Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist
Digesting strong but mostly weaker than expected China Q1 and monthly activity indicators, robust Singapore Exports; awaiting final Eurozone CPI, US Housing Starts and Michigan Sentiment; smattering of central bank speakers; financials again dominate US Q1 earnings reports
US Treasury yield fall due to a cocktail of geo-political risks, infection rate rises, vaccine suspensions, reflation trade short squeeze and Treasury Fed Cash Balance run down
China: Q1 GDP miss, Q4 upward revision confirm loss of recovery momentum; Retail Sales point to private consumption rebound taking over reins of recovery from manufacturing and export demand
US Housing Starts: sharp bounce expected, but headwinds emerging despite low levels of inventories
US Michigan Sentiment: further solid gain expected as economy re-opening gains pace; inflation expectations in view
EVENTS PREVIEW
Today is primarily about the overnight run of Q1 GDP and monthly activity indicators from China, with final Eurozone CPI, US Housing Starts and provisional Michigan Sentiment being the only other statistical items of any note. The scheduled event calendar only has a smattering of central bank speakers, while financials again dominate the US Q1 Corporate earnings run, which also sees Kansas City Southern reporting. Next week’s run of data has G7 flash PMIs, a busy run of data from the UK that includes CPI, labour data, Retail Sales and PSNB, while the US awaits Existing and New Home Sales, with Japan Trade, Canada CPI and Australia provisional Retail Sales also on tap. On the central bank front, the Bank of Canada is expected to announce that it will taper its govt bond purchases to a C$3.0 Bln pace from C$4.0 Bln, while the ECB is seen holding policy rates and asset purchase volumes at unchanged levels.
Yesterday’s US Treasury market rally in the face of strong economic data (above all Retail Sales, NY & Philly Fed surveys) is having many people scratch their heads, above all given rising equities and oil prices. Political risk is definitely playing a role as the tensions between the West and the SCO (China/Russia) continue to escalate, as are Vaccine suspension, and infection rates surging in India and perhaps more alarmingly Chile given the high vaccination rate and continued high infections rates in much of continental Europe. But flows are also playing a significant role, with strong demand at all of this week’s US 3, 10 & 30 yr auctions (plenty of talk of strong Japanese demand) putting paid to reflation trades, and doubtless prompting a good deal of stop loss trades on ‘reflation trades’. But as we have highlighted before the US Treasury is running down its Cash Balance at the Fed at a rapid rate (from a peak of ca $1.7 Trln in January down to ca. $920 Bln currently and with the ultimate objective of sub $500 Bln by the end of Q1, which is primarily being executed by paying down T-Bill issuance, injecting more liquidity into the banking sector and, forcing banks and others to move up the curve given the depleted stock of T-Bills. This is a temporary factor, but in combination with unwinding of short positions, Covid-19 concerns and geo-politics, and along with the inherent lack of market liquidity (depth), such moves all too frequently have a life of their own that runs heavily counter to consensus views.
** China – Q1 GDP / March FAI, Industrial Production & Retail Sales **
– The primary observations are a) the Q1 GDP miss (0.6% q/q vs. expected 1.4%), despite a record pace of y/y growth (18.3% y/y) due to base effects, and the upward revision to Q4 does confirm the loss of recovery momentum which has been flagged by PMIs; b) the strength of Retail Sales (34.2% y/y vs. forecast 28.0%) does however offer an offset, along with the dip in Unemployment (5.3% vs. Feb. 5.5%), and offers some hope that domestic private consumption will take the reins of growth momentum from a slower pace of manufacturing and export demand, and the impact of curbs on property investment. As base effects unwind, Q2 growth will likely be similar in q/q terms but slow to around 6.0% y/y, the critical aspect will be the impact of reduced fiscal support and tightening credit conditions.
** U.S.A. – March Housing Starts / April Michigan Sentiment **
– Housing Starts are expected to rebound sharply (12.6% m/m to 1.60 Mln SAAR) from the weather related slump in February, with Permits expected to remain very robust at 1.750 Mln SAAR. While inventories of both new and existing homes for sale remain very low, the combination of rising mortgage rates and house prices along with input price pressures (raw materials, wages) and labour shortages suggest that the Q4 cyclical peaks for 1.584 Mln for Starts and 1.886 Mln for Permits are unlikely to be tested, even if the underlying profile for the sector will remain robust. Michigan Sentiment is forecast to post a further solid rise to 89.0 after jumping 8.1 points in March, with stimulus cheques, easing lockdown restrictions, a robust pace of vaccine roll-outs and improving labour demand all contributing, though the consensus estimate would still leave the index some 12.0 points below February 2020 levels. Inflation expectations will inevitably garner attention, with 1-yr expectations seen rebounding to 3.3%, the top of the recent range, from March’s 3.1%; 5-yr expectations have been steady in recent months at 2.7% y/y.
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Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.
ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
A subsidiary of Archer Daniels Midland Company.
© 2021 ADM Investor Services International Limited.
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