US Futures Slide On Lack Of New "Trade Deal Optimism"; Dollar Ramps Higher

Overnight, BoJ board member Yutaka Harada has said that Japan’s economy might slide into a recession after a planned sales tax hike later this year, despite a raft of government measures to limit its impact. He cited the example of the 2014 sales tax hike which hit consumption hard and as a result, the BoJ ramped up its stimulus 6 months into the hike. Harada is definitely at the dovish end of the committee.

Staying in the region, with China’s NPC into its second day, yesterday our China Chief Economist Zhiwei Zhang outlined his summary of the government’s 2019 work plan which you can find here. Zhiwei believes that the speech sent more signals of policy easing – both fiscal and monetary – and as such he now expects two cuts to the benchmark lending rate of 25bps each in Q2 and Q3.

Back to the PMIs, upward revisions to the core and better than expected non-core readings meant we saw the services reading for the Euro Area revised up half a point to 52.8 and therefore the highest since November. That left the composite at 51.9 which means it finally snapped a run of five consecutive monthly declines. So finally some signs of improving momentum in Europe, or at least in the services sector. Germany’s services reading was revised up from 55.1 to 55.3, France to 50.2 from 49.8 while there were beats for Italy (50.4 vs. 49.5 expected) and Spain (54.5 vs. 54.3 expected). All eyes turn to the ECB tomorrow however one has to expect that the data plays into the wait-and-see message that we’ve been getting from officials of late.

We should also note that the services reading for the UK also surprised to the upside yesterday at 51.3 (vs. 49.9 expected) – up 1.2pts from January. That being said the underlying details were weaker including the employment component. Sterling closed flat, with downside pressure from Brexit headlines offset by positive monetary policy signals. First, Bloomberg headlines popped up just after lunch suggesting that no breakthrough was expected at the Brexit talks yesterday in Brussels. A further story suggested that no agreement was likely on the backstop before the end of this week and that talks could potentially stretch into the weekend (how many times have we said that on both pure EU issues and with Brexit). On the other hand, the pound got some support via comments from Bank of England Governor Carney, who said that "the path of interest rates is not quite high enough," suggesting that current pricing for the next rate hike for Q4 this year may not be in-line with his own expectations. Staying in the U.K., Bloomberg reported (citing sources) yesterday that the UK PM May’s chief whip Julian Smith is not confident that he has the numbers for March 12th Brexit vote and has predicted that in the votes that follow, a no-deal Brexit would be taken off the table, and the government would be instructed to seek an extension to talks. He also said that he expected lawmakers to put down further amendments that would pass and put the UK on course to staying in the customs union. Sterling is trading weak (-0.32%) this morning as Reuters overnight confirmed the above Bloomberg story that the Brexit talks yesterday didn’t yield any progress and cited an EU official as saying they didn’t go well!

Back to yesterday’s data and as well as the PMIs, we also got the February ISM non-manufacturing reading in the US which looked particularly impressive at a headline level (59.7 vs. 57.4 expected) after jumping 1.7pts and to the highest since November last year. The new orders component also rose 7.5pts to 65.2 and the highest since 2005 however the one small negative was a slight drop in the employment component to 55.2 from 57.8 last month. That said, today’s ADP (190k expected) is likely to be more important for setting payrolls expectations this Friday.

As for the other US data yesterday, new home sales for December printed at 621,000, better than expected but along with a downward revision to the prior month, leaving the overall outlook roughly unchanged. The Treasury's monthly budget statement showed a surplus of $8.7bn for January, marginally smaller than expected. These statement will become more interesting when we get deeper into tax season over the next few months, to help us better gauge the impact of last year's tax cuts. Finally, the final Markit composite PMI for February was revised lower by 0.3pts to 55.5, still its highest level since last July.

Finally, in terms of the day ahead, we’ve got no data releases scheduled in Europe this morning while in the US the focus should be on the February ADP employment change reading, and the December trade balance. Later this evening we’ll also get the Fed’s Beige Book while the Fed’s Williams and Mester are due to speak this evening in New York and Ohio, respectively. The BoE’s Cunliffe and Saunders are also slated to speak while the OECD’s interim economic outlook is also due to be released.

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