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Good Morning: The Long & the Short of it and The Bigger Picture - 27 February 2019 - ADM ISI


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Ostwald, Marc
09:16 (2 minutes ago)



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- Digesting uptick in UK BRC Shop Prices and steep decline in Australian
Construction Output; awaiting raft of EU and national surveys, US Pending
Home Sales, and catch up on Goods Trade Balance and Wholesale Inventories;
Brexit drama continues, more from Powell and some ECB speak; bond auctions
in Germany & Italy, and slew of corporate earnings

- Brexit: May puts ball firmly in parliament's court

- US Goods Trade Balance: expected to widen out again, energy prices the
likely wild card

- US Pending Home Sales: modest rebound expected after 3 consecutive falls,
presumably predicated on fall in mortgage rates, strong labour market

- Fed: Powell underlines policy in transition period, optimism on US
outlook, but much greater sensitivity to international developments than
historically typical

- Morning call audio:
https://www.mixcloud.com/MOstwaldADM/adm-isi-morning-call-27-february-2019/

..........................................................................

********************
** EVENTS PREVIEW **
********************

The Brexit drama will more than likely be the focal point for the day, even if there as many column inches devoted to the Trump/Kim Jong Un meeting. Otherwise a relatively busy day for data has Australian Q4 Construction output (very weak with Q3 revised even lower) and the UK BRC Shop Price Index (rebounding sharply from Jan seasonal sales discounting, perhaps stockpiling related??) to digest ahead of a slew of Eurozone and national confidence surveys, while the US looks to Pending Home Sales and catches up on Dec Goods Trade Balance and Factory Goods orders, while Canada has CPI (headline to be dragged lower by oil prices at 1.4% y/y from 2.0% in December, but core still very steady at 1.9%, as it has been for a very protracted period). There is some ECB speak from Coeure & Weidmann, along with the second round of Fed Powell's semi-annual testimony. In earnings terms, Bayer, ITV, K+N, Rio Tinto and Wienerberger are likely to be among the highlights, while the govt bond auction schedule has a 10-yr sale in Germany, and 3 & 10-yr in Italy. In terms of the Brexit drama, the media once again appears to have focussed on the latest developments as being 'another defeat' for PM May, though the truth of the matter is that she has in effect put the ball in the UK parliament's court - she will try and railroad another vote on her deal, and if that is defeated which would appear likely given the record defeat last time (but may not be given the alternative choices), then she will force parliament to make a decision on 'No deal', thus ensuring that an accidental 'hard Brexit' is off the table (and effectively putting the blame for no deal on parliament), and if that is defeated, there will be a vote on extending Article 50 - even if another 90 days of 'more of the same' seems futile given that parliament has failed to coalesce around any option over the past 1000 days since the referendum. There will be more twists and turns and of course there remains the possibility that all 3 options are defeated, in which case a general election would appear inevitable. In the long list of things that the UK media and parliament are not reporting on or talking about, the wildfires that have in the moorlands of Yorkshire require attention, as they are a function of a lack of rainfall which could have a very adverse impact on the UK's grain output in 2019, and which could result in a sharp rise in a raft of related food prices (whatever happens with Brexit!)

** U.S.A. - Dec Goods Trade Balance & Jan Pending Home Sales **
Today's Wholesale Inventories & Goods Trade Balance will primarily be of interest in terms of any final tweaks that need to be made ahead of tomorrow's advance/provisional Q4 GDP report, with the sharp fall in Housing Starts (possibly partially accounted for by weather and shutdown effects) implying a drag from residential Construction. Trade data during the quarter have been volatile with a record $-77.2 Bln deficit in October, followed by November narrowing to a $-70.5 Bln (smallest deficit since June), with December seen widening to $-74.1 bln, which in nominal terms would imply that the Q4 deficit was little changed vs. Q3, though much may well depend on the impact of the sharp oil price fall. Pending Home Sales are seen posting a very modest bounce of 0.8% after a sharper than anticipated -2.2% m/m in December, that followed falls of 0.9% and 2.6% in prior months. The forecast is presumably assuming a boost from lower mortgage rates, though it may also see a drag due to the govt shutdown. Be that as it may, sales would remain markedly lower in y/y terms at -4.6%, though not as sharp as November's -9.5%.

As far as Powell's testimony on Tuesday, there were as expected very few surprises, with much emphasis on the Fed's ability to 'patient', stressing that inflation trends are benign (as is the pick-up in wages... at least thus far - see also this Dallas Fed article suggesting wage growth is much stronger than official data suggest https://www.dallasfed.org/research/economics/2019/0226 ), the outlook of the US economy is 'generally favourable', and the primary concern is global growth. The discussions on QT and indeed its inflation targeting policy framework are ongoing. In terms of the former, Powell used the opportunity to berate Congress for not having raised the debt ceiling, and trashing MMT ("debt does matter") , and this is not just a matter of it being embarrassing that the US should find itself in the situation, but clearly also the fact that the resulting rundown in the Treasury's cash balance at the Fed as a consequence of this, makes managing the QT process all the more complex given that the rundown adds liquidity to the banking sector, which will then have to be reversed as and when the debt ceiling is raised (see chart).
 
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