Markets: Avalanche
When there is too much information to sift through and analyze, many search for the one or two stories to cling to and ignore the rest. This leaves fundamentals for the economists and machines grinding on the slopes of data – weaker medium-term outlook clashes with risk-on return as safe-havens unwind. Winter sports may be the best analogy for the day as the FOMC minutes and US/China trade talks keep investors off the slopes. This isn’t powder but an ice day. The avalanche of economic data has been dug through like a St. Bernard searching for hope and it shows a few survivors – as Europe sees German Services and French Manufacturing recover – but remains weak and growth elsewhere in the Eurozone suspect. Elsewhere, Australian jobs put some doubt about at the Westpac RBA easing call last night but AUD hurt with rumors that China has capped coal imports. The Japan and Australian flash PMI reports were lost in the snow of the US MOU leak with China talks. Negotiators are drawing up six memorandums of understanding on structural issues: forced technology transfer and cyber theft, intellectual property rights, services, currency, agriculture and non-tariff barriers to trade, according to news reports. The fear factor for investors maybe in the buying-of-rumors and selling-of-facts risks for any US/China agreement as the rest of the world appears set up for a weaker 1Q and beyond for growth. Throw in that the PBOC seems unlikely to cut until it has to and you have more growth doubts. The FOMC noted in its minutes that growth was the problem and reason for a pause leaving it data dependent, with only the balance sheet run-off plans shifting – sufficient to support the S&P500 but perhaps not the world. The ECB minutes today will have less impact but maybe just as key for the EUR which holds below the 1.1380 and 1.1535 resistance points but clearly looks bid at 1.1250 and so leans on the China recovery hopes and the brandy from the barking dogs of the ECB to support the hopes for 1.1750 again.
Question for the Day: Is global trade getting worse before it gets better? The hope for a US/China trade fix is on and priced. The risk is that the rest of the world takes time to recover and that the hopes for a quick V recovery in global growth proves false. The China trade relationship to Japan and Korea and the knock-on effects to global growth are clearly casting shadows over the risks for a recession in the region. The Japan flash PMI report puts that “R” word back in play for Japan.
The WTO downgraded its forecasts even before the Japan trade report this week. They see the trade outlook as the worst since March 2010. “The simultaneous decline of several trade-related indicators should put policy makers on guard for a sharper slowdown should the current trade tensions remain unresolved,” WTO said. It added that the sustained loss of momentum highlights the urgency of reducing trade tensions, which together with continued political risks and financial volatility could foreshadow a broader economic downturn.
What Happened?
- Australia January employment jumps 39,100 after revised 16,900 (pre +21,600) – better than +15,000 expected. Full-time jobs rose 65,400 while part-time fell 26,300. The unemployment rate held steady at 5% - as expected - as the participation rose 0.1% to 65.7% from 65.6%. The labor underutilization rate fell to 13.2% from 13.3%. Total unemployment rose 6,600 to 673,500 in January.
- Australia February flash CBA Composite PMI 49.7 from 51.3 – weaker than 51.1 expected. This is the first contraction since the survey started in 2016. Services led the decline while manufacturing touched 7-month lows. New business rose in services as did employment. Confidence also was steady. The PMI for manufacturing 53.1 from 53.9 – weaker than 53.4 expected. The services 49.3 from 51 – weaker than 50.7 expected.
- Japan February flash Nikkei Manufacturing PMI 48.5 from 50.3 – weaker than 50.4 expected – 32-month lows. Falls in production and new orders notable. Future output expectations drop for the first time since Nov 2012.
- Indonesia central bank keeps rates on hold at 6% - as expected – but looks to boost loan growth. “So we will direct interest rate policy toward (maintaining) external stability, while we ease liquidity. Macroprudential policy will be eased,” Governor Warjiyo told reporters after the monetary policy meeting. BI was reviewing instruments such as countercyclical capital buffer, loan-to-value for home and vehicle lending and other liquidity rules for possible easing, which would boost lending and economic growth, Warjiyo said.
- German January final HICP -1% m/m, 1.7% y/y after 0.2%, 1.7% y/y – as expected. The national CPI 1.4% y/y after revised 1.6% y/y (was originally 0.3% m/m, 1.7% y/y).
