Cold weather. The arctic vortex crashes down on the US with my spigots suffering like my fingers. Anyone that has suffered frozen pipes knows the feeling: spigots become freezing ice volcanoes after a thaw. Burst pipes and ongoing cold blasts make the present market melt up look technically bearish, even while the headlines improve over the big worries with China perpetual bond issuance for banks seen as a U-turn on its forced deleveraging of the shadow banks; with Trump blinking on his wall money and reopening the government; with the UK May blinking with the DUP over Brexit and with the ECB blinking over its rush to normalize. Nevertheless, the last week was modest for risk takers with the economic data confirming the 4Q downturn has no real bounce in 1Q and so the gloom set in for the “gliteratti” of the WEF Davos as the IMF cut its WEO growth for 2019 and increased the downside risk. 

So, for the week ahead, the trepidation over Fed pauses or Chinese QE (quantitative easing) should be about the credit pipes and the flooding that follows. Thaws in risk mean less room for the FOMC to pause. Financial conditions are a global affair and between ongoing BOJ, SNB, BOE bond buying, and now the new QE with Chinese characteristics, the FOMC normalization and the ECB talk of doing the same makes QT (quantitative tightening) seem like a frozen spigot. There is a growing danger in this thinking given that short volatility, long carry plays have become the consensus winning game again.  EM flows into debt overwhelm fears about weaker earnings and slower global trade. 

The headlines from last week were just not focused on China stimulus plans after a weaker set of economic data but rather US/China talks stalling over intellectual property, gloom from Davos speakers, North Korea/US summits, NATO/Russia concerns over the new Russian missile defense and the collapsing regimes of Venezuela and Zimbabwe. The culmination of the last week came from the US airport slowdowns from TSA and air traffic controllers leading to Trump flipping on his wall showdown with the democrats. This event reopened the government and ensures a deadlock for anything new from the US on fiscal stimulus. 

How the US growth rate plays out in 2019 and beyond rests on the consumer and business spending as the US government appears to be tapped out post the Trump tax reform and given the size of the national debt. The role of fiscal and monetary policy in how nations grow isn’t the only factor with the last week highlighting the role of confidence driving forward business and consumer spending plans. This brings us back to how the FOMC considers financial conditions along with confidence measures and whether the new Powell Fed will be tested accordingly. 

Question for the Week Ahead: Does the China Perpetual Bond plan end growth concerns for 2019?

The connections between US and China, the world and Asia all come to play in the outlooks for 2019. On one hand you have China stimulus and on the other, is the risk for an extended China trade war. The question maybe whether the plan for China back-door QE leads to less willingness to come to a deal with Trump over the stickier issues of intellectual property and open seas (read as the militarization of the South China Sea). Many want to believe that China can re-inflate the economy at the command of Xi. The ability for the Chinese government to issue more debt as it did in 2008 and help spur growth globally is the playbook. China has room when you look at the amount of government debt compared to Europe or the US or Japan. 

However, the larger and more troubling issue about perpetual bond issuance working as a new QE for the world rests on how it drives the Chinese consumer.  Many see the plan a merely a recapitalization of the banks – as they issue perpetual bonds (the big 5 and up to 40 other institutions), the PBOC swaps them for government bills. This move puts their debt on the balance sheet of the central bank. The duration of these swaps, the amount of actual bonds in the pipeline to be issued, the willingness of the insurance sector and foreigners to buy the stuff – all that matters as well. The Bank of China issues about $5.6 billion (CNY40 billion) Friday at 4.5% with 2 times cover – that is better than the 5.2% expected – but still implies even higher pass on costs to the private sector.  The roll-over of private debt is the usual stuff of 1Q and the noise of the Chinese New Year celebration (Feb. 5) in disrupting business and spending makes it hard to tell if all this will work. 

The speed of change in the private sector and household balance sheets makes the present plan for perpetual bonds look a bit like pushing on a string.  Can you get banks to lend to riskier companies and consumers by giving them more liquidity? Supply meets demand and that remains the key fear for China as it shifts into a middle income trap risk like Japan in the 1980's. The present plan for 2019 to hold grow at 6% by government stimulus and this new QE makes the risk for asset price inflation clear, but as the US and EU learned it doesn’t drive the private sector to investment or the consumer to spend more without inflation. Property price inflation is the natural place to expect this money from perpetual bonds to flow. 

The other issue for the plan will be in the CNY and the tension between the government hopes to attract foreign investors to its bond market leaving the CNY stronger vs. the natural interest rate spread forcing CNY weaker.  As the bond market starts to fear longer term inflation and the curve steepens, the CNY may actually suffer with a test back to 7.0. The inflows of the last 2 weeks with CNY bonds the draw is something to watch as to the timing of such risks. 

