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The Ides of March: Global Week Ahead

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On Friday, the Ides of March arrive.

This is the 15th day of March in the Roman calendar. It has gained a very specific notoriety. In 44 BC, it became notorious as the date of the assassination of Julius Caesar by a group of Roman senators.

Since those ancient times, as a result of that bloody event, this has been considered an unlucky day. The date is also considered a deadline for settling debts, for the same reason.

Just in front of the Ides of March, as the unlucky always seem to have it, the U.K.’s Brexit drama returns to center stage. There are three votes this week. One is on March 12th. The others fall on March 13th and 14th.

I am with the economist consensus: a delay of Brexit is the most likely option after this week is over. But I am equally in amazement.

How has Prime Minister Theresa May survived this long?

I would think a fresh Vote of No Confidence would be the next vote to have. However, it seems the option of Labour Party rule under Jeremy Corbyn is a worse fate for the House of Commons. It is the Devil you know, versus the similar one lurking in the wings.

Without fresh faces in power, it means there is no fresh momentum for the country. That’s a pity.

It’s yet another Anglo “Kick the Can” moment for all to enjoy globally. I have written too often under that metaphor. It keeps finding a persistent way — back to utility — in these weak political times. Those of us who firmly believe in Democracy would surely like to see the system work better than this.

Next are Reuters’ five big world market themes. These are the ones most likely to dominate the thinking of investors and traders in the Global Week Ahead.

(1) The Debate About “QE” Returns

So after three years of pumping 2.6 trillion euros worth of stimulus and cutting interest rates to minus -0.4%, the ECB has admitted its growth/inflation targets remain elusive, and those emergency-era monetary settings will have to persist for a lot longer.

The ECB is not alone.

Doubts abound around the world about whether developed economies have enjoyed lasting benefit or been fully repaired by trillions of dollars of bond buying “quantitative easing” from central banks over the past decade.

  • Japan has been in this funk for decades
  • The Federal Reserve is finding “normalization” of its policy settings difficult
  • Of late, slowing economic momentum has been seen in Australia
  • Canada and Sweden are turning tail on policy tightening plans
     

All this speaks loud and clear to the current economic policy backdrop – a raging debate around MMT, or Modern Monetary Theory: effectively a reworking of monetary theory by the left of the U.S. Democratic Party ahead of next year’s elections.

MMT advocates posit that policymakers in countries fortunate enough to manage the world’s main reserve currencies should, as long as inflation remains as subdued as it is right now, just keep interest rates at zero and print money to invest in environment and infrastructure projects.

With interest rates near zero and inflation structurally depressed, they argue that government deficits and debt levels far higher than the sometimes arbitrary limits set by current orthodox policy can be both sustainable and productive in seeding higher and better-quality economic growth in the longer term.

The idea is akin to British opposition Labour leader Jeremy Corbyn’s proposal of “People’s QE” a few years back. Some politicians across Europe too, especially among Italy’s populist coalition government, have railed against fiscal orthodoxy as strangling growth. Many have called on the ECB to support debt-funded government reinvestment programs.

Mainstream economists such as Larry Summers dismiss MMT as “voodoo” and as MMT balks at the idea that bond and currency markets should continue to be allowed to dictate government spending levels and priorities, many financial market economists also oppose the notion.

But as Europe shows, no one can argue that tried and tested orthodoxy has really worked. Expect to hear more about a rethink of economic policy theories like this as May's European Parliament election approaches and campaigning gets going for 2020 U.S. presidential elections.

(2) A Series of Three Brexit Votes This Week

Three votes in three days!

The Brexit saga returns with a vengeance on March 12 when Prime Minister Theresa May risks another crushing defeat of the deal she’s negotiated with the EU. Another defeat for May — who as of Monday had no new concessions from Brussels to present to Parliament — could just reignite fears about an eventual no-deal outcome. It will also deal a blow to the pound that’s rallied in recent weeks as this risk was priced out.

If May loses the vote, lawmakers will get to vote on March 13 and 14 to rule out a no-deal Brexit and on delaying Britain’s departure. Depending on whom you ask, agreement to delay will either settle nerves or prolong the unknown.

A Reuters poll of economists predicted Brexit would be delayed by a few months, with a free-trade deal eventually agreed. But uncertainty is showing up in currency derivatives markets, with one-month implied volatility — capturing the March 29 Brexit date — at its highest since mid-January. The pound too has come off recent highs.

