Markets: Grinding
Markets can be a bit like a Grist Mill, grinding out returns requires energy and only those with the right technology find it palatable or long-term sustainable. Measuring success in bonds and stocks gets tricky and the next friction is sometimes found in the FX market as a leading indicator. The present news headlines paint a picture of hope more than greed driving the tape. The focus remains squarely on US trade policy with US/China talks restarting in Washington today and Japan/EU mixed reactions to new auto tariff threats. Consider the inconsistencies of Oil holding 3-month highs, Asia shares holding 4-month highs, Europe near 6-month highs, while negative yields for government bonds globally has risen 21%since October, bringing that total back to $11trn. FX markets reverse a bit from USD weakness yesterday with index up over 97.
- Grinding against the JPY is the BOJ Kuroda promises for more action should its strength hurt the economy. The Reuters Tankan drop from 18 to 13 adds to the need for action.
- Grinding against the EUR, the tough US-EU trade talks ahead and an ECB sounding notably dovish along with Brexit, the Spanish election, ongoing doubts about French and German politics and Italy with its budget and growth dilemma.
- Grinding against the SEK is the weaker CPIF disproving the Riksbank optimism from last week.
- Grinding against the GBP is the Honda plant closing reflecting the global economy, but grinding against easy money BOE plans to counter Brexit fear are the UK wages and unemployment holding 44-year lows. GBP also finds support in the Labour Party splintering off of 7 MPs which eases back some fear ofan viable new Corbyn government into the next election.
- The AUD grinds against the Chinese freezing coal orders– with 40-day delays in customs at ports – and with the RBA minutes confirming the dovish SOMP.
- The RUB grinds against FDI doubts as the US founder of Baring Vostok sits in a Russian prison awaits trail for fraud on charges many inside Russia see as trumped up by disgruntled investors but finds support on the monthly tax pressures and oil.
The returns for FX are mixed with GBP and CNY still the biggest focus and perhaps the least exciting. The USD remains king with its one-eye leading in the land of the blind. Watching 97.25 and 97.70 for something more exciting than a grinding rally.
Question for the Day: Is FX a race to the bottom again? The EUR and JPY are both seeing reactions to policy talk of more easing. There are logic reasons behind the shift. The USD weakness in January was linked to the Powell turnabout on normalization. The question for the market is whether that patience plays out or is too late. The relative spread of rate differentials links back to inflation outlooks. This is where the FOMC shift worked and where the ECB has much more talking to do to catch-up.
Of course, the other big central bank to pay attention to in this race to ease is China. Overnight, the PBOC again pushes commercial bank perpetual bonds for recapitalization. Remember that the PBOC will swap them for government bills effectively putting bank debt onto their balance sheet. The Bank of China January perpetual bond (CNY40bn at 4.5%) received a widespread welcome from market investors and other banks are “actively preparing to issue perpetual bonds to replenish capital,” said Pan Gongsheng, deputy governor of the People's Bank of China at a press conference today. “Some banks have now encountered capital constraints in their development," Mr. Pan said. "This, in combination with shadow banking folding back on to the balance sheet, has raised the requirements for the capital replenishment of commercial banks”.
What Happened?
- Japan February Reuters Tankan drops to 13 from 18 for manufacturing and 22 from 31 for services – back to Oct 2016 lows. Key for BOJ and growth expectations - “Capital expenditure is being put off due to the U.S.-China trade war and slowdown in the Chinese economy,” a manager of a machinery maker wrote in the survey. The May outlook for manufacturing drops to 12 while for services it drops to 20.
- RBA meeting minutes: Confirms “significant uncertainties” for economic outlook. Even with growth above trend in 2018 for Australia’s key trading partners and expected to hold trend in 2019 and 2020, the RBA was dovish noting: “…the downside risks to the global outlook had increased in the preceding few months. Members noted that it was difficult to predict the effectiveness of recent policy measures in China and how the authorities would balance their objectives of supporting growth and containing financial risks. Trade tensions and signs of slowing domestic demand had also increased the risks to the outlook for China. More broadly, trade tensions remained a material risk to the global growth outlook.”
- Sweden January CPIF -1% m/m, +2% y/y after 0.4% m/m, 2.2% y/y – much lower than the -0.7% m/m, 2.3% y/y expected. The Riksbank forecast 2.4% y/y. The Statistics Office revises the weighting of its basket of consumer goods in January every year and outcomes can therefore be hard to interpret.
- Eurozone December current account surplus narrows to E16bn from E23bn – 2-year lows and less than the E36.2bn expected. This put the surplus at 3% to GDP down from 3.2% y/y in November. The ECB sees the C/A surplus narrowing to 2.7% of GDP in 2019 and 2.5% by 2021.
- Eurozone December construction output drops 0.4% m/m, +0.7% y/y after 0.9% y/y – weaker than 1.1% y/y expected. Building in construction fell 0