Market Recap:

The IMF WEO knocked down GDP outlooks and warned of downside risks into the Davos WEF meetings where gloom dominated. The weaker GDP from China along with a less domestic demand added as did the weaker EU PMI flash reports. However, markets were not as negative, particularly Asian EM. The connection of China stimulus hope rising post Xi meeting leaders and talking about grey rhinos led to a bigger bump up in risk there. 

Equities:

The MSCI all-country World Index rose 0.21% to 484.53 on the week.  The MSCI EM index jumped 1.4% to 1032.34 with Asia rebound notable. 

• The US S&P500 fell 0.22% to 2,664.76 on the week, still up 6.3% on the month. The Monday holiday and US government shut down mixed with better earnings to leave US markets mixed. The DJIA up 0.08% to 24,727 on the week while the NASDAQ up 0.11% to 7164.86 on the week.  The Cboe VIX fell 0.38pp off 2.13% on the week to 17.42%. 
• The Stoxx Europe 600 rose 0.22% to 357.84 on the week, up 6.43% on the month so far for the fourth week of gains.  The German DAX rose 0.68% to 11,281.79 for the week. The French CAC40 rose 1.02% to 4,925.82 on the week. The UK FTSE 100 fell 2.28% to 6,809.22 (reflecting GBP gains) for the week. The Italian FTSE MIB rose 0.52% to 19,810.52 on the week. 
• The MSCI Asia Pacific Index rose 0.98% to 154.86 on the week. The Japan Nikkei rose 0.52% to 20,773.56 on the week. The Hong Kong Hang Seng rose 1.77% to 27,569.19 on the week. The China Shanghai Composite rose 0.22% to 2,601.72 on the week. The India CNX Nifty fell 1.16% to 10,780.55 on the week. The Australia All Ords rose 0.5% to 5,971.10 on the week and the Korea Kospi rose 2.52% to 2,177.73 on the week. 

Fixed Income: 

The US focus was on growth hits from the government shutdown leading to a bond rally and reversal Friday as Trump relented on his wall money for now. The ECB meeting and dovish sounding Draghi mixed with weaker EU flash PMIs and other data to drive bond yields lower this week. The Chinese perp bond PBOC swap and the big infusion of TMLF money Wednesday were key for Asia fixed income after disappointing China data Monday – while the BOJ on hold but lowering CPI outlook added to view that easy money is here to stay for awhile regardless of the fickle Fed next week.  Growth data, FOMC decision/statement and US/China trade along with supply from US, Germany and Italy key for next week. 

• US bonds see curve flattens with FOMC pause expected, mixed data- 2Y off 3bps to 2.59%, 3Y off 4bps to 2.56%, 5Y off 3bps to 2.59%, 10Y off 4bps to 2.75%, 30Y off 7bps to 3.03%.
• Canadian 10-year bond yields fell 6bps to 198% on the week– with mixed data, focus on trade and BOC still key.
• Japan JGB yields fell 1bps to 0% on the week– with BOJ on hold despite cutting CPI outlook and global trade hit showing up in data.
• Australian 10-year bond yields fell 10bps to 2.24% on the week- with data ahead CPI/PPI key for RBA, China stimulus focus vs. trade talks
• UK Gilt yields fell 4bps to 1.32% on the week- with Brexit still the only story and still not resolved with data mixed
• German Bund yields fell 7bps to 0.19% on the week- with risk fears on growth higher and ECB on hold but Draghi talking dovishly 
• French OAT yields fell 6bps to 0.60% on the week– with data mixed, Macron politics bottoming hope
• Italian BTP yields fell 4bps to 2.70% on the week– ECB Draghi talk key.
• Spanish Bono yields fell 11bps to 1.25% on the week– tracking ECB and leading with growth/politics still key risks
• Portugal 10-year bond yields rose 6bps to 1.65% on the week– supply and growth along with unwind vs. Italy
• Greek 10-year bond yields fell 10bps to 4.08% on the week– chase for yield winning post Macedonia vote, ignoring protests. 

