Weekly note (15/2) | Stronger sentiment drives markets

Global markets were driven higher this week following indications from US President Trump of a potential delay in the introduction of an increase in tariffs on Chinese imports. The US and China are working towards reaching a trade agreement by a jointly-agreed deadline of March 1 this year, with tariffs on US$200bn of imports from China set to rise from 10% to 25% in the event of no resolution by that date. Amid signs of progress being made in high-level negotiations during the week, President Trump told an assembled press group that he was prepared for the deadline to "slide for a little while", possibly for up to 60 days according to Bloomberg sources. Sentiment received a further boost on strong indications that another partial US government shutdown would be averted.

In terms of key data releases, US inflation according to the Consumer Price Index was stronger than expected in January on both headline (1.6%Y/Y) and core (2.2%Y/Y) measures but remains well contained. Weakness in oil prices saw the headline rate ease from 1.9%Y/Y to its lowest since June 2017, while core inflation held steady. Retail sales slumped by 1.2% in December, which was its sharpest monthly fall in 9 years as shown in our chart of the week, below. This report was heavily delayed by the government shutdown but matched with poor retail sales data seen in other major economies in December. Of particular note, online sales fell by a sharp 3.9% — its largest monthly slide in more than a decade — which as we have discussed before might be indicative of a broader trend of a shift in purchasing patterns as consumers take advantage of online sales promotions around Black Friday (in November), with spending then attenuating in the following month.   

Chart of the week 

European markets gained strongly this week, driven by the lift in sentiment and also ongoing results from the corporate reporting season covering Q4 last year. The European data flow, however, continued to come in on the soft side of expectations in line with slowing activity in the continent. The second estimate of GDP growth in Q4 was 0.2% in Q4 and 1.2% through the year, unchanged from the first estimate, but a moderation from annual growth of 1.6% in Q3. Highlighting concerns, GDP growth in Germany - the euro area's largest economy - was weak over the second half of 2018, with growth stalling in Q4 following a 0.2% contraction in Q3. Meanwhile, euro area industrial production contracted at a sharper-than-expected pace in December, falling by 0.9% and by 4.2% on the year. The result was impacted by notable weakness in the output of capital and consumer-related goods. 

Shifting over to the UK, GDP growth for Q4 slipped to 0.2% lowering growth over the year from 1.8% to 1.4%, its slowest pace in 6 years. The underlying detail highlighted weakness in net exports and business investment, due in large part to what Bank of England Governor Mark Carney described at last week's policy meeting as the "fog of Brexit" hampering confidence in the economy. Also this week, UK inflation eased from 2.1% to 1.8% in January, a two-year low driven by changes around household energy pricing. The central scenario from Bank of England is for inflation to remain below target at a sub-2% pace this year before lifting next year.   

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Turning to the Australian perspective, most of the headlines were focused on the ongoing reporting season, though there were several points of interest for macro watchers. The National Australia Bank's Business Survey for January retraced some its sharp deterioration from the previous month, with business conditions rising by 4pts to +7 to be around its long-run average. Conditions had collapsed by 8pts in December to a revised reading of +3. For January's read, there was moderate improvement across the trading, profitability and employment sub-components. The first half of 2018 was very strong for business conditions, where the index averaged a +18 reading, though there was a notable loss of momentum over the second half. Consistent with this, employment expectations were indicating growth of around 19,000 jobs per month, a moderation from 2018's pace. Business confidence increased by 1pt in January to +4 but remains below average. 

Westpac-Melbourne Institute's Index of Consumer Sentiment also posted an improvement, with February's reading rising by 4.3% to a "cautiously optimistic" 103.8. The rebound appeared to be driven by last week's change in guidance from the Reserve Bank of Australia to a more dovish stance. Overall, consumer sentiment appears to be holding up despite headwinds from slowing economic growth, weakening housing market conditions and political uncertainty both at home ahead of the federal election and abroad. Views around the housing market deteriorated in February across price expectations and sentiment towards purchasing a property. These developments will need to be closely monitored for signs of a spillover into consumption spending. Assessments of family finances recovered from a sharp fall in the previous month, though are only around long-run average levels.  

Housing finance data posted another weak outturn in December, with falls in both approvals (-8.2%) and lending (-5.9%) in the month. Weakness continues to be led by the investor segment, though over recent months a more entrenched deterioration from owner-occupiers has become evident. Tighter lending standards continue to weigh on access to finance, while declining property prices are also likely to be impacting on the demand side as highlighted in Westpac-Melbourne Institute's survey of consumer sentiment.