It was a somewhat subdued weekend from a news flow perspective, with reports that Deutsche Bank and Commerzbank have commenced merger talks, another round of Yellow Vest protests in France and President Race War’s verbal assault on foes real and imagined filling in the gaps between soundbites from would-be Democratic presidents stateside.
The Deutsche-Commerzbank merger has been in the rumor mill for months and the consummation of the deal would create a $2.05 trillion lender at a time when European banks are beset from all sides as the outlook is clouded by the persistence of the ECB’s adventures in NIRP and pressing concerns about the outlook for the bloc’s economy amid a burgeoning global downturn.
It goes without saying that the merger will be a costly endeavor and that skeptics abound.
In France, the persistence of domestic political upheaval (this was the 18th straight weekend of protests) was underlined by a lackluster police response, with accusations flying that Macron has failed to maintain law and order.
This is fertile ground for you know who. “Far-right leader Marine Le Pen accused the government of shutting down far-right pressure groups while failing to deal with the ultra-left”, France 24 wrote.
Sunday also brought the predictable OPEC+ headline deluge. The message from Al-Falih in Azerbaijan was simple: OPEC+ needs to “stay the course until June” as the group’s job “is nowhere near complete in terms of restoring oil-market fundamentals.” He noted that US inventories are still “significantly” elevated and said there’s still a risk of oversupply in the short-term.
Compliance with the supply cuts rose to a 15-month high last month at 89%. Crude is parked at a four-month peak.
‘March’ing towards the end of runoff
The March Fed meeting takes center stage in the week ahead, and market participants will key on the plan for the balance sheet. Generally speaking, most folks expect an announcement on an end date for runoff. The SEP will likely show modest downgrades to the outlook and analysts are divided on whether the median dot will tip one hike in 2019 or zero.
Read our full March Fed preview
As mentioned in the linked post above, it’s not clear that the term “dovish surprise” makes much sense this time around. The Fed has made its “patience” stance abundantly clear and the data since the January meeting has been mixed, so Powell will likely stick directly to the script. Deviating too much in the dovish direction risks “confirming” the market’s fears about a downturn, something Draghi learned earlier this month when the ECB delivered a deep cut to the euro-area growth forecast.
The dollar is coming off a weekly loss and 10-year yields are stuck in a range as rates vol. flatlines to record lows.
“We do not expect a larger USD reaction to the Fed’s balance sheet plans because its dovish capitulation since the January meeting has been met by coincident dovish shifts by other major central banks”, Barclays wrote Sunday.
Meanwhile, US stocks are of course riding high after the best week since November wiped out the previous week’s losses and then some, although some analysts see potential trouble ahead.
Last week’s gains came amid $25.5 billion in inflows into US equity funds.
An outlier and a joke
In addition to the Fed, we’ll get the BoE and the Norges Bank this week. The latter will probably hike – again. Liftoff, you’ll recall, was in September.
“Norwegian data have been robust despite weaker global momentum: activity has strengthened, oil prices have risen and inflation has surprised significantly to the upside”, Goldman writes. Given that, the bank sees Norway hiking and raising its policy rate path “slightly”, communicating that it “expects to hike again in the second half of the year.”
Barclays calls Norway an “outlier”, echoing that “since the December MPR, Norwegian economic data surprises have been positive, inflation has surprised slightly to the upside, oil prices are firmer and the NOK is somewhat weaker.”
As far as the BoE is concerned, there’s Brexit-related uncertainty afoot – perhaps you noticed. Goldman expects the bank to do three things in the MPC minutes: “(i) acknowledge recent Brexit-related volatility in some Sterling asset prices (ii) take some reassurance from a rebound in GDP in January, reversing December’s sharp decline and (iii) reiterate that there is no urgency in the timing of any next rate rise given the broader softening in UK growth since 3Q2018.”
“The rhetoric of ‘gradual and limited’ rate hikes in the event of an orderly Brexit [will] likely be maintained, [but] the minutes will likely focus on the effect of persistent Brexit uncertainty on activity data”, Barclays writes.
Here’s a good set of charts from Barclays which together underscore receding hawkishness and deteriorating data:
Speaking of Brexit, they’ll be another damn “meaningful” (scare quotes there for a reason) vote this week, if you can believe it.
Or at least they’ll be another vote if May thinks she can win it. Whatever the case, Brexit is delayed. The pound is coming off a stellar week (the risk of a no-deal, nightmare scenario is likely off the table) but where things go from here is anybody’s guess.
Late last week, FT called Brexit “a Monty Pythonesque joke.”
I’ll trade you
Speaking of jokes, one supposes the trade headlines will pick back up this week now that China is finished with the NPC.
News that the Trump-Xi summit (which was never confirmed in the first place) has been pushed to at least April dented sentiment for a couple of days, but markets seemingly forgot about it in short order.
It seems pretty clear by now that both sides are in fact working on the text of a deal, it’s just a matter of whether that text is going to include enough about the structural issues (e.g., IP theft, forced tech transfer, state subsidies, etc.) to make markets believe that anything of substance has actually been accomplished.
Further, Bob Lighthizer has been keen to pound the table on the extent to which enforcement is going to be a veritable nightmare, something markets will continue to fret about going forward, especially if the US reserves the right to reinstate any tariffs that are lifted in order to punish Beijing for perceived infractions.