Foreign Exchange:

US dollar index is off 0.55% to 95.79 on the week – tests higher failed putting 95.20 as next key support. In Emerging Markets the USD was lower for the week  - EMEA:ZAR rose 1.6% to 13.608, RUB rose 0.3% to 65.951, TRY rose 1.1% to 5.268; ASIA:CNY up 0.75% to 6.7580, INR up 0.45% to 70.89, KRW up 0.6% to 1117.80; LATAM:MXN up 0.5% to 18.979, BRL off 0.5% to 3.769, ARS up 1.5% to 37.012

• EUR: 1.1410 up 0.45% on the week with 1.1320-1.1480 hot points and 1.13-1.15 range holding despite weaker EU data and dovish ECB.
• JPY: 109.55 off 0.2% on the week with EUR/JPY 124.95 up 0.2% with 125 pivotal still and equities driving more than economic data for USD 110 pivotal resistance. 
• GBP: 1.3200 up 2.5% on the week with EUR/GBP off 2.1% to .8640 – Brexit delay and possible 2ndvote driving with DUP deal hopes opening 1.35 retest risks. 
• CHF: .9930 off 0.25% on the week with EUR/CHF 1.130 up 0.15% - all about ECB dovish talk vs. equities and US rate with 1.00 pivot still.
• AUD: .7180 up 0.2% on the week with China stimulus vs. commodities and mixed data key with .7050 base for .7350 again, NZD up 1.4% to .6835 on the week with RBNZ easing talk lower after better data watching .6880 and .6950 next. 
• CAD: 1.315 off 0.3% on the week with 1.3250 pivot pointing to 1.3050 if BOC and data next week help along with crosses, 1.34 cap key. 

Commodities:  

The S&P/GSCI total return index fell 0.81% to 2,411.17 on the week. Lumber led the winners up 7.5%, Platinum second up 2%. Also notable cold weather not enough for NatGas off 8.7% on the week, with Cocoa and sugar and milk – the hot chocolate basket all lower as well. 

• Oil: $53.69 off 0.6% on the week– first drop in 4-weeks – but still up 16.1% on the month. Brent $61.64 off 1.7% on the week with focus on US inventories and OPEC counter with Venezuela issues ignored. 
• Gold: $1303.15 up 1.7% on the week with USD weakness driving and $1285 base holding (cash) for $1305 and $1310 next. Futures $1298.1 up 1.2% on the week (Feb). Silver $15.744 up 2.7% on the week with another shot at $15.90 key. Platinum up 2% to $813.50 and Palladium off 1.15% to $1360.50 with focus on auto demand and US sales next week. 
• Corn: $380.25 off 0.4% on the week with US trade talks still key but weather also matters – Soybeans up 0.9% to $925.25 while Wheat up 0.45% to $520.00. 
• Copper: $2.7050 off 0.1% on the week, but with March futures $2.7265 up 0.25% on the weekwith focus on China stimulus. $2.75 key resistance. Iron Ore $74.51 Feb futures up 1.5% on the week. 

Calendar for the Week Ahead:

US/China trade talks, UK Brexit vote and Tory party, US FOMC meeting and Powell press conference, ECB Draghi speech dominate with 4Q earnings along with the usual month-end big economic data with global PMI, EU flash CPI, Korea trade, US and EU economic sentiment surveys.  The world wants to believe 2019 is going to be better than the worst case scenario priced at the end of 2018 and the data ahead matters accordingly. 

Monday, January 28: ECB M3, Draghi speech, US 2-5Y sale

• 0650 pm Japan BOJ minutes
• 0830 pm China Dec industrial profits (ytd) 11.8%p 
• 0400 am Eurozone Dec ECB M3 (y/y) 3.7%p 3.8%e / private loans 3.3%p 3.4%e
• 0830 am US Dec Chicago Fed National Activity 0.22p 0.15e
• 0900 am ECB Draghi speech
• 1030 am US Jan Dallas Fed Manufacturing -5.1p -2e
• 1130 am US sells 3M and 6M bills
• 0100 pm US sells $40bn 2Y and $41bn 5Y notes

Tuesday, January 29: US home prices, consumer confidence, UK Brexit vote

• 0730 pm Australia Dec NAB business confidence 3p 2e
• 1045 pm Japan sells 40Y Y400bn JGBs
• 0245 am French Jan consumer confidence 87p 89e
• 0300 am Spanish 4Q unemployment rate 14.6%p 14.5%e
• 0540 am German 2Y Schatz E5bn auction
• 0800 am Hungary central bank rate decision - expected -0.15% depo / 0.9% repo unchanged
• 0900 am US Nov S&P/Case-Shill home prices (y/y) 5%p 5%e (m/m) 0%p -0.1%e
• 1000 am US Jan Conference Board consumer confidence 128.1p 124e
• 1130 am US sells 12M bills and $20bn in 2Y FRN
• 0100 pm US sells $32bn 7Y notes
• 0200 pm UK Parliament vote on Brexit PlanB
• 0430 pm US weekly API oil inventories 6.55mb p 2mb e

Wednesday, January 30:Japan retail sales, Australia CPI, French/Spanish retail sales, EU economic sentiment, German CPI flash, US ADP, FOMC rate decision.