- French January final HICP -0.6% m/m, 1.4% y/y after 0.1% m/m, 1.9% y/y – as expected. The national CPI -0.4% m/m, 1.2% y/y from 0% m/m, 1.6% y/y – as expected.
- Italy January final HICP -1.7% m/m, 0.9% y/y after -0.1% m/m, 1.2% y/y – as expected. The national CPI 0.1% m/m, 0.9% y/y after -0.1% m/m, +1.1% y/y – as expected.
- Spanish December industrial orders -1.7% y/y after +22.1% y/y revised (pre 22.3%) – weaker than 12% y/y expected. The monthly change was -35.4% in capital goods, with total orders -13.8% m/m. Durable consumer goods -7.1% m/m, Energy -6.9% m/m, intermediate goods -1.4% m/m.
- Eurozone Feb flash Composite PMI 51.4 from 51 – better than 50.8 expected – 3-month highs as services recover while manufacturing contracts for the first time since June 2013. The flash manufacturing PMI 49.2 from 50.5 – weaker than 50.3 expected – 68-month lows. The manufacturing output index fell to 49.2 from 50.5 – 69-month lows. The flash services PMI 52.3 from 51.2 – better than 51.2 expected – 3-month highs. Overall, new orders fell with output led by manufacturing weakness. Employment rose and was better than January. Business confidence rose to 4-month highs – albeit weaker in manufacturing. Outside of France and Germany, output growth was modest – weakest since Nov 2013 across both services and manufacturing.
- French February flash Composite PMI 49.9 from 48.2 – better than 49 expected. Manufacturing expands while services stabilize. The flash manufacturing PMI 51.4 from 51.2 – better than 50.9 expected – 5-month highs with output index at 50.1 from 49.8. The flash services 49.8 from 47.8 – also better than 48.9 expected – 3-month highs. Business confidence rose overall similar to January except in manufacturing.
- German flash Composite PMI 52.7 from 52.1 - - better than 52 expected – 4-month highs. Still, the implied growth rate is the lowest in 5 ½ years. Manufacturing got worse – back to Apr 2013 lows, Services better. The flash manufacturing 47.6 from 49.7 – weaker than 49.8 expected – 74-month lows. The manufacturing output fell to 48 from 50.3 – 74-month lows. The flash services PMI 55.1 from 53 – better than 52.8 expected – 5-month highs. Overall, employment rose to the best since Oct 2018. Business confidence rose to 5-month highs as well.
- French February business confidence 103 from 102 - better than 102 expected. The composite is above the 100 long-term average and virtually stable as manufacturing is unchanged at 103, construction up 2 to 111, retail up 2 to 102 but services down 2 to 102. Employment improves to 106 from 104.
- UK January Public Sector net borrowing (PSNB) GBP15.759bn after -GBP2.11bn – more than +GBP11bn expected. The ex-banks PSNB was GBP14.9bn surplus, the largest January surplus on record, up GBP5.6bn from 2018. The tax receipts were GBP21.4bn up 3.1bn from Jan. Overall, public debt ex banks was 82.6% of GDP down 0.8% from Jan 2018.
Market Recap:
Equities: The US S&P500 futures are up 0.05% after a 0.18% gain. The Stoxx Europe 600 is off 0.15% while the MSCI Asia Pacific is flat.
- Japan Nikkei up 0.15% to 21,464.23
- Korea Kospi off 0.05% to 2,228.66
- Hong Kong Hang Seng up 0.41% to 28,629.92
- China Shanghai Composite off 0.34% to 2,751.80
- Australia ASX up 0.63% to 6,214.60
- India NSE50 up 0.51% to 10,789.85
- UK FTSE so far off 0.6% to 7,187
- German DAX so far up 0.4% to 11,447
- French CAC40 so far up 0.1% to 5,199
- Italian FTSE so far off 0.25% to 20,251.11
Fixed Income: Supply and mixed flash PMI reports dominate with risk-on mood key ahead of ECB minutes and more US data this is an unwind of safe-haven day – German Bund 10-year yields up 4bps to 0.14%, French OATs up 2bps to 0.55% and UK Gilts up 4bps to 1.22% while periphery better with Italy off 4bps to 2.82%, Spain off 1bps to 1.20%, Portugal off 1bps to 1.51% and Greece flat at 3.76%. Auctions in Spain and France went off without much excitement despite headlines.
