“Make good news great again!”
If you had any worries that market participants might soon find themselves faced with a familiar post-crisis paradox where “good” news can be “bad” news to the extent it presages less accommodative central banks, you can probably put those worries to bed – at least for the next couple of months.
It’s now abundantly clear that policymakers have no stomach for a further deceleration in global growth amid increasingly dire warnings from the likes of the IMF (which now sees the global economy growing at the slowest pace since the crisis) and the WTO (which recently cut its outlook for global trade) and as the picture continues to darken in Germany, where the government is set to slash its growth target in 2019 to just 0.5%, below the already lowered estimates of the country’s leading economic institutes.
With inflation still (forever?) subdued and as Donald Trump continues to pressure the Fed to ease policy, the bar for a hawkish turn from the world’s major central banks is arguably so high as to be unclearable in the near-term.
That sets the stage for any good news to be interpreted “purely” on the merits. “The market has fully embraced the narrative that good news is good news, with risk assets rallying because of stabilizing data in China and Europe, as core central banks remain decidedly on the sidelines”, Barclays wrote Sunday, adding that “data which dispel concerns about global growth and signals reduced negative risks coming from trade or geopolitics are likely to keep high carry EM and G10 risk currencies bid vs. the USD, while EUR has found support as shorts are cut back.”
Of course the flipside of this is that bad news is just bad news, especially if you think central banks can’t possibly get any more dovish without doing something that accidentally “confirms” everyone’s worst growth concerns.
This week will bring plenty of data for traders to parse in search of “green shoots” and “confirmation” for the nascent “cyclical reflation” trade which got more traction on Friday amid upbeat export data and better-than-expected credit growth numbers out of China. Two weeks removed from the post-March-FOMC growth scare and 10-year US yields are back above 2.55. For now, “the jaws” are closing in a benign fashion.
On the data front, China again takes center stage. This is a critical week with GDP and the IP/retail sales/FAI trio on deck.
The risk, obviously, is that March’s upbeat PMI data out of Beijing and Friday’s export and credit growth numbers have created a false sense of confidence in the “inflection” story, thereby setting the market up for a let down.
“CNY experienced some support last week from the strong exports and loan growth data, but we are less optimistic versus consensus on the activity data releases in the coming week [as] imports growth contracted more than expected, indicating a still-fragile domestic recovery”, Barclays writes, adding that they “expect FAI growth to tick up to 6.2%y/y as stimulus measures feed through into infrastructure investment but IP growth to recover only mildly to 5.6%y/y from the dip in February.” As for GDP, Barclays is looking for Q1 growth to slow to “just” 6.0%y/y from 6.4%y/y.
“We expect real GDP growth to ease to 6.2% y/y in 1Q19 from 6.4% in 4Q18 as industrial sector growth likely stays soft, while services sector growth shows a weaker momentum”, BofAML said last week.
As a reminder, here’s where things stand in terms of the trajectory:
(Bloomberg)
Mainland shares have risen in 12 of the last 14 weeks. Last week was one of those two lonely down stretches.
Notably, Northbound saw large net selling of nearly $2 billion last week, the most in six months.
(Goldman)
Meanwhile, trade talks will drag on (over teleconference, apparently), and one supposes this will be another week where everyone on both sides suggests things are in “the home stretch.”
“We think much of the positivity around US-China trade talks and growth rebound may be in the price, and maintain our bias for potential upside in USDCNY, especially if global equities begin to show signs of weakness”, Barclays cautions.
In the US, there’s a good bit of data on deck as well (although nothing top-tier, really), including IP, retail sales, the trade balance, Philly Fed, housing starts, empire manufacturing, inventories, the Beige Book and, of course, the obligatory procession of Fed speakers.
March payrolls took a lot of the pressure off when it comes to the US recession narrative and ISM earlier this month helped too. That could mean that barring any truly grievous misses, the inclination will be to view things in a positive light, although that’s a “knock on wood” type of assessment.
“We estimate that core retail sales rose 0.4% in March (mom sa), reflecting a lackluster rebound in retail spending data and lower than usual tax refunds”, Goldman said Sunday, adding that they’re looking for a “1.0% increase in the headline measure, reflecting a sharp rebound in gasoline prices and auto sales.” BofA sounds more optimistic. To wit:
The long-awaited rebound in consumer spending has arrived. According to BAC aggregated credit and debit card data, retail sales ex-autos jumped 1.5% mom sa in March, partly reversing the decline over the prior three months. This recovery supports our view that the recent drop was largely due to temporary distortions rather than a fundamental weakening in consumer spending. We see evidence that the timing of tax refunds pushed spending from February into March, specifically for lower income households.
Of course earnings season is ramping up stateside and as detailed here on Saturday, the bar has been lowered dramatically, presumably increasing the chances of “slight” beats. JPMorgan’s results were solid, and that has folks’ hopes up. Guidance will be crucial – at least if you believe markets are still driven primarily by the ebb and flow of the macro narrative. This is a useful little table from Barclays:
(Barclays)
In the UK there’s plenty of data to parse, and with Brexit now postponed until (appropriately) Halloween, it’s at least possible that everyone can get back to focusing on what “matters”, although who knows. The UK can still leave “early” (where “early” is actually “late”) if the Withdrawal Agreement is ratified, which means the risks may be skewed to the downside for sterling.
We’ll get flash PMIs in Europe this week as well, and given that the bloc is on the frontlines of the global slowdown, it’s possible that relatively shallow beats/misses could be subject to over-interpretation.
Oh, and the Mueller report will be released this week – redacted, of course. The domestic political situation in the US is a hot mess and that has the potential to make things worse.
Full calendar via BofAML
