European Outlook: The global sell off in equities continued in Asia overnight, as commodities continued to slide. Most Asian markets are in the red, with the Nikkei managing to outperform and holding on to slight gains as the Yen retreats and helps to underpin exporters. U.S. stock futures are higher, but U.K. futures are signaling a further slide in U.K. stocks, which were hit by a stronger Pound and May’s surprise announcement of a snap election on June 8 yesterday. The FTSE 100 closed with a nearly 2.5% loss on Tuesday and while Eurozone markets also headed south, losses were much more muted. Core bond futures had a bumpy ride yesterday, but Bund and Gilts managed to close higher in the end and with the Bund contract consolidating gains in after hour trade and U.K. stock futures still in the doldrums, it seems likely that Bund futures will remain supported at the open. French markets meanwhile remain under pressure ahead of Sunday’s first round of the Presidential election, as leftist EU critic Melenchon threatens to throw a spanner in the works. The European calendar has final Eurozone inflation data for March and EU trade numbers for February.
US reports: industrial production data that closely tracked estimates and a housing starts report that modestly fell short, though both reports documented a rebounding factory sector and a housing market that continues to grow despite March setbacks, with big winter distortions from a mild winter and weakness in the vehicle sector. For industrial production, a 0.5% headline rise reflected an 8.6% March surge in utility output after a 13.4% 6-month drop to a 13-year low, alongside a 3.8% vehicle assembly rate drop that partly explains the weak March jobs report. For housing, starts fell 6.8% in March alongside a 3.6% permits rise and a 3.2% climb for completions that proved particularly strong through the winter months.
UK: UK PM announced a snap general election for June 8, clearly looking for a strong mandate from the public as she heads into negotiations to take the UK out of the EU. May, having replaced Cameron mid-term as PM, would strength her position in the event that her Tory party wins the election, which does seem likely given the prevailing disarray of the opposition and with the economy having held up well since the vote to leave the EU last June. The political opposition in the UK is in a mess and the UK economy has performed robustly since the Brexit vote last June. The main opposition party, Labour, have formally supported Brexit in the wake of the referendum, while the much small Liberal Party, is against. The election doesn’t therefore seem likely to derail Brexit. The pound dove on news that PM was to make an announcement, though has recovered most of the losses and held steady when May confirmed the election. Sterling showed gain on the dollar and when averaged against the G3 currencies. The IMF has also raised its 2017 forecast for UK growth to 2.0% from 1.5% forecast in January, and up from the 1.0% growth it was forecast back in October. The IMF still warned that the eventuality of Brexit will dent trade, while there is a risk that Scottish independence will find further impetus as a consequence of the election.
Main Macro Events Today
- Eurozone CPI – Eurozone March HICP inflation, which is widely expected to confirm the headline rate at 1.5% and core inflation at just 0.7%. The fall back clearly below the 2% limit in March is partly due to the later timing of Easter this year, which saw holiday related prices rising in April rather than March, so the data doesn’t change the picture of gradually rising headline rates.
- NZD CPI (Q1) – Q1 CPI, expected to reveal a 0.8% gain (q/q, sa) after the 0.4% rise in Q4. The annual pace is projected to accelerate from 1.3% y/y in Q4, which would be supportive of our projection for the Reserve Bank of New Zealand to hold rates steady at 1.75% though year end.
- Japan Trade Balance – In Japan, the March trade report is expected to reveal a narrowed JPY 575.8 bln surplus, versus the revised 813.5 bln in February.
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