- US Bonds are lower with MOU hopes on US/China talks– 2Y up 2bps to 2.52%, 5Y up 4bps to 2.50%, 10Y up 4bps to 2.68%, 30Y up 2bps to 3.02%
- Japan JGBs are mixed with curve flat on weaker data– 2Y flat at -0.18%, 5Y flat at -0.17%, 10Y off 1bps to -0.03%, 30Y off 1bps to 0.57%.
- Australian bonds are mixed with RBA calls, coal vs. better jobs– 3Y off 1bps to 1.64%, 10Y flat at 2.09%.
- China still waiting for PBOC– 2Y off 5bps to 2.59%, 5Y flat at 2.91% and 10Y flat at 3.14%.
Foreign Exchange: The US dollar index flat at 96.45. In EM mixed – Asia lower, EMEA stronger – INR off 0.35% to 71.25, RUB up 0.35% to 65.412, ZAR up 0.95% to 13.885, KRW off 0.3% to 1125.60
- EUR: 1.1355 up 0.15%Range 1.1320-1.1363 with 1.1385 and 1.1450 next as ECB minutes and US data drive.
- JPY: 110.75 off 0.1%.Range 110.59-110.86 with EUR/JPY 125.65 flat. Weaker data offset by US/China hopes 110-112 game still.
- GBP: 1.3075 up 0.2%.Range 1.3026-1.3088 with EUR/GBP .8690 flat. Some Brexit hopes more focus on ECB than BOE.
- AUD: .7115 off 0.75%.Range .7086-1.7207 with NZD .6820 off 0.6% - Coal and RBA calls vs. Jobs with crosses in play. .7050 key.
- CAD: 1.3180 up 0.05%.Range 1.3163-1.3206 with focus on BOC and US data next – 1.3150 base building.
- CHF: 1.0010 flat.Range .9995-1.0023 with EUR/CHF 1.1360 up 0.1%. Waiting for more ECB and US data – 1.00 still pivot with .9880-1.0120 holding.
- CNY: 6.7170 flat. Range 6.6880-6.7260. MOU talk drove rally early. PBOC fixed CNY 6.7220 from 6.7558
Commodities: Oil up, Gold down, Copper off 0.5% to $2.8770
- Oil: $57.33 up 0.3%.Range $56.96-$57.61 with Brent flat at $67.08. The API reported a 1.26mb crude build after -1mb draw – this left some doubt about EIA today and markets moderated with $57.50-$58 resistance in WTI holding.
- Gold: $1337.20 off 0.8%.Range $1334.60-$1344.30 with USD not driving as safe-haven needs unwinding a bit - $1345-$1350 now key resistance for $1325 retest. Silver off 1.85% to $15.88, Platinum off 1.25% to $823.90 and Palladium off 1.6% to $1439.
Conclusions: Is now the time to hedge? The all-clear for risk siren blasted after the FOMC minutes and extended on the leak of US/Chian MOU hopes overnight. The VIX index is back to the 2017 range and the shape of that volatility curve (steeper) makes clear that carry and selling volatility will be in vogue until the next surprise. Markets are sanguine about economic risks and perhaps that reflects the blind faith in central bankers getting easy money right. The economic data ahead will be a test of this story with the jobless claims, durable goods, Philly Fed and flash PMI reports all a test to see if the Fed patience is sufficient.
Economic Calendar:
- 0750 am Atlanta Fed Bostic speech
- 0830 am ECB Praet speech
- 0830 am Canada Jan ADP employment change -13k p -3k e
- 0830 am Canada Dec wholesale sales (m/m) -1%p +0.1%e
- 0830 am US weekly jobless claims 239k p 228k e
- 0830 am US Dec durable goods orders (m/m) 0.8%p 1.8%e / ex trans -0.3%p +0.3%e
- 0830 am US Feb Philadelphia Fed manufacturing index 17p 14e
- 0945 am US Feb flash PMI manufacturing 54.9p 54.7e / services 54.2p 54.3e / composite 54.4p 55.1e
- 1000 am US Jan existing home sales (m/m) -6.4%p +2.2%e / 4.99mn p 5m e
- 1000 am US Jan conference board LEI -0.1%p +0.1%e
- 1100 am US weekly EIA oil inventory 3.633mb p -1mb e
- 1250 pm BOC Poloz speech
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