Markets: Birthday Candles
Today is my birthday. We all know there is light at the end of the tunnel and at the end of the birthday candle – so today that analogy to markets looks obvious with next week bringing the last full week for 2018 trading and with it regrets along with hopes as central banker decisions from the FOMC, BOE, Riksbank and others likely will dominate.
Fear of failure meets the greed of success daily and in the last week, fear beat greed. There wasn’t much new to add to the fear list last week other than more Trump impeachment fodder, but less to add to greed for US markets even with good retail sales and lower weekly jobless claims. Globally, the Europeans did best with risk as UK PM May blinked and postponed her Brexit deal vote and managed to win a Tory leadership challenge. ECB Draghi delivered a dovish enough message even as the central bank continues its plan to normalize policy by ending QE. The Italian government agreed to lower its budget deficit for 2019 to 2.04% down from 2.4% - perhaps enough to prevent the EU from the EDP (excessive deficit procedure). The weakness of growth in Japan and China led Asia and markets suffered accordingly even though US/China talks continued with some positive signals. The list of fears stands in the way of a Santa Claus risk rally. The candle charts are suggesting more blow off tops than hefty cake to enjoy with 2535 the next target rather than a bounce back to 2700 for year end.
- Recession– The odds for a recession in the US economy rose last week despite the modestly better data – JPM Chase grabbed headlines with a 70% odds in 2-years.
- Impeachment– Predictit odds of an impeachment fell last week even as the headlines on Trump were worse with the sentencing of Cohen and the press around it. This begs the question of what political headlines matter in the US – with the Pelosi and Trump meeting an example or the threat of a government shutdown.
- Global Trade– Fear that the trade truce between Xi/Trump falls apart continues to drive markets. Trade volumes in the last month are going down – as the CPB world trade monitor shows 1.1% dip in September (its latest report).
- Brexit and UK May government. The last week brought plenty of drama but little change. The odds for a new government from Labour or a no-deal divorce from the EU remain in play. Another referendum also plays to the market and to the sense of regret shown in polls over the last month. May is battling with former PM Blair on his call for a new Brexit vote.
- EU Politics. Another weekend brings more yellow-vest protests to France even as Macron tried to compromise last week. Polls show Macron losing popularity with Ifop at 23% down 2% last week and Ipsos at 20% off 6%.
- Emerging Markets. The FOMC rate hike risk next week, ongoing fears about US/China trade and growth – and ongoing capital outflows suggest further funding and growth issues for 2019.
Question for the Week Ahead: Are central bankers the secret Santa?
The host of central bank decisions this week – with the FOMC leading the charge – leave many hoping that there is a respite for tighter policy and some risk-rally relief into the last of 2018. This seems temporary at best. The “market tensions we saw during this quarter were not an isolated event,” Claudio Borio, head of the monetary and economic department at the BIS said today. Monetary “policy normalization was bound to be challenging especially in light of trade tensions and political uncertainty,” Borio added in the BIS’s quarterly review. What seems obvious to 2018 is that central bankers have been intent on policy normalization and that in 2019 this won’t reverse quickly.
Among the challenges facing the global economy, Borio listed the possibility of rising inflation, the “dark cloud” of lower-rated U.S. corporate debt in an overstretched market and weakness in the European banking sector. The BIS worries will show up in illiquid markets and in credit – with Europe on the front lines.
Market Recap:
Growth fears dominated the week – from weaker China data starting with trade that showed slowing exports and weaker imports to weaker industrial production and retail sales. Europe added to the anxiety with weaker flash PMIs – particularly France with its yellow-vest crisis driving. The US/China trade talks remained front-and-center for investors but Huawei CFO arrest became a Canadian first problem as China detains two Canadians in seeming retaliation. China did return to buying US soybeans and reports are that they are redrafting made in China 2025 plans along with considering cutting auto tariffs – that helped Europe considerably. Japan with its 3Q GDP revision at -2.5% y/y from -1.2% y/y suffered notably and added to the global growth doubts. For the US the data was mixed – Industrial Production rose 0.6% in November more than the 0.4% expected. US PMI flash for manufacturing fell to 13-month lows at 53.9 while services fell to 53.4 – 11-month lows. US retail sales rose 0.2% in November – better than 0.1% - and greatly influenced by drops in gasoline prices.
Equities:
The MSCI all-country World Index fell 1.15% to 468.51 on the week. The MSCI EM index fell 0.97% to 971.90 on the week. Focus was on global growth and trade with US and China both seen as hurting while Europe saw a bit of respite as Brexit delays, Macron compromises and Italy Budget games mixed well with talk of China cutting auto tariffs on the US.
