Euro area February flash PMIs are due out . In January, PMIs signalled that the euro area economy is edging closer to stagnation - (indicated by PMI level around 50) - with manufacturing PMI falling to a 50-month low at 50.5 while service PMI showed signs of stabilisation. Falling new orders and the ongoing political disputes still point to some downside risk for the manufacturing index, which we therefore expect to fall to 50.2 in February while we see scope for a rebound in services PMI to 51.4 in light of strengthening domestic demand.
Important ECB minutes from the January meeting are out 13:30 CET. We will look for the growth discussion and hints for potential outlook assessment (recall, they changed their assessment to downside risks in January). Further, any wordings for TLTRO will be scrutinized.
US Markit PMIs for February (preliminary) are due out today. We still expect Markit manufacturing PMI to stabilise around the current level of 54.9. While the US is not immune to the global slowdown, expansionary fiscal policy is pulling in the other direction.
US December capital goods data . New capital goods orders fell unexpectedly in November, which shows a slowdown in investments at the end of 2018. We expect investments to continue growing in 2019 but probably not at the same pace as in 2017 and 2018. Today also brings existing home sales numbers. The housing market has begun to show some weakness, likely to driven by higher mortgage rates.
We also have an interesting day ahead today in the Scandi countries, with particular focus on the oil investment survey in Norway (see page 2 for further details).
Selected market news
The FOMC minutes contained a lot of useful information. FOMC members agree to stay patient for now but disagree for how long. While "Many participants suggested that it was not yet clear" whether another Fed hike is "appropriate later this year", "several others" indicated it would be if the economy evolves as expected. So it seems like we are in for another doves versus hawks later this year, especially as "many" said the Fed could change the "patient" language if "uncertainty abated". We stick to our view the Fed may hike again in June based on our optimistic macro outlook but the probability declined after Fed put more weight on inflation in its reaction function.
The FOMC members also discussed the relevance of continuing the dot plot, which is another discussion to look out for in 2019. With respect to the balance sheet, "almost all" think the Fed "before too long" should announce a plan to end the runoff "later this year". We think an announcement on the balance sheet is more likely than not already in March (60% probability, otherwise in May) and the runoff will be completed in Q4. On Friday a lot of FOMC members will be discussing the balance sheet at a conference, which might give us more clues on the timing.
The EU27 and the UK government are likely moving closer to a compromise on the backstop , see Bloomberg . Even if this is the case, it is definitely not a given that it would pass the House of Commons if put forward for a vote on Wednesday 26 February. Many Brexiteers will vote down any deal (they do not mind a "no deal" Brexit) and so far May has not been able to persuade enough Labour and pro-EU Conservative MPs to vote in favour. This is also the reason why the EU leaders have hinted it will no longer approve anything until it has been approved in the House of Commons. However, as the pressure is building, it may change. Right now it seems more likely, though, that the House of Commons will force Theresa May to ask for an extension of the Article 50 deadline next week, or it has to go down to the wire in March.
The EU27 and the UK government are likely moving closer to a compromise on the backstop, see Bloomberg. Even if this is the case, it is definitely not a given that it would pass the House of Commons if put forward for a vote on Wednesday 26 February. Many Brexiteers will vote down any deal (they do not mind a “no deal” Brexit) and so far May has not been able to persuade enough Labour and pro-EU Conservative MPs to vote in favour. This is also the reason why the EU leaders have hinted it will no longer approve anything until it has been approved in the House of Commons. However, as the pressure is building, it may change. Right now it seems more likely, though, that the House of Commons will force Theresa May to ask for an extension of the Article 50 deadline next week, or it has to go down to the wire in March.
Scandi Markets
In Norway Statistics Norway is due to release estimates for future investments in oil and gas, manufacturing and electricity supply, i.e. the ‘investment survey’ this morning. This is the first time the oil investment survey will also cover 2020. The survey is key for the business cycle outlook as well as providing vital input for Norges Bank’s upcoming Monetary Policy Report. The pickup in oil-related investments in 2018, after the 2017 trough, is a main driver for the ongoing recovery in the manufacturing industries. Revisions to the 2019 numbers will also be closely monitored. We expect a 2019 level of about the recent survey at NOK175bn. The interpretation of the 2020 number should be more complicated, as this is published in the February survey for the first time. The first survey for 2019 (May 2018) was NOK155bn. That is, a survey number for 2020 above NOK160 bn should indicate a further healthy expansion of oil investments.
In Sweden, the IMF releases a statement on their assessment of the Swedish economy (article IV consultation) at 10:00. Later, at 13:00, there is a press meeting at the Riksbank with the leader of the IMF-delegation, Mr Beaumont. We would assume that the IMF acknowledges that also Sweden faces a gradual slowdown, point to vulnerability in the housing market but above all warns of risks attached to high household debt.
In Denmark, we get monthly employment data for December. Employment has increased for 67 consecutive months and continued to grow healthily in November despite some indicators pointing to slower job creation. It will be exciting to see whether it can keep this up or if it is set to shift down a gear.
Fixed income markets
We have a busy day in the European markets given the release of the Minutes from the latest ECB meeting as well as plenty of key economic data with the main focus on the PMIs in both Euroland and the US. If the PMI data for Euroland supports the view of a slowdown in the European economy then we expect to see more flattening from the long end of the EU curves such as core-EU as well as non-core curves.
Italian government bonds continue to be under pressure on the back of weak economic data coming from Italy. Today, the Italian Debt Office is issuing EUR 4.75bn in a zero coupon bond as well as two linkers, and tomorrow there is a rating review from Fitch, which has them on negative outlook. So far, the negative sentiment has had limited impact on the other peripheral markets such as Spain and Portugal. We expect that both Spain and Portugal will continue to be separated from the problems in Italy.
Yesterday, we published our bi-weekly on the Danish fixed income market. Here we go long 5Y DKK swaps versus Euroland. We close our shorts in Danish government bonds and look at the potential issuance in the Danish mortgage market given the low rates and potential for higher prepayments – see more here.