• 0650 pm Japan Dec retail sales (m/m) -1%p 0.8%e (y/y) 1.4%p 0.8%e
• 0730 pm Australia 4Q CPI (q/q) 0.4%p 0.4%e (y/y) 1.9%p 1.7%e / RBA trimmed mean 1.8%p 1.8%e / weighted mean 1.7%p 1.7%e
• 1200 am Japan Jan consumer confidence 42.7p 42.5e
• 0130 am French 4Q preliminary GDP (q/q) 0.3%p 0.2%e
• 0200 am German Feb GfK consumer confidence 10.4p 10.3e
• 0200 am German Dec import prices (m/m) -1%p -0.8%e (y/y) 3.1%p 2.1%e
• 0245 am French Dec household consumption (m/m) -0.3%p -0.2%e
• 0300 am Spanish Dec retail sales (m/m) 0.4%p 0.3%e (y/y) 1.4%p 2.1%e
• 0300 am Sweden Jan consumer confidence 96.4p 95.9e / business 104.1p 103.6e / CPI expectations 3.4%p 3.2%e
• 0400 am Italy Jan business confidence 103.6p 103e / consumer 113.1p 112.5e
• 0430 am UK Dec BOE mortgage approvals 63.73k p 63k e / cons. Credit G0.942bn p 0.8bn e 
• 0500 am Eurozone Jan economic sentiment 107.3p 106.7e / business confidence 0.82p 0.73e / consumer -8.3p -7.9e
• 0540 am German 10Y E3bn Bund sale
• 0545 am Italy 5Y and 10Y E7bn BTP sale
• 0600 am German States Jan preliminary CPI (m/m) 0.1%p -0.8%e (y/y) 1.7%p 1.6%e / HICP 1.7%p 1.8%e
• 0815 am US Jan ADP employment change 271k p 175k e
• 1000 am US Dec pending home sales (m/m) -0.7%p +0.5%e
• 1030 am US weekly EIA oil inventories 7.97mb p 2mb e
• 0200 pm US FOMC rate decision – no change from 2.5% expected.

Thursday, January 31: Korea and Japan IP, China NBS PMI, Spain and France flash CPI, German jobs, Eurozone 4Q GDP flash, Canada Nov GDP, US ECI and Chicago PMI

• 0600 pm Korea Dec industrial production (m/m) -1.7%p -0.2%e / manufacturing 0.1%p 1.8%e
• 0650 pm Japan Dec industrial production (m/m) -1%p -0.4%e (y/y) 1.5%p 3%e
• 0650 pm Japan BOJ summary of opinions 
• 0730 pm Australia Dec private sector credit (m/m) 0.3%p 0.3%e (y/y) 4.4%p 4.5%e
• 0800 pm China Jan NBS manufacturing PMI 49.4p 49.3e / services 53.8p 53.9e
• 0830 pm BOJ Amamiya speech
• 1045 am Japan sells Y2.1trn of 2Y JGBs
• 0200 am German Dec retail sales (m/m) 1.4%p -0.7%e
• 0200 am German Dec unemployment 3.3%p 3.3%e
• 0245 am French Jan flash CPI (m/m) 0%p -0.2%e (y/y) 1.6%p 1.4%e /HICP 1.9%p 1.4%e
• 0300 am Spain Jan flash CPI (m/m) -0.4%p -1.2%e (y/y) 1.2%p 1.1%e / HICP 1.2%p 1.1%e
• 0300 am Spain 4Q flash GDP (q/q) 0.6%p 0.6%e (y/y) 2.4%p 2.3%e
• 0355 am German Jan unemployment -14k p -11k e / rate 5%p 5%e
• 0400 am Italy Dec unemployment rate 10.5%p 10.6%e
• 0500 am Eurozone 4Q flash GDP (q/q) 0.2%p 0.2%e (y/y) 1.6%p 1.2%e
• 0500 am Eurozone Dec unemployment rate 7.9%p 7.9%e
• 0515 am ECB Mersch Speech
• 0830 am Canada Nov GDP (m/m) 0.3%p 0.1%e
• 0830 am Canada Dec PPI (m/m) -0.8%p +0.1%e (y/y) 2.8%p 3%e
• 0830 am US 4Q employment costs 0.8%p 0.8%e 
• 0830 am US weekly jobless claims 199k p 211k e
• 0945 am US Jan Chicago PMI 65.4p 62.3e
• 1245 pm Canada BOC Wilkins speech