- The US S&P500 fell 1.26% to 2,599.95 on the week. The break of 2600 is seen as key for a larger correction – right now at -11.3% from its October highs. Financials hit on bond moves while utilities led sectors. Small-caps suffered with Russell 2000 at 52-week lows – down 2.6% to 1410.82 on the week. The DJIA fell 2.02% to 24,100.51 on the week back to May 3 lows and now down over 10% from its Oct 3 record high. The NASDAQ fell 0.84% to 6,910.67 on the week – up 0.11% on the year – only major US index still positive. The VIX fell 1.6pp to 21.63% on the week.
- The Stoxx Europe 600 rose 0.51% to 347.21 on the week. The German DAX rose 0.72% to 10,865.7 on the week. The French CAC40 rose 0.84% to 4,853.70 on the week. The UK FTSE rose 0.99% to 6,845.17 on the week. The Italian MIB FTSE rose 0.9% to 18,910.79 on the week.
- The MSCI Asia Pacific Index fell 1.35% to 149.14 on the week. The Japan Nikkei fell 1.4% to 21,374.83 on the week, while the TOPIX fell 1.51% to 1592.16. The Hong Kong Hang Seng rose 0.12% to 26,094.79 on the week, but the China Shanghai Composite fell 0.47% to 2,593.74 on the week. The Korea Kospi fell 0.31% to 2,069.38 on the week. The Australian ASX200 fell 1.37% to 5,678.80 on the week. The India Nifty50 rose 1.05% to 10,805.45 on the week.
Fixed Income
This was a choppy week for bonds. Hopes for trade talks progressing clashed with weaker global data, supply and political fears from France to US to China. The big repricing of Fed hikes mostly held this last week even while the ECB plans to normalize. The number of FOMC hikes for 2019 dropped from 2.5 to 1 in the last 2 weeks. The FOMC meeting this week is 75% for a 25bps hike – but after that its an open book. The biggest moves in bonds last week were in the periphery of Europe where Italy’s new government offered a budget compromise though few see this as anything but a extend and pretend game and there is doubt that EU accepts this still. Overall, the risk-off in equities in Asia and US left bonds flat to bid.
- US bonds see modes curve steepening after supply, better data– 2Y up 3bps to 2.74%, 3Y up 1bps to 2.73%, 5Y up 4bps to 2.73%, 10Y up 4bps to 2.89%, 30Y up 1bps to 3.15%.
- Canadian 10-year bond yields up 3bps to 2.10% on the week. Tracking US moves and watching oil/BOC reaction function.
- Japan JGB yields off 3bps to 0.035% on the week. The weaker GDP and weaker shares leave many expecting more from BOJ.
- Australia 10-year bond yields off 1bps to 2.44% on the week. Tracking US and watching China growth.
- UK Gilt yields off 2bps to 1.25% on the week. The focus on politics and Brexit remains key with data mixed.
- German Bund yields up 1bps to 0.26% on the week. Holding pattern with periphery and ECB the main drivers.
- French OAT yields up 4bps to 0.72% on the week. The Macron compromise with yellow-vests is key focus – no reform=higher yields.
- Italian BTP yields off 17bps to 2.97% on the week. Though 2.04% isn’t 1.99% the game for EU compromise driving with growth still key concern.
- Spanish Bono yields off 4bps to 1.42% on the week. Politics, growth and Italy driving.
- Portugal 10-year bond yields off 13bps to 1.67% on the week. Catch up to Italy with 1.80% now key pivot for 1.35% again.
- Greek 10-year bond yields off 7bps to 4.25% on the week. Doubts about politics, returning to market in 2019 and growth.
Foreign Exchange
The US dollar index rose 0.94% to 97.42 on the week with 97.71 highs marking new 18-month highs. In Emerging Markets USD was bid most of the week - Asia:KRW 1131.70 off 0.7%, CNY 6.8995 off 0.25%, INR 71.91; EMEA:RUB 66.761 off 0.55%, ZAR 14.386 off 1.65%, TRY 5.362 off 1.1%; LATAM:BRL 3.917 off 0.25%, MXN 20.233 up 0.1% - all on the week.
- EUR: 1.1305 off 0.6% on the week. Watching 1.12 and 1.14 for further moves – ECB vs FOMC.
- JPY: 113.35 off 0.25% on the weekand EUR/JPY 128.15 off 0.85% on the the week. Focus is on equities and BOJ with 112.50-80 key
- GBP: 1.2585 off 1.1% on the weekand EUR/GBP .8970 up 0.4% on the week. Focus is on UK politics and Brexit deals with 1.24-1.27 keys.
- CHF: .9975 up 0.35% on the weekand EUR/CHF 1.1280 off 0.15% on the week. SNB didn’t act, growth worse, ECB dovish enough to make 1.00 still USD stability +/-1%.
- CAD: 1.3380 up 0.45% on the week. The China retaliation, commodities and US rates all driving with 1.33-1.3450 keys.
