Market movers today
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.
