Weekly global market focus — The U.S. markets this week will focus on (1) any market reaction after Attorney General Barr late Sunday afternoon reported the top-level conclusions of the Mueller investigation to Congress, (2) the chances for a US/Chinese trade deal as Lighthizer-Mnuchin travel to China on Thursday/Friday for another round of trade talks, (3) a busy week for Fedspeak with 12 appearances by various Fed officials, (4) the U.S. yield curve as the 3-month/10-year Treasury yield curve spread inverted last Friday, (5) the Treasury’s sale of $131 billion of T-notes this week, and (6) earnings reports by nine of the S&P 500 companies including Lennar and Accenture.
This week’s active U.S. economic calendar includes housing data on Tuesday, trade data on Wednesday, the revised Q4 GDP report on Thursday (expected +2.3% vs previous +2.6%), and Friday’s PCE core deflator (expected unchanged at +1.9% y/y).
In Europe, the focus will be on Brexit and any additional weak Eurozone economic data this week. The Euro Stoxx 50 index last Friday fell sharply by -1.83% on the weak economic data that included the -1.7 point decline in the March Markit Eurozone manufacturing PMI to a 6-year low of 47.6 and the -2.9 point drop in the Markit-BME German manufacturing PMI to a 6-3/4 year low of 44.7.
Today’s German Mar IFO business climate index is expected to be unchanged at 98.5, stabilizing after its year-long decline to Feb’s 4-year low. Friday’s March Eurozone CPI report is expected to be unchanged at +1.5% y/y and the core CPI is expected to be unchanged at +1.0% y/y. The expected CPI reports would keep Eurozone inflation mired well below the ECB’s target of just under +2.0%.
The Asian markets this week will focus on the US/Chinese trade talks that resume this Thursday and the performance of Asian stocks today after last Friday’s sharp sell-off in U.S. and European stocks on weak economic data. The markets will be watching to see if China’s PMI reports this coming weekend suggest that the government is winning in its efforts to boost the economy. China’s March manufacturing PMI is expected to show a +0.4 point increase to 49.6, more than recovering Feb’s -0.3 point loss to 49.2. China’s March Caixin manufacturing PMI is expected to rise by +0.1 point to 50,0, extending Feb’s +1.6 point upward rebound to 49.9. Thursday night’s Japan Feb industrial production report is expected to show an increase of +1.3% m/m, recovering part of Jan’s -3.4% plunge.
U.S. yield curve turns negative and sparks more recession talk — The 3-month/10-year Treasury yield curve spread last Friday turned slightly negative by -0.3 bp for the first time since August 2007 when the financial crisis was swinging into gear. Meanwhile, the 2s10s spread of the 10-year yield minus the 2-year yield fell to a new 3-month low last Friday of 12.2 bp, which is just 1.3 bp above the 12-year low of 10.9 bp posted last December.
The flattening yield curve has sparked even more media commentary about the odds of a recession. However, the yield curve now is now flattening, not because the Fed is raising interest rates further, but because long-term yields are falling faster than short-term yields. The decline in long-term yields should provide stimulus to prop up the economy by helping the housing and auto sectors in particular, making a U.S. recession less likely.
U.S. confirms upcoming round of US/Chinese trade talks — The White House last Friday confirmed that USTR Lighthizer and Treasury Secretary Mnuchin will visit China for trade talks this Thursday and Friday (March 28-29). The White House said that Chinese Vice Premier Liu will then visit Washington beginning next Wednesday (April 3) to continue the talks. The trade talks have slowed in recent weeks since China has reportedly backtracked on some of its concessions since the Trump administration will not commit to lifting tariffs. The key sticking point is reportedly the enforcement of the agreement with President Trump saying that tariffs will only be lifted as China meets certain milestones set in the agreement.
Brexit headed for busy week with PM May under increased pressure to step down — Prime Minister May is hanging on by a thread as she is attacked from all directions on her Brexit plans. The Sunday Times over the weekend reported that at least six of her cabinet ministers on Monday plan to confront Ms. May and force her to step down or see mass cabinet resignations. There were also mass protests in London on Saturday with reports of more than 1 million protesters spilling out onto the streets to call for a second vote on Brexit.
Meanwhile, Prime Minister May is still trying to get Parliament to vote for a third time on her Brexit separation agreement, which has already been rejected twice by large margins in Parliament. It remains to be seen whether Speaker Bercow will even allow a third vote on her plan, which has to be substantially changed to qualify for a new vote. French President Macron late last week said the odds are only 5% that Ms. May will be able to get Parliament to approve her Brexit plan. Meanwhile, Ms. May’s government has promised a series of indicative votes in Parliament to test support for various Brexit alternatives. Those votes could come as soon as this week with a Brexit debate scheduled for today.
The UK now faces a deadline of April 12 to approve a Brexit agreement. If a Brexit agreement is approved by April 12, then the deadline would be extended until May 22 to give Parliament time to pass the enabling legislation. However, if Parliament does not approve a Brexit separation agreement by April 12, then the UK faces either a no-deal ejection from the EU on April 12 or the UK must request what is sure to be a long deadline extension of at least nine months.