- AUD: .7175 off 0.3% on the weekand NZD 0.6795 off 1% on the week. Market watching crosses, commodities and China with .7050-.7280 keys.
Commodities
The S&P/GSCI fell 2.45% to 2,387.69 on the week with oil again a key driver. Winners for the week – cattle, cocoa, wheat while Nat Gas reversed and led the losers off 14.7% on the week with Lumber and orange both down near 3%.
- Oil: $51.11 off 2.3% on the week. Brent $60.24 off 1.97% on the week. The mix of OPEC doubts and equity weakness drives with $50-$52.50 key in WTI and $59-$62 in Brent.
- Gold: $1238.1 off 0.75% on the week. USD bid tone driving with some safe-haven demand holding $1236 for now but risk is $1215-$1225 again. Silver $14.566 off 0.35% on the week. Platinum $787 off 0.35% on the week. Palladium $1237.60 off 1.8% on the week.
- Corn: $376.75 up 0.74% on the week. China buying returning Friday vs. USD bid, vs weather and global supply. Soybeans $900.50 off 1.77% on the week. Wheat $527.75 up 1.59% on the week.
- Copper: $2.7750 up 2% in cash / Futures $2.7520 up 1.23% on the week. Copper reflects something different than equities – Dr. Copper telling us Christmas is almost here. Iron Ore up 2.5% to $66.71 Jan futures – reflecting much the same as higher grade demand rises.
Calendar for the Week Ahead
Plenty of news and rate decisions to chew on for the last full week of 2018. Markets will focus on US FOMC, housing starts, sales, GDP revision, durable goods and Philly Fed. UK gets BOE and CPI/PPI/retail sales/GDP revision. German IFO, GfK and PPI along with French business confidence, Swedish Riksbank and consumer confidence round out Europe. Asia focus is on Japan CPI and Trade data, Australian jobs, and Indonesia rate decision.
Monday, December 17: Eurozone final HICP, US NAHB housing index
- 0500 am Eurozone Oct trade surplus E13.1bn p E12.7bn e
- 0500 am Eurozone Nov final HICP (m/m) 0.2%p -0.2%e (y/y) 2.2%p 2.0%e / core 1.1%p 1.0%e
- 0830 am US Dec NY empire state manufacturing 23.3p 20.6e
- 1000 am US Dec NAHB housing market index 60p 61e
- 1130 am US sells 3M and 6M bills
- 0400 pm US Oct TIC long-term flows $30.8b p $30bn e
Tuesday, December 18:German IFO, US housing starts
- 0730 pm RBA meeting minutes
- 0400 am German Dec IFO business climate 102p 101.7e / expectations 98.7p 98.3e / current conditions 105.4p 104.8e
- 0800 am Hungary rate decision – no change from 0.9% expected.
- 0830 am Canada Oct manufacturing sales (m/m) 0.2%p -0.2%e
- 0830 am US Nov housing starts 1.5%p -0.7%e / 1.228m p 1.225m e
- 0430 pm US weekly API crude oil inventory -10.18mb p +1mb e
Wednesday, December 19: Japan trade, German PPI, UK PPI/CPI, Canada CPI/ US existing home sales, FOMC rate decision
- 0430 pm New Zealand 3Q current account (q/q) NZ$5.8bnp NZ$1.62bn e / GDP ratio -3.6%p -3.3%e
- 0630 pm Australia Nov Westpac LEI 0.1%p 0.1%e
- 0650 pm Japan Nov Trade deficit Y449bn p Y603bn e / exports 8.2%p 1.8%e / imports 19.9%p 11.5%e
- 0200 am German Nov PPI (m/m) 0.3%p -0.1%e (y/y) 3.3%p 3.2%e
- 0300 am Sweden Dec business confidence 104.8p 104.7e
- 0300 am Sweden Dec consumer confidence 97.5p 99e / inflation exp 3.3%p 3.2%e
- 0430 am UK Nov CPI (m/m) 0.1%p 0.2%e (y/y) 2.4%p 2.3%e / core 1.9%p 1.8%e
- 0430 am UK Nov PPI output (m/m) 0.3%p -0.1%e (y/y) 3.3%p 2.9%e / core 2.4%p 2.3%e / input (m/m) 0.8%p -3%e (y/y) 10%p 4.6%e
- 0500 am Eurozone Oct construction output 4.6%p 2.9%e
- 0600 am UK Dec CBI industrial trends orders 10p 6e
- 0830 am Canada Nov CPI (m/m) 0.3%p -0.2%e (y/y) 2.4%p 1.9%e / core 1.6%p 1.5%e
- 0830 am US 3Q current account deficit $101.bn p $124bn e
- 1000 am US Nov existing home sales (m/m) 1.4%p -0.6%e / 5.22m p 5.20m e
- 1030 am US weekly EIA oil inventories -1.208mb p -3mb e
- 0200 pm US FOMC rate decision 25bps hike to 3% expected / FOMC forecast shift for 2019 (expected lower) / Powell press conference
Thursday, December 20: BOJ, Indonesia, Riksbank, Czech, BOE and Mexico rate decisions, Australia jobs, UK retail sales, US Philly Fed
- 0730 pm Australia Nov jobs +32.8k p +20k e / unemployment rate 5%p 5%e / participation 65.6%p 65.6%e
- 1000 pm Bank of Japan rate decision – no change in policy expected.
