UK secures legal changes to Brexit backstop

-->UK secures legal changes to Brexit; US retail sales strong going forward; PBoC Governor talks up trade, sees less scope for RRR cuts 

• Bloomberg reports that UK PM May’s effective deputy David Lidington this morning declares that the UK government has been able to secure "legally binding changes" to the Irish backstop from the EU. This is potentially a major positive development for sterling as the EU commits to "alternative arrangements". The legal instrument comes in addition to the Withdrawal Agreement and also sets out a joint statement setting out how the UK and EU are going to move swiftly to bring forward defining the future relationship.      

• Strength of US January retail sales supports the narrative the US consumer is currently in good standing but remains on watch. Retail sales advance 0.2%MoM in January and the “control group” (which enters Q1 GDP) comes in at a very strong 1.1% and above consensus for 0.6%. December however sees even deeper negative revisions (control group down from -1.7% to -2.3%).                                           

• Bloomberg reports PBoC Governor Yi as saying, “China still has some room to cut the amount of money banks must hold in reserve, but it’s much smaller than in previous years”. Markets now expect PBoC to offer more focused measures to ease liquidity than an outright RRR cut. The PBoC governor also comments on FX issues between US and China, saying “the two sides have reached consensus on many crucial issues, and discussed previous commitments on avoiding competitive devaluation. They also talk about respecting “autonomy” of each other’s monetary policy”.                    

A weak US Q1 GDP likely to keep the Fed on hold in H1’2019

• Citi analysts continue to view the plunge in US December retail sales as an outlier, in-part reflecting seasonal adjustments. The strong bounce-back in sales in January increases confidence that data on domestic growth will likely firm and be supportive of Fed rate hikes later this year. But for now, a weaker US Q1 GDP will likely be another factor that keeps the Fed “patient” at the March meeting and beyond (Citi analysts revise their Q1 GDP forecast lower from 2.1% to 1.7%). 

• Data wise, the remainder of the week sees US February CPI (Citi sees 0.19%MoM on core CPI). In Japan, Citi analysts expect the BoJ to remain reluctant to announce any additional stimulus at its board meeting (Thursday-Friday). Nevertheless, BOJ officials expect both exports and production to remain weak in Q1, with the focus on how weak global demand weighs on capital investment.      

PM May’s Brexit changes yet to get green light from key UK parliamentarians; German manufacturing weak but France picking up            

• What do this morning’s agreement between the EU and UK mean for tonight’s vote (that may possibly be delayed to tomorrow) on PM may’s Brexit deal in the UK parliament? The EU – UK agreement comprises of 2 forms – (1) A "joint, legally binding instrument" statement on the withdrawal agreement and protocol on Northern Ireland that will ensure the EU can't try to trap UK in the backstop indefinitely; such an outcome would breach legally binding commitments agreed to. (2) A joint statement to supplement the political declaration on the future UK-EU partnership as a commitment by the UK and EU to speed up and improve future trade deal negotiations.  

• Markets now look to UK Attorney General Cox's opinion on the new agreement as the next key event along with responses from DUP/ERG lawyers, to influence tonight’s UK parliament vote (though could be delayed). Indications from the ERG group (the hard Brexiteers of which there probably more than 60 in the UK parliament) appear to be relatively upbeat though no formal statement has yet been issued.               

• Since this morning’s developments, Citi analysts have seen overall interbank FX volumes in spot GBP rise to approximately 15% above average. Should UK Attorney General Cox confirm that the “legally binding changes” are valid and the DUP (UK Conservatives’ coalition partner) agree, this could potentially represent a major positive development for risk sentiment and in particular sterling.

• In the euro zone, German industrial production ex-energy and construction is down by 1.2% MM in January, more than reversing the temporary December rebound (of 1.0% MM). Car production still appears to be weighing heavily as trade tensions and Chinese growth weakness bite. Meanwhile, in France, the BdF trims the French 1Q-19 GDP estimate by 0.1pp to 0.3% QQ but the business climate measure rises by one point to 101. The survey notes industrial production has bounced back in February while order books have stabilized with  business leaders expecting industrial activity to continue to grow at the same pace in March.    

RBA governor elaborates on the [limited] impact of housing correction on the domestic economy

• •AUD stubbornly supported but meets with analyst skepticism - AUDUSD tests the key 0.7000 level Friday following weaker China data. Analysts also flag the housing market as the main concern in Australia which the RBA dismisses. RBA estimates currently 5% of indebted owner-occupier households have negative equity and vast bulk of these households continue to meet their mortgage obligations. An adjustment in housing market is manageable and unlikely to derail economic expansion. 

Weaker China credit data still encouraging for growth       

• Data from China – (1) M2 growth decelerates by 0.4ppt to 8%YoY in February, worse than expected (at 8.4%YoY); (2) New RMB loans fall to 885.8bn on seasonality (vs. 3.23tn in January); (3) New TSF slump more than expected to RMB703bn (vs. previous CNY64tn and consensus at 1.3tn). Bottom Line: Citi analysts see China’s Jan-Feb credit data as still encouraging for growth stabilization, notwithstanding the de-acceleration.  

• This is an extract from the Daily Currency Update, dated March 12, 2019. Please approach a Citigold Relationship Manager if you would like more information