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Danske Daily - Retail Sales Shock Amid Trade Talks

Published 02/15/2019, 07:20 AM
Updated 05/14/2017, 06:45 AM

Market movers today

We expect markets to stay alert to news from Beijing , as high-level trade talks continue. According to Chinese media, US representatives Steven Mnuchin and Robert Lighthizer will meet President Xi Jinping today. The recent newsflow indicates that the two parties remain far apart from each other. We think this is in part expectation management.

Also, we believe focus will remain on the risk of a new partial US government shutdown . At this stage, it seems President Donald Trump will sign the spending bill that Congress has passed this morning. This would avoid another shutdown. Meanwhile, tensions are running high, as the President has indicated he plans to declare a national emergency to get funding for his border wall with Mexico. The deadline is midnight US time.

On the data front, today's highlight is new car registrations in Europe . Bottlenecks in the car sector were one of several Achilles heels for the euro area in Q4 and a continuing rebound in new car registrations would be welcome news. Focus is also set to be on US (manufacturing) data after yesterday's severe retail sales miss. In the Scandies , we are due trade balance figures in Norway but we do not expect any market impact from their release.

Selected market news

Asian equities are trading in the 'red' this morning on the back of a sour US session hit by the retail sales miss (see below), stories that US and China remain far apart in the trade negotiations and Chinese PPI figures falling short of expectations.

The delayed US December retail sales figures released yesterday disappointed significantly, showing the largest monthly fall in the control group since January 2000 (Y2K) (see chart ). In itself the release is very worrying, as the Commerce Department said response rates were at or above the normal level and as there was no immediate explanation from the shutdown (this was the December report) or the weather as online sales were weak. Given retail sales relation to consumer confidence, we find comfort in the recent rebound and expect this retail sales report to be a 'one-off'. However, we intend to monitor this very closely.

Prime Minister Theresa May suffered another defeat, as there was no support for her Brexit statement (the hard Brexiteers abstained). While the vote was only indicative and not legally-binding, it has made life more difficult for May, as she can no longer show she has a united party behind her. See FX markets for more colour and our subjective event probabilities.

The German economy narrowly escaped a technical recession as GDP growth in Q4 18 stayed broadly flat at 0.02% q/q. Apart from continued headwinds from the external front, many domestic factors were still at play. Overall, we expect to see a pickup in the underlying German growth momentum compared with H2 18 but we see annual GDP growth in 2019 still only at 1.0%, due mainly to the zero carry over from 2018.

As expected, Norges Bank's Governor Øystein Olsen did not deliver any new policy signals to markets at his annual address to the Norwegian people yesterday evening (see FX markets ). In an interview with E24 , Olsen criticised the government's recent attempt to run certain expenses next to the fiscal rule. Olsen clarified Norges Bank plans to include all fiscal spending in its monetary assessment, so this constitutes a possible positive factor for NOK rates.

Fixed income markets

The rally in global fixed income continued yesterday after the weak set of US retail sales, which also triggered a bullish flattening of the 2s10s curve in both treasuries and bunds. The poor risk appetite weighed on periphery bond markets and both Italy and Spain underperformed. However, the underperformance was after all modest considering the expectations that the Spanish Prime Minister will call a snap election at the weekly council meeting today.

Portugal is up for review by Moody’s (Baa3/Stable) tonight. Portugal, together with Spain, is the positive growth story at the moment and considering that Moody’s is one notch below Fitch and the S&P rating outlook is ‘positive’, we expect Moody’s to put Portugal on ‘positive outlook’.

FX markets

In the majors, EUR/USD rebounded to the 1.13 level on the back of the disappointing US retail sales. Meanwhile, weak euro area figures continue to keep a lid on the cross for now, so we still see EUR/USD as a range play.

In terms of GBP, the market reaction to Theresa May’s loss proved very limited in the House of Commons yesterday evening – indeed the loss was widely expected and everyone continues to eye the vote on 27 February. The EU is not willing to negotiate and make concessions if it does not know whether it will be sufficient. May has promised another vote by the end of February but she is unlikely to have anything new to bring forward then.

So, right now it seems as though we have to get very close to the 29 March deadline (remember there is an EU summit on 21-22 March) or a small majority in the Commons will force May to ask for an extension of Article 50 by the end of this month. Pressure is rising on all. We stick to our view that the two most likely outcomes are May’s deal passing eventually (40%) or a second EU referendum (30%). A no-deal scenario would probably happen only ‘by accident’ and we attach a 15% probability to this scenario. We still expect the 0.86-0.89 range in EUR/GBP to hold before we get more clarification.

In the Scandies, NOK/SEK has moved a little lower after yesterday reaching the 1.0750s, driven primarily by foreign SEK selling. EUR/NOK is little changed after a reverse-‘V’- type price action matching oil. As expected, Norges Bank’s Olsen’s annual address delivered no new policy signals. The key topics of the speech were globalisation, technology and climate change. On monetary policy, Olsen emphasised that the biggest risk factors are global developments but ‘If economic developments prove to be in line with expectations, the policy rate will be raised gradually and cautiously ahead’. The market reaction was very muted. We still expect two rate hikes from Norges Bank this year but, importantly, see the balance of risk skewed towards three hikes. Going forward, we still like to be long NOK versus both EUR and SEK.

In the rest of G10, NZD has been the big winner over the past few sessions, in a move driven primarily by the Reserve Bank of New Zealand, as the central bank on Wednesday dismissed the likelihood of a forthcoming rate cut. The message triggered renewed selling interests in AUD/NZD yesterday, with the cross back at the lowest levels since June 2017 (disregarding the 3 January blip this year).

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