- Today’s claimant count report is expected to reflect low macro risk for the UK
- The outlook for Britain is encouraging, despite some pessimism about Brexit
- Retail sales in Brazil on track to rise in March for the first time in three months
- Janet Yellen has hinted that the Fed is keen to keep hiking interest rates
- The benchmark 10-year Treasury yield touched a new year-to-date low yesterday
The UK economy is in focus today with the March update on the labour market scheduled for release. We’ll also see March numbers on Brazil’s retail sales. Meantime, traders will be closely monitoring the US 10-year Treasury yield, which dipped to a new year-to-date low in mid-day trading on Tuesday.
UK: Labour Market Report (0830 GMT): Brexit opponents keep looking for a smoking gun in the economic data that will confirm their forecasts that leaving the European Union will come at a heavy price for the UK economy. But so far, there are few signs in the hard data that trouble is near.
True, retail sales look wobbly, but some analysts say this is less about trouble in the consumer sector versus seasonal issues related to a late Easter. “The distortion which results from the timing of Easter always makes Spring a tricky period to assess and the later timing of the holiday this year certainly detracted from last month's performance,” noted the chief executive at the British Retail Consortium.
Bears note too that Inflation has increased, rising modestly above the Bank of England’s 2% target. But it appears that pricing pressure isn’t set to climb sharply higher from current levels.
Meanwhile, the near-term growth outlook for Britain remains encouraging, based on this week’s update of the OECD’s composite leading indicator (CLI). “The CLI continues to point to tentative signs of growth gaining momentum, although uncertainty related to Brexit remains,” the organization advised.
The EY Item Club’s new forecast also sees moderate growth continuing this year. “Our forecast projects that UK GDP will grow by 1.8% this year, in line with last year’s outcome,” the consultancy predicted.
Brexit risks lurk, of course, but for the moment the UK appears to be adjusting to the shifting landscape unleashed by last year’s decision to exit the EU.
Today’s March report on the labour market isn’t expected to change the cautiously upbeat outlook. For example, economists expect that the number of newly unemployed workers is expected to drop for a third month in a row, according to Econoday.com’s consensus forecast. Note, however, that the Office for National Statistics has removed this data from the statistical release (although it will still be published on the ONS web site). The reasoning, according to the government: the numbers may be dispensing a misleading profile of the labour market.
Perhaps, but a broad review of economic data continues to signal a healthy rate of growth for the months ahead. The bullish outlook for the claimant count comes with new caveats, but for the moment these numbers are reflecting a familiar narrative: the UK’s expansion rolls on.
Brazil: Retail Sales (1200 GMT): The central bank today is widely expected to announce a 100-basis-point cut in its policy rate to 11.25%. The news will certainly find a welcome audience at a time when doubts are rising about the prospects for Brazil’s recovery from a harsh recession.
One cautionary sign: the Latin American nation’s stock market, which has tumbled recently in the wake of disappointing economic news. The Bovespa Stock Index has fallen 6% from a peak in late-February that followed a one-year rally.
“High unemployment, austerity measures and tight monetary policy are hampering a recovery and data for the first quarter of 2017 point to muted gains,” FocusEconomics recently noted.
Survey numbers paint a brighter profile for the economy, however. “PMI data for Brazil reinforce perceptions that the economic downturn bottomed out and that the only way is up,” an economist at IHS Markit said last week. “The past two years have proven challenging for businesses, but there is finally a light at the end of the tunnel.”
Some of the light is expected to emerge in today’s update on retail sales. The consensus view via TradingEconomics.com sees spending rising 0.5% in February, which would mark the first monthly advance in three months. Good news, although the trend is still on track to remain deeply negative: year-over-year spending is projected to slide 6.9%.
Recovery is still likely, but the crowd now recognizes that climbing out of the hole will unfold at a painfully slow pace.
US: 10-Year Treasury Yield: Fed Chair Janet Yellen gave an upbeat speech on the economic outlook on Monday, hinting that the central bank is eager to continue raising interest rates.
“Looking forward, I think the economy is going to continue to grow at a moderate pace,” Yellen said at the University of Michigan’s Ford School of Public Policy. “We think a gradual path of increases in short-term interest rates can get us to where we need to be, but we don’t want to wait too long to have that happen,” she advised.
Fed funds futures aren’t pricing in a rate hike at next month’s policy meeting, but the probability for another round of tightening is estimated a bit over 60% for June, based on CME data.
The 10-year Treasury yield, by contrast, is sending a different message as the benchmark rate continues to wind lower. For much of the past month, this key rate has been edging down, falling at one point to just below 2.30% in mid-day trading on Tuesday – the lowest level so far this year.
The latest dip is noteworthy because it represents another run at poking below the roughly 2.30% support line that’s prevailed in the wake of higher yields following Donald Trump’s election last November. If the 10-year falls decisively below 2.30% in the days ahead, the drop will signal a deeper level of doubt in the bond market that the Fed will raise rates sooner and faster than previously expected.
But there’s an alternative view: the recent drop in the 10-year yield is less about faltering economic expectations vs. heightened anxiety related to geopolitical risk in the wake of last week’s US military strike against Syria.
Then again, some estimates for first-quarter GDP growth look worrisome. The Atlanta Fed’s GDPNow model is projecting that output will rise by just 0.6%, as of April 7. That’s an outlier relative to most forecasts, but it’s a reminder that at least some of the decline in the 10-year yield is due to renewed worries over macro risk.
Disclosure: Originally published at Saxo Bank TradingFloor.com