US retail sales fall, UK Prime Minister defeated again and Spain to head back to the polls

US retail sales fall, UK Prime Minister defeated again and Spain to head back to the polls

The US ended last week with a bang. Retail sales posted their biggest drop in nearly a decade, while other data, delayed by the shutdown, were also released.  Atlanta Fed GDP tracker’s estimate of GDP growth for the fourth quarter of 2018 plunged from 2.6% (before the data was released) to 1.5%. We adjust our own outlook in a similarly sharp fashion, to 1.2% (seasonally adjusted annual rate) from 2.4% previously. The US government avoided a repeat shutdown on Friday, with Congress passing a compromise bill, providing $1.4bn of funding for border “barriers”.

President Donald Trump has since declared a state of emergency to make up the residual. Trade discussions also continued last week. Little progress has leaked into markets, but Trump has discussed a 60-day extension of the tariff deadline and we are optimistic that the US will defer increasing tariffs on China beyond 1 March. An improving political environment has helped with an easing of financial conditions. coming week is quiet for US data, although January’s Federal Open Market Committee meeting minutes will be scanned for clues on balance sheet discussions on Wednesday.

Spain's.Prime Minister Pedro Sánchez has called for a snap general election on 28 April 28, after his 2019 budget plan was rejected on Wednesday. The short-lived minority government led by his Socialist Party (PSOE) only controlled 84 of 350 MPS, making approval of any policy measures complex. Polls signal that the political landscape will likely remain highly fragmented, with no clear party combination emerging (only a small advantage for a conservative-led coalition). We see growth implications limited in the near term, and expect economic activity to continue to outperform its euro area peers with average quarterly growth of 0.5% in 2019.

Yet, the medium term picture remains fragile. A strong political majority is unlikely to emerge from the April elections and, as a result, neither are much-needed structural reforms of the pension and labour markets, such as those aimed at tackling the dual nature of the Spanish labour market, which is characterised by both full-time, open-ended contracts that offer a very high level of job protection and temporary contracts with much less protection[LS2] . The fiscal position is still weak. The public deficit, while falling (after an estimated 2.8% in 2018, we see it at 2.5% in 2019) is still significantly above the 1.3% of GDP target. Indeed, some spending measures, which were included in the 2019 budget, had already been introduced through decrees in December (such as increases in the minimum wage and pensions), while measures aimed at increasing revenues have not yet been approved.

UK Prime Minister Theresa May endured another defeat in the House of Commons last week. Parliament voted against a motion to back the government’s negotiating tactics with the European Union. However, the vote was more symbolic than consequential. This week promises to be quieter, while the following week will see the government put their latest negotiation achievements to the Parliament. If there continues to be no progress, we expect Parliament to put in place a binding motion to extend Article 50 to address the growing risks of an accidental “no deal” Brexit.

Tuesday’s labour market report will be watched for further signs of a tightening labour market. However, following subdued GDP and inflation figures last week, we expect the BoE to defer further monetary policy tightening until November this year.

Growth remains weak in China, but leading indicators suggest some improvements. Last week’s economic data were a mixed bag. The continued easing of domestic prices suggests pressure on economic growth remained intense, with the industrial sector likely to fall into deflation again, due to weak commodity prices. The latter will weigh on corporate profitability and hinder equity market performance from an earnings perspective. On the flipside, trade activities surprised on the upside, with exports resuming growth, while imports contracted less than expected. These results, however, should be interpreted with caution, given the distortion from the Lunar New Year (LNY) and continued weak demand from the US (due to the US-China trade spat) and other developed economies.

In addition, both Asia’s exports and imports growth indicated a mixed picture. India, Singapore and Taiwan saw an improvement from the previous month, although partially due to LNY distortions, as well as some stabilisation in pharmaceutical and electronics exports. However, the weakness in exports in Korea and Vietnam, along with soft PMI export orders, suggests it is too early to call a bottom on the Asian trade cycle. Finally, a real surprise came from China’s January credit data, which rose to a record high. Strong bank lending, along with a sharp rebound in bond issuance, helped to offset still lukewarm, shadow banking credit, resulting in a noticeable pick-up in total social financing growth. The latter is a nascent sign that the official efforts to unclog China’s monetary policy transmission mechanism are starting to work. Provided this continues, the real economy is likely to bottom in the second quarter, before staging a mild recovery in the second half of 2019.

Upcoming events:
Euro Area: German ZEW survey (Tuesday), EU19 Consumer confidence and German PPI (Wednesday), EU19, German and French PMI, German, French and Italian HICP and French Insee Manufacturing confidence (Thursday), EU19 CPI, German GDP and Ifo business climate index and Fitch review of Italian sovereign debt rating (Friday)
US: NAHB housing market index (Tuesday), FOMC publishes January minutes (Wednesday), Jobless claims, Durable goods, Philadelphia FED index, PMI, Existing home sales and Leading index (Thursday)
UK: Unemployment, Average earnings (Tuesday), CBI Industrial Trends Survey (Wednesday), PSNB (Thursday), CBI Distributive Trades Survey (Friday)
Japan: Trade balance (Tuesday), Manufacturing PMI, All industry activity index and CPI (Thursday)
China: New home prices (Friday)


Market and asset types measured by the following indices: Equities = MSCI. Fixed Income = JP Morgan and BofAML.  


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