Buying Time

By Robert Savage

Wednesday, April 10, 2019 8:25 AM EST

What is the cost of waiting? Investors suffer this question daily when cash burns a hole in the pocket with zero or negative rates. This is the dynamic tension of the day as buying time for a delay whether its UK May and Brexit or ECB Draghi and the EU recovery – both come at a price. Markets are pricing in a 10% chance of a 10bps cut in Europe by end of 2019. The EU-China trade talks are the notable uplifting moment for trading this morning and its in stark contrast to the US-EU tariff talk yesterday. The movement in anything is muted though and the wait-and-see for the ECB and FOMC Minutes later is notable. The shuffle of data remain gloomy but with some shots of Spring with Korea jobs better, China auto sales falling less fast, Australian consumer confidence higher after the election budget, along with big bounces in February industrial production from France to Italy to the UK. In fact, the UK data was much better than most expected, but to no real impact on trading as its only about politics and Brexit today, and maybe forever, or until they can’t afford to buy more time. The EU is pushing for a long delay and that makes this uncomfortable as the cost of such uncertainty on investment and trade isn’t so simple. The other cost of waiting shows up in Italy where its forecasts for growth at 0.1% in 2019 make the budget deal with the EU impossible. There are plenty of reasons to have doubts about Europe and yet the price action in stocks and the EUR remains positive suggesting more value than growth driving the view. The markets are shifting from a US divergence to a global synchronized view again. This puts the risk barometer squarely back on the buying of time hopes that the GBP has and makes 1.33 the focal point for today even with the ECB and FOMC minutes to distract us.

Question for the Day: How delicate is the global economy? The recovery hopes for 2Q are rising after another slug of data today and more talk of pushing back on Brexit along with the usual mix of US/China trade deal hopes. The IMF forecast shifts lower in global growth released yesterday made for an excuse to sell US risk. There should be no surprise to the IMF moves from 3.7% global growth forecasts in October 2018 to 3.5% in January and 3.3% now. The reaction was outsized to the usual pattern of such cuts and to the 3.5% average since the 2008 crisis.

Perhaps some of this price action was to be expected from the rush of money in the last week and due to the EU-US tariff talk. Also, the cut in US growth from 2.9% to 2.3% puts the focus on US earnings outlooks and 1Q results ahead. Markets today are going to watch the FOMC minutes, more on the 10Y $24bn auction of US debt and on the surprising comparison of the IMF US growth cuts vs. China growth stability.

What Happened?

China March CPCA auto sales -12% y/y to 1.78mn after -18.5% y/y – the 10th monthly decline. MPV sales led the way down with a 20% plunge to 130,000 units, while passenger car sales fell 12% and SUV were almost 11% lower. The association said sales of new energy light passenger vehicles more than doubled to 111,000 units last month, bringing the year-to-date total to 254,000 units, and predicted this segment would expand by around 40% to 1.7m units over the full year. High inventories remained a problem for the market with dealers of many brands holding more than double their normal monthly sales volume.
Korea March unemployment rate rises to 3.8% from 3.7% - better than the 3.9% expected. The unadjusted jobless rate fell 0.2% y/y to 4.3% to 1,197,000 off 60,000 y/y. Total employment rose 250,000 y/y to 26,805,000 with hiring rate up 0.2% y/y to 60.4% the best on record. Manufacturing jobs fell 108,000 – hit by semiconductors, while healthcare rose 172,000 y/y. The participation rate was flat at 63.1% y/y.
BOJ Kuroda: Vows to continue “powerful” easing. At the same time the Governor urged the government to win market confidence in its fiscal management. Kuroda also told parliament that he saw no problems with long-term government bond yields moving at slightly negative rates due to risk aversion among investors globally.