Friday, February 1: Global manufacturing PMIs, Japan jobs, Korea trade, US jobs, US Michigan consumer sentiment, US auto sales

• 0430 pm Australia Jan AIG manufacturing PMI 49.5p 51e
• 0500 pm Australia Jan final CBA manufacturing PMI 54p 54.3e
• 0600 pm Korea Jan CPI (m/m) -0.3%p +0.2%e (y/y) 1.3%p 1.7%e
• 0630 pm Japan Dec unemployment rate 2.5%p 2.5%e 
• 0700 pm Korea Jan trade surplus $4.56bn p / exports -1.2%p +3.3%e
• 0730 pm Australia 4Q PPI (q/q) 0.8%p 0.4%e (y/y) 2.1%p 1.9%e
• 0730 pm Japan Jan final Nikkei manufacturing PMI 52.6p 50e
• 0730 pm Korea Jan manufacturing PMI 49.8p 50e
• 0845 pm China Jan Caixin manufacturing PMI 49.7p 49.7e
• 0315 am Spain Jan manufacturing PMI 51.1p 50.5e
• 0345 am Italy Jan manufacturing PMI 49.2p 48.8e
• 0350 am France Jan final manufacturing PMI 49.7p 51.2e
• 0355 am German Jan final manufacturing PMI 51.5p 49.9e
• 0400 am Eurozone Jan final manufacturing PMI 51.4p 50.5e 
• 0430 am UK Jan manufacturing PMI 54.2p 53.5e
• 0500 am Eurozone Jan flash HICP (y/y) 1.6%p 1.4%e / core 1%p 1%e
• 0600 am Russia 4Q flash GDP (y/y) 1.5%p 2.2%e
• 0830 am US Jan non-farm payrolls 312k p 160k e / unemployment rate 3.9%p 3.8%e / hourly earnings 0.4%p 0.3%e / gov jobs 11k p -10k e
• 0930 am Canada Jan RBC manufacturing PMI 53.6p 53.9e
• 0945 am US Jan final manufacturing PMI 53.8p 54.9e
• 1000 am US Jan manufacturing ISM 54.1p 54.1e
• 1000 am US Jan final Univ. Michigan consumer sentiment 98.3p 90.7e
• 0300 pm US Jan total vehicle sales 17.55mn p 17.2mn e

Conclusions: Is there a Powell S&P 500 Put the drives the USD or is there a UK May survival bounce in the GBP?

The USD index is telling us that the market expects the FOMC pause talk to continue even as China potentially re-levers and UK May appears set to survive Brexit (at least with a delay).  The USD 95.10 index 200-day moving average in the dollar is the next big level and the focus will be squarely on that and the FOMC news conference to dissect the sentiment shift of rate path expectations. The fear of a recession in the US maybe going down, but the role of FOMC pauses is a critical part of that market feedback loop. If the FOMC sounds more upbeat the USD will be watching 95.88 the 200-week moving average for confirmation.  

The biggest data surprise in the US last week maybe the most important for the FOMC next week and for the markets Friday if its correctly foreshadowing upside economic surprise. The weekly jobless claims fell 13,000 to 199,000 – back to Nov 1969 lows.

The other upside story for the US last week was in the 4Q earnings up to at 10.9% blended rate, though still down from the Dec 31 12.2% estimate according to FactSet. The 22% of the S&P500 that has reported earnings show 71% beating on EPS and 59% beating on revenues.  

The other consideration for markets into the FOMC decision is about the real effect of the US government shutdown on 1Q growth and how much this will bounce back in 2Q. The 0.1% a week hit puts this number at -0.5% against expectations of 2-2.5% for 1Q. The risk to companies and their spending/hiring plans is covered also by FactSet in its weekly. The number of companies highlighting the shutdown in their earnings calls is 15 out of 110.  Next week another 126 companies report and this will be a focus even as the shutdown appears to be finished (at least until February 15.   

The UK next week will have another key week for Brexit and UK May with voting on Plan B and the risk for more splintering of the Tory party to follow. The possibility of a Brexit delay, another referendum and an election call all are in play. The GBP rally over its 200-day average and the risk for 1.35 that follows will be central for FX trading given the over 2% gain in GBP last week.  Holding or extended this move will have knock-on implications for the USD around the world with EUR the first to watch should 1.1550 break. A weaker USD this week, and a flatter yield curve, all followed fears about US growth. Should the FOMC pause and sound upbeat, should US jobs prove better, and should the ISM reflect less trouble in manufacturing in comparison to the rest of the world, then the USD maybe battling Europe for supremacy again creating some real volatility and opportunity.

Money goes where its needed and stays where its well treated.