- 1130 pm Japan Oct all industry activity index (m/m) -0.9%p 2%e
- 0200 am Indonesia rate decision – no change from 6% expected.
- 0330 am Sweden Riksbank rate decision – no change from -0.5% expected
- 0400 am Eurozone current account surplus E24.1bn p E21.7bn e
- 0400 am Italy Nov PPI (y/y) 5.8%p 5.2%e
- 0430 am UK Nov retail sales (m/m) -0.5%p +0.3%e (y/y) 2.2%p 1.9%e / ex fuel 2.7%p 2.3%e
- 0600 am UK Dec CBI retail trade 19p 16e
- 0700 am UK BOE rate decision – no change from 0.75% expected.
- 0700 am Czech central bank rate decision – no change from 1.75% expected.
- 0830 am Canada Oct wholesale sales (m/m) -0.5%p +0.4%e
- 0830 am US weekly jobless claims 206k p 215k e
- 0830 am US Dec Philadelphia Fed manufacturing 12.9p 15e
- 1000 am US Nov Conf Board LEI 0.1%p 0.1%e
- 0200 pm Mexico central bank rate decision – 25bps high to 8.25% expected.
Friday, December 21: Japan CPI, UK GDP revised, Canada GDP, US revised GDP, personal spending/income/PCE prices/ Michigan survey
- 0630 pm Japan Nov CPI (m/m) 0.2%p 0.1%e (y/y) 1.4%p 1.4%e / core 1%p 1%e
- 0200 am German Jan GfK consumer confidence 10.4p 10.3e
- 0245 am French Dec business confidence 105p 102e
- 0245 am French Nov household consumption (m/m) 0.8%p -0.1%e
- 0245 am French 3Q final GDP (q/q) 0.2%p 0.4%e
- 0330 am Sweden Nov retail sales (m/m) -1.1%p 0.6%e (y/y) -0.1%p 1.9%e
- 0400 am Italy Dec business confidence 104.4p 103.8e
- 0400 am Italy Dec consumer confidnce 114.8p 114e
- 0430 am UK 3Q current account deficit G20.31bn p G21.2bn e
- 0430 am UK 3Q final GDP (q/q) 0.4%p 0.6%e (y/y) 1.2%p 1.5%e / business investment -0.7%p -1.2%e
- 0430 am UK Nov PSNB G7.956bn p G7.05bn e
- 0700 am UK BOE 4Q Bulletin
- 0830 am Canada Oct GDP -0.1%p +0.2%e
- 0830 am Canada Oct retail sales (m/m) 0.2%p 0.3%e (y/y) 3.8%p 3.9%e
- 0830 am US Nov durable goods orders (m/m) -4.4%p +1.7%e / ex trans 0.1%p 0.3%e / ex defense -1.2%p +1.2%e
- 0830 am US 3Q final GDP 4.2%p 3.5%e / core PCE 2.1%p 1.5%e / corporate profits 2.1%p 3.3%e /
- 0830 am US Nov personal income (m/m) 0.5%p 0.3%e / spending 0.6%p 0.3%e / core 0.1%p 0.2%e
- 1000 am Canada BOC business outlook
- 1000 am US Dec final Michigan consumer sentiment 97.5p 97.5e
- 1100 am Canada Oct budget deficit C$1.36bn p C$0.99bn e
Conclusions: Is the real risk about disinflation?
The next few months will become data dependent for investors. This means that talk for a March Fed rate hike will rest on US jobs, US growth and US inflation data. The ECRI weekly index is telling us to watch for disinflation. This will be a problem for some as they watch Fed policy and hope for a pause or reversal in Fed rate hikes. The hope for a return to a Goldilocks story remains in play for 1Q – with lower inflation and steady growth suggested by the data but clearly doubted by investors and the market.
What seems clear from the data last week is that the big four indicators most used by the FOMC to indicate trouble are all flashing green – retail sales, industrial production, employment – all so far are positive and suggest no reason for Fed pauses. Next week's personal income and spending are not expected to surprise to the downside either.
There is no reason for 4Q blues in the US other than through confidence in the future eroding. The Atlanta Fed 4Q GDP now points to better not worse growth dynamics. This will make the USD bid tone harder to turn and the policy fears for FOMC higher into January.
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