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Weekly Focus: Renewed Trade War Fears Rock Financial Markets

ByDanske Markets
Published 08/11/2019, 03:23 AM

Market movers ahead

  • News on the US-China trade war will continue to be in focus. The next key event is scheduled trade talks in Washington in September.

  • Any comments by members of the Fed and ECB will be scrutinised for signals of how much easing is in the pipeline.

  • On the data front, attention will turn to German ZEW, euro-area GDP for Q2, US core inflation and Chinese numbers on industrial production and retail sales.

  • In Scandi markets the focus will be on Swedish inflation numbers and the Norges Bank meeting, where markets will look out for on any signals on future hikes.

    • Summer wrap-up

  • Trump escalates the trade war further and the US officially designates China a 'currency manipulator'.

  • Bond yields fall sharply on the back of heightened uncertainty. The German 30-year bond yields drop below 0 for the first time.

  • Trade war fears also triggered a sharp decline in global stock markets.

  • The market is awaiting new easing signals from the Fed and the ECB.

    • Focus

  • We have changed our view on the trade war and no longer expect a deal on this side of the US Presidential election in November 2020, see US-China Trade: Three trade war scenarios – ‘no deal’ now our baseline, 8 August 2019.

  • We see room for further declines in bond yields, see Yield Outlook: Rates and yields yet to bottom, 8 August 2019.

    • German 30-year bond yield

    Market movers

    Global

  • The US next week is quiet in terms of data releases. CPI core is due out Tuesday and we expect it rose +0.2% m/m in July which translates into an unchanged annual inflation rate at 2.1% y/y.

  • In the euro area, the focus turns to the German Zew (Tuesday) and the GDP figures, most notably in Germany (Wednesday). We expect the Zew to continue to point to a gloomy outlook in the uncertain global environment. On Wednesday we expect an unchanged euro area GDP growth figure from the advance estimate (0.2% q/q), but with the first release of the drivers we will assess if investments are still holding up amid the global uncertainty. Furthermore, the ailing German economy will publish its first Q2 GDP estimate. We expect 0.1%, but we acknowledge a downside risk to our forecast. Even the risk of a sub-zero reading cannot be excluded at this stage. Notably, we will look out for a potential reversal in the very strong investment growth that we saw in Q1. Financial market attention will once again also be on the unstable Italian political situation after the recent calls for new elections by League leader Salvini.

  • Next week in the UK, the labour market report for June is due out on Tuesday and CPI inflation in July is due out Wednesday. While the releases are important, the focus remains on Brexit and how it will develop over the autumn. Right now, the Brexiteers and remainers are discussing whether or not Parliament is able to block a ‘no deal’ Brexit from happening automatically. We still consider another extension or snap election (which would also likely require an extension) as the two most likely outcomes but we cannot rule out a no deal Brexit happening ‘by accident’.

  • There are no market movers in Japan next week.

  • The focus in China continues to be on the trade war with the US, where things went sharply downhill last week. We expect the matter to go on the backburner for a while as both sides probably want to calm things down a bit to keep talks scheduled for September on track. For now it seems that the forthcoming talks will be as much about damage control as making progress towards a deal.

  • On the data front we have the batch of industrial production, retail sales and fixed asset investments, which always come on the same day. In line with consensus we expect the data still to paint a soft picture of the Chinese economy, but not a hard landing. Retail sales growth moved sharply higher but we expect it to fall back to around 8-8½% in July. New home prices will probably show a still robust pace of increase as they are underpinned by low inventories of houses.

    • Scandi

    In Denmark, July CPI inflation is due on Monday. We expect a further decline to 0.3% from 0.6% in June. A key (temporary) factor is the 30% increase in prices for package holidays in July last year, which will exit inflation along with a big rise in food prices. More lasting effects will come from the adjustment of the PSO tariff on electricity, which will now be zero in Q3. The remaining district heating plants that did not hike prices in January, when a government subsidy for plants producing electricity was removed, will be adjusting their prices in July. There is some uncertainty connected to this, but we do not expect a price correction anywhere near the 8% increase we saw in January. Clothing prices remain a joker in the pack, as we have seen a steep downward trend this year. After another surprisingly big drop in June, we expect a more muted decrease in July.

    On Thursday, Statistics Denmark publishes its first estimate of Q2 GDP growth in the form of its GDP indicator. Exports had another strong quarter considering the weak growth in export markets. This is also supported by solid industrial production, which we know is used directly in the calculation of this first estimate of GDP growth. Private consumption, on the other hand, will pull the other way in a quarter where car sales came back down to earth after record-high sales in Q1. We predict GDP growth of 0.4%.

    Swedish June CPIF inflation is expected to stay more or less unchanged at 1.6 % y/y. According to our forecast, inflation will stay slightly on the high side of the Riksbank’s forecast for the next couple of months. For instance, we think there is some further upside in food and clothing prices, partially reflecting lagged effects of SEK weakness. Having said that, CPIF-inflation has peaked for now and to the extent that the next few numbers will offer the RB some relief it is likely to be only temporary.

    Prospera publishes new inflation expectation survey data. This time the monthly survey only covers the money market. Some Riksbank board members have mentioned the fact that inflation expectations show some tendency of declining but so far not to an extent that is cause for alarm. Still these data deserve attention going forward keeping in mind that too low inflation expectations some years ago were the reason why the RB moved into negative rates and QE.

    In Norway, Norges Bank has a rate-setting meeting on Thursday. Although this is one of its ‘interim’ meetings, with no press conference or monetary policy report, and we do not expect any change to interest rates, the meeting is still attracting greater interest than usual. In June, the bank went to great lengths – both in its interest rate projections in the monetary policy report and at the press conference – to signal that a rate increase was likely in September. On the face of it, then, we would expect this to be confirmed in the press release following the upcoming meeting. However, global risks have increased since the June meeting, and Norwegian data have been slightly disappointing. There will not therefore be any need for the bank to commit itself yet to raising rates in September. Instead, we expect Norges Bank to reiterate its message from June that ‘the policy rate will most likely be increased further in the course of 2019’. This would keep the option of a September hike open while giving the bank scope to postpone if the current uncertainty persists or worsens. That said, we still expect the bank to hike in September. The week also brings data for wages in Q2. After picking up gradually since 2016, wage growth has shown some signs of accelerating over the past two or three quarters. This ties in well with reports of firms having increasing problems sourcing skilled labour and is normally a sign of a labour market that is getting seriously tight. We therefore expect wage growth to climb further from 3.2% y/y in Q1.

    To read the entire report Please click on the pdf File Below..

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