Japan February Machinery Orders rose 1.8% m/m, -5.5% y/y after -5.4% m/m, -2.9% y/y – weaker than the +2.5% m/m bounce expected. The orders from overseas also bounced from -18.1% to +19% m/m. Government orders were steady at 2.2% from 2.7% m/m.
Japan March PPI up 0.3% m/m, 1.3% y/y after revised 0.3% m/m, 0.9% y/y – more than the 0.2% m/m, 1.1% y/y expected. The February PPI revised higher from 0.2% m/m, 0.8% y/y. Prices of oil and coal added 0.18pp to the total gain m/m while electronics and machinery took away 0.01pp. Steel exports were notable price jump while transport fell.
Australia April Westpac consumer confidence 100.7 from 98.8 – better than the 97 expected. Confidence rebounded 1.9% after -4.8% - also better than the -1.8% expected. The government budget was cited as a key driver with a 7.7% jump post the release. The outlook for family finance rose 4.1 to 105.6, economic conditions outlook rose 6.2 to 101.8 but buying major items fell 2 to 115.5, house buying rose 2.4 to 119.4 while house price expectations rose 11.9 to 95.6.

RBA Debelle: Job market surprisingly strong. The deputy governor spoke to the AmCham at the Adelaide Business School on “the state of the economy.” He noted the dynamic tension between jobs and output data, with all indicators for employment solid but consumption growth “considerably slower,” than expected. He targeted the March CPI data as key.
French February industrial production up 0.4% m/m after revised +1.2% m/m – better than the -0.5% m/m expected. January revised lower from 1.3% m/m. Manufacturing rose 1.1% m/m after 0.7% m/m.
Italy February industrial production up 0.8% m/m, +0.9% y/y after revised +1.9% m/m, -0.8% y/y – better than -0.8% m/m expected. The January revised higher from 1.7% m/m.

UK February GDP up 0.2% m/m, 2% y/y after 0.5% m/m, 1.5% y/y – better than 0% m/m, 1.7% y/y expected. The 3M average steady at 0.3% q/q after revised 0.3% q/q (was 0.2% q/q) – also better than 0.2% q/q expected.
UK February trade deficit GBP4.86bn after GBP5.345bn – worse than the GBP1.2bn expected. The 3M total trade deficit now GBP5.5bn from GBP6.5bn – improving due to services. Imports for goods rose 3.9% q/q to GBP 130.1bn while exports fell 1.7% q/q to GBP88.7bn.
UK February construction output rose 3.3% y/y after 2.2% revised – better than 2.4% y/y expected. The January revised higher from 1.8% y/y.

UK February industrial production rose 0.6% m/m, 0.1% y/y after revised 0.7% m/m, -0.3% y/y – better than the +0.1% m/m, -0.9% y/y expected. January revised higher from 0.6% m/m, -1.1% y/y. The manufacturing output rose 0.9% m/m, 0.6% y/y after 1.1% m/m, -0.7% y/y – also better than the +0.2% m/m, -0.6% y/y expected. Manufacturing rose in 11 of 13 subsectors – with basic metals leading up 1.6%.

Market Recap:

Equities: The US S&P500 futures are up 0.3% after a 0.61% drop. The Stoxx Europe 600 is up 0.3% extending morning gains with EU-China trade hopes. The MSCI Asia Pacific fell 0.2% with US/EU trade and IMF growth forecast cuts.

Japan Nikkei off 0.53% to 21,687.57
Korea Kospi up 0.49% to 2,224.39
Hong Kong Hang Seng off 0.13% to 30,119.56
China Shanghai Composite up 0.07% to 3.241.93
Australia ASX up 0.02% to 6,316.50
India NSE50 off 0.75% to 11,584.30
UK FTSE so far up 0.15% to 7,436
German DAX so far up 0.4% to 11,900
French CAC40 so far up 0.4% to 5,457
Italian FTSE so far up 0.25% to 21,728

Fixed Income: Supply, better risk moods detract from some buying, but hopes for more from ECB keep EU bonds bid. German 10Y Bund yields off 1bps to -0.01%, French OATs off 2bps to 0.34%, UK Gilts up 3bps to 1.11% on Brexit extension hopes. Periphery is bid with Italy off 4bps to 2.55%, Spain off 2bps to 1.07%, Portugal off 1bps to 1.20%, Greece off 1bps to 3.46%.