(3) New Retail Sales Data to Ponder

Was December’s dismal retail sales report in the United States a one-off pause in consumer spending caused by the stock market meltdown? Or was it the start of a trend?

That question could be answered on Monday when January data is released — roughly three weeks later than normal after the partial government shutdown in December and January disrupted the data release schedule.

The figures will be a key signal about how well the U.S. consumer and economy are standing up to a worldwide slowdown. Overall sales are seen edging up 0.1 percent in January after dropping 1.2 percent in December, the biggest fall since 2009. Several subsets of the series saw an even more-alarming decline — for instance the so-called ‘core’ measure of retail sales slid 1.7 percent for its largest decline since 2001.

Even against that bleak backdrop, the December falloff in online sales was especially weak. In the hitherto booming sector, the 3.9 percent decline was the largest since the financial crisis and marked the worst December ever for the ‘nonstore’ category that stands as a proxy for online sales. Another month of weakness will confirm the storm clouds are gathering and the stimulus impact is well and truly over.

(4) Sluggish China Growth in Focus

The message that rang loud and clear from China’s annual parliament meeting was: stability is paramount.

Which is why the authorities kept growth targets within a broad 6.0-6.5 percent range, cut taxes but kept fiscal easing well short of 2015 levels. And they emphasized yuan stability as a priority. Yet, reading between the lines, one might conclude that to keep growth above 6 percent, China needs to be flexible about credit growth and deficit targets.

But after February’s 20 percent-plus exports contraction and the sharp imports slowdown, it seems a matter of when, not if, benchmark interest rates will be cut.

Upcoming data on industrial output, retail sales, housing and credit will also come against the backdrop of speculation about what deal U.S. President Donald Trump and his Chinese counterpart Xi Jinping will eventually reach on those all-important trade tariffs.

(5) Another Emerging Market Currency Crisis?

The Argentine peso in recent days has led emerging currencies in a race to the bottom, plumbing record lows. Others such as the Turkish lira and South African rand have followed closely.

One culprit is the strong dollar, which has surged to its highest level since June 2017. But domestic factors are also to blame. Aside from problematic politics and high inflation, Turkey, Argentina and South Africa rely heavily on external financing. Slowing world growth will weigh on such markets’ prospects. Turkey and Argentina were also clobbered with economic forecast downgrades by the OECD, while South Africa’s economy too has slowed.

There are signs investment into emerging equities and bonds is starting to slow. It all stirs memories from 2018 when a buoyant first quarter dissolved into selling, with Turkey and Argentina getting walloped by currency crises. Both countries have since taken steps to recover. Investors will be wondering whether those are sufficient to stop history repeating.

Top Zacks #1 Rank (STRONG BUY) Stocks—

Boeing (BA - Free Report) : The grounding of 737s by China and India won’t be kind to this pick. It has a Value Score of D too. Can the DJIA stand up if this stock heads south? I doubt it. A $422 share price and lofty second place in market cap in our rankings, at $239B are scary.

Columbia Sportswear (COLM - Free Report) : This $6.9B market cap apparel maker sports a $100 a share price. The Zacks VGM score is A too. Not all apparel makers are struggling, obviously.

Foot Locker (FL - Free Report) : This is a $6.8B market cap retailer of shoes and apparel with a $60 share price. It is a Zacks VGM score of B too.

With all the focus on retail sales this week, these retail and apparel stocks will be in focus.

Global Macro—

Keep your eyes on retail sales data, from the U.S., Mexico, and Brazil.

On Monday, Antad same store sales (Mexico’s retail sales data) comes out. The +2.5% y/y print last time looks weak.
The more important U.S. retail sales data also come out. The -1.2% U.S. retail sales print from December will get an update.

On Tuesday, U.K. GDP comes out. The -0.4 m/m rate is sluggish. A host of other U.K. indicators like industrial production, construction output, and an index of services also come out.

South Korea’s unemployment rate should get to 4.2% from 4.4% in a prior reading. That sounds like a solid performance.

The U.S. CPI comes out.

On Wednesday, U.S Durable Goods orders come out. Ex-transportation, they could be +0.2% m/m. 

The U.S. PPI also comes out. +0.2% m/m is the consensus there.

On Thursday, the HICP in Germany comes out. That +1.7% y/y consumer inflation reading will be closely watched, given the recent slowdown in GDP data there.

Broad retail sales in Brazil should climb to +2.7% y/y from +1.8% y/y.

On Friday, the Bank of Japan updates us on its target rate (now -0.1%) and its 10-year yield target (now 0.0%). Don’t expect any change.


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