retail trade also seems to be over the worst, so there is no reason to expect any great deterioration in the service sector either. Overall, we expect a moderate fall in the aggregate output index from 1.57 to around 1.30 but this still signals above-trend growth. We will also be keeping an eye out for signs of growing pressures in the labor market. Core inflation can fluctuate wildly in the summer months, so there is real uncertainty here. We believe the surge in food prices in July was just a rebound from weak growth in the spring and will not reverse fully in August. In addition, we do not expect airfares to fall as far as they did in August 2018. We also expect the underlying trend in prices for imported goods such as clothing, footwear and furniture to start pushing up gradually on the back of a weaker SEK. On balance, we expect core inflation to edge up to 2.3% y/y in August, with the risk slightly on the upside.
Market movers ahead
Weekly Wrap-Up
UK snap election seems unavoidable
Main macro themes
We have concluded a very dramatic week for Brexit. Our base case is now that the UK will call a snap election early next week and that this will be held after 31 October (i.e. likely in November), implying an extension to the current Brexit deadline of 31 October into next year. Unfortunately, it is difficult to predict the outcome, as we cannot translate opinion polls directly into number of seats. Seat projections during the run-up to the 2017 election were a long way from the result. For more details, see Brexit Monitor – Election may lead us to the Brexit end game (but not necessarily), 6 September.
China and the US finally agreed to resume trade talks. In a phone call, the top negotiators from both sides agreed to meet for new talks in early October. Our baseline scenario continues to be no deal on this side of the US election in November 2020 but also that we do not see much further escalation, as it would damage the US economy too much and hurt Donald Trump's election platform.
In Germany, we think a wait-and-see attitude on expansionary fiscal policy seems to prevail despite fiscal measures being a much more powerful tool than monetary policy to counter the German downturn (see Research Germany – Loosening the brake, 5 September.
The US economy is growing at two difference paces. ISM manufacturing fell to 49.1 and is now below the 50 threshold indicating a contraction. However, ISM nonmanufacturing rose and while it remains lower in 2018, it is at a healthy level. The US manufacturing sector is in recession, which makes sense as manufacturing is very global, while the service sector is growing at a decent pace. Overall, US growth has peaked.
Financial market developments
Risk sentiment improved this week with trade talk hopes, stronger-than-expected ISM non-manufacturing and diminishing no-deal Brexit fears.
EUR/GBP has moved down further this week, as the immediate threat of a no-deal Brexit in October has declined and a snap election opens the way for more GBP positive scenarios. EUR/GBP is now trading below 0.90.
EUR/USD rose back above 1.10 after the disappointing ISM manufacturing and dovish Fed comments. Improved risk sentiment and rising oil prices pushed USD/JPY up to 107.
Yields have moved higher, notably in the US where treasuries sold heavily and the curve was pushed more than 10bp higher. European bond markets came under strong pressure, as the market scaled back QE expectations ahead of the ECB meeting next week and the lower geopolitical risks continued to support European equity markets. German 30Y yields turned positive for the first time since the beginning of August.
Scandi update
Denmark – Pharmaceuticals buoying Danish industry
Industrial production rose by a full 4.1% in July compared to the previous month, indicating that Danish industry continues to perform well taking into account the poor conditions under which global manufacturing is operating at the moment. Growth was, however, not unequivocal, as the rise came on the back of a 6.8% fall the previous month and is mainly being driven by the pharmaceutical industry. Take out pharmaceuticals and industrial production has fallen slightly over the past three months, which suggests that quite a few Danish companies are indeed suffering from the many uncertainties swirling around the global economy.
Sweden – Unexpected twist to Riksbank repo path
Riksbank took most of us by surprise by sticking to the view that it is appropriate to hike around the turn of the year. Instead the new repo rate path is distinctly flatter than in July. The end point (Q3 22) is 53bp lower than in July. The revised repo rate path implies about two and a half rate hikes (62bp) over a period of three years. It is almost as if we are back in 2011. As late as in September that year, the Riksbank was planning for hikes. Three months later, in December after the ECB had started to ease, the Riksbank delivered the first of a series of cuts.
We simply cannot understand the rationale behind the sharp flattening of the repo rate path, it would have been more sensible to keep the steepness, while postponing the hike as the economy weakens. Still, in our view, this is a first step toward postponing rate hikes in coming meetings and eventually cutting the repo rate in early 2020. The Riksbank appears to take little notice of the implications of a weakening labour market. In particular we find this statement fascinating: “… the rate of wage increases is expected to rise over the next few years, among other things because the wage bargaining round in 2020 will take place in a situation where the labour market has been strong and inflation close to 2 per cent for several years”. Needless to say, we believe the opposite. In a deteriorating labour market we would be surprised to see higher wage growth.
Maybe the Riksbank is buying time, trade conflicts and Brexit could be resolved and maybe then things could look better, so why not wait. Or maybe the policy decisions and forward guidance are a compromise. We would not be surprised if views between hawks and doves this time around were very split indeed. So the way to reach a compromise was to keep the rate hike around the turn of the year intact but at the same time flattening the curve.
Norway – Clear signs of continued growth
Uncertainty about the economic outlook has receded over the past couple of weeks. GDP growth came out strong, retail sales have bounced back and unemployment is falling again. The past week has also brought a sharp rebound in the PMI after its weakness in July. The index is now more in line with other manufacturing indicators, showing a softer but still normal rate of growth. The number of vacancies also climbed to 76,100 in Q2, up 8,000 y/y and 3,400 q/q, which says two things. First, it confirms that economic growth has held up despite the global slowdown. Second, the labour market is getting ever tighter, with now only 1.03 unemployed per vacancy. It is more than a decade – before the financial crisis – since the UV ratio has been this low. Even in manufacturing, which should feel the global economic slowdown first, there was a clear rise in vacancies in Q2. This goes to show how important the upswing in oil investment is for manufacturing activity at present. As if this were not enough, housing prices climbed further in August than they fell in July, allaying much of the fear that interest rates had begun to bite.
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