Germany 5Y sale underbid but good cover– German sold E3bn of 5Y )% BOBL at -0.41% with 1.486 real cover after 0.32% and 1.168 previously
US Bonds are bid, curve flatter, waiting for $24bn in 10Y supply, FOMC minutes– 2Y flat at 2.33%, 5Y flat at 2.29%, 10Y off 1bps to 2.49%, 30Y off 1bps to 2.91%,
Japan JGBs are bid with BOJ key– 2Y off 1bps to -0.16%, 5Y off 1bps to -0.17%, 10Y off 1bps to -0.06%, 30Y off 1bps to 0.53%.
Australian bonds hold bid– 3Y off 3bps to 1.42%, 10Y off 1bps to 1.88%. The AOFM sold A$900mn of 10Y 2.75% Nov 2029 bonds at 1.8864% with 2.91 cover – previously 1.8158% with 2.81 cover.
China PBOC skips open market operations for 15thday, leaves liquidity neutral, but bonds continue lower – 2Y up 9bps to 2.76%, 5Y up 5bps to 3.08%, 10Y up 4bps to 3.32%.

Foreign Exchange: The US dollar index fell 0.1% to 96.94. In emerging markets, USD is lower – ASIA: KRW up 0.2% to 1138, INR flat at 69.24; EMEA:RUB up 0.4% to 64.658, ZAR up 0.85% to 13.965, TRY up 0.15% to 5.683.

EUR: 1.1275 up 0.15%.Range 1.1255-1.1280 with 1.1280-1.1320 for ECB key and 1.1180-1.1420 on the wides.
JPY: 111.20 up 0.1%.Range 111.06-111.24 with EUR/JPY up 0.2% to 125.40 – all about risk and rates still 110-112.
GBP: 1.3090 up 0.25%.Range 1.3042-1.3096 with EUR/GBP off 0.1% to .8620 with focus still on EU extension.
AUD: .7145 up 0.35%.Range .7109-1.7158 with NZD .6755 up 0.2% - all about RBA and better growth hopes. - .7120 base for .7220 again.
CAD: 1.3325 flat. Range 1.3319-1.3339 with focus on oil, rates and FOMC minutes.
CHF: 1.0000 up 0.1%.Range .9994-1.0013 with EUR/CHF up 0.1% to 1.1285. Watching ECB.
CNY: 6.7170 up 0.1%. Range 6.7090-6.7180. PBOC fixed 6.7110 from 6.7142. Waiting for CPI/PPI tomorrow.

Commodities: Oil up 0.65%, Gold off 0.1%, Copper off 0.15% to $2.9370. Notable that China iron ore prices fell for the first time in 8 sessions.

Oil: $64.41 up 0.65%. Range $64.05-$64.54. API weekly crude stocks rose 4.1mb after 3mb previously – more than the 2.5mb expected. Bounce back in EU spurred by China trade helps, along with ongoing Libya/Iran issues. Brent up 0.% to $70.95 with focus on $70-$72 still.
Gold: $1307.40 off 0.1%. Range $1305.10-$1309.30 with USD not the driver as much as global trade/growth with $1302 key for $1310 breakout. Silver $15.21 flat. Platinum off 0.45% to $895.20 and Palladium off 0.5% to $1355.

Conclusions: Is the FOMC rethinking full employment? The Fed Vice Chair Clarida speech late yesterday is worth considering as markets wait for the ECB and FOMC minutes. The low unemployment rate “has been interpreted by many...as suggesting that the labor market is currently operating beyond full employment,” Clarida said in prepared remarks for a Minneapolis Federal Reserve bank conference on monetary policy and income inequality. But the actual level of “full employment” is difficult to determine, Clarida said, and “the range of plausible estimates likely extends at least as low as the current level of the unemployment rate.”

Economic Calendar: