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Good Morning: The Long & the Short of it and The Bigger Picture - 26 February 2019 - ADM ISI


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Ostwald, Marc
08:50 (29 minutes ago)



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- Digesting solid French and German Consumer Confidence ahead of US Consumer
Confidence, Housing Starts, House Prices and regional Fed surveys; focus
on Powell testimony and chatter around Brexit and US/China Trade: ECB
and BOE speakers; more corporate earnings and bond sales in UK, US &
Germany

- China: NDRC official' comments on headwinds to infrastructure investment
underline trade deal with US may not be a panacea for ailing China economy

- Brexit: perceived lowered probability of 'no deal' offers GBP, but still
does offer any clarity on longer term prospects

- Powell: set to stress 'patience' on rate outlook, and optimism on domestic
outlook, headwinds elsewhere; unlikely to offer clear signal on rates or
balance sheet outlooks

- US Consumer Confidence: rebound expected after steep 2 month fall; present
situation / expectations divergence likely to be main talking point

- Morning call audio file:
https://www.mixcloud.com/MOstwaldADM/adm-isi-morning-call-26-february-2019/


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** EVENTS PREVIEW **
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A rather busier day is in prospect, though outside of Powell's first round of semi-annual testimony to Congress it is probably only US Consumer Confidence and perhaps Housing Starts that may elicit much market reaction, with French & German Consumer Confidence, UK BBA Mortgage Approvals and the generally overlooked Philly Fed Non-manufacturing and Richmond Fed surveys. On the policy side of the equation a close eye will need to be kept on the meeting China’s National People’s Congress (CNPC) Standing Committee ahead of the full NPC meeting next week, both in terms of any further measures to try and boost the economy, as well as the ongoing US/China trade negotiations, while ECB speak comes via way of Coeure and Mersch, and Carney & Co testify on the BoE's Q1 Inflation Report. The array of US housing data (starts, permits and prices) are all December data, i.e. still catching up after 'shutdown'. Otherwise there is another slew of corporate earnings reports, and there are bond auctions in Germany (2-yr), U.K. (9-yr I-L) and the US (7-yr T-Note & 1-yr T-bill). On the Brexit front, PM May is apparently going to put the option of extending Article 50 (i.e. delaying Brexit) 'on the table, presumably to try and head off the chance of the Cooper-Letwin amendment being approved when Parliament votes tomorrow, ahead of which May will this afternoon brief parliament on the most recent round of negotiations. The opposition Labour party is now officially backing a second referendum, though precisely what that would offer as options remains unclear, and like the Conservative party, Labour remains deeply divided. But for the time being, the ostensible reduction in the probability of a 'no deal' or 'hard' Brexit will offer the GBP support, even if there is little real thought being given to exactly what the current Withdrawal Agreement, let alone a second referendum would mean for the economy. Likewise more conditionally positive noises from Mr Trump on the prospects for some form of trade deal with China is encouraging, and would clearly alleviate market concerns about a further escalation. However whether this would provide a major boost to the beleaguered Chinese economy is rather more debatable, in so far as many of the headwinds are rather more structural, and it is well worth noting comments from an NDRC official suggesting that 'infrastructure investment plans are under pressure' as the confidence of investors in them has 'dipped', which does not bode well for the one area of the domestic economy that was assumed would soften the blow of restructuring elsewhere, as well as the headwinds from trade tensions.


** U.S.A. - Powell testimony / Feb Consumer Confidence **
- The accompanying report to Powell's testimony was published on Friday, as is now customary to allow members of the respective Senate (today) and House (tomorrow) Committees to digest it (see: https://www.federalreserve.gov/monetarypolicy/2019-02-mpr-summary.htm ), and was largely very unsurprising. Powell will doubtless stick to the current Fed narrative that with inflation low, and headwinds to the global economy, the FOMC can be 'patient and wait for a clearer picture to emerge on the domestic and global economies, despite a very tight US labour markets. He will as such avoid much in the way of specific policy guidance, though probably hint that the next move in rates will probably be up, if the economy performs as well as current FOMC projections assume, but stands ready to change its stance if that outlook changes. There will probably be some questions about Trump's verbal interventions on Fed policy, particularly given the relatively sharp shift in rhetoric between mid-December and the end of January. Powell will doubtless stress that the shift was predicated on incoming data, and that the FOMC was and is always willing to adjust its view and its policy mix as circumstances evolve. Markets will naturally be focussed on what he indicates about the balance sheet reduction programme, as well as any comments on its review of its policy instrumentation and communication. Given a distinct lack of current data on consumer spending, today's Consumer Confidence will be very closely watched, with the headline index expected to rebound after sliding from 136.4 in November to 120.2 in January, predicated by an even steeper fall in Expectations to 87.3 from 112.3 in November, while the Present Situation Index edged only marginally lower to 169.6 in January from 172.7 in November. Lower mortgage rates, higher wages and solid labour demand continue to support the latter, with the end of shutdown and perhaps some optimism on US/China trade talks should see expectations recover somewhat. As ever the labour differential will be closely watched ahead of next week's Payrolls data, and like the Present Situation Index remains close to its cyclical high (Nov 34.2) at 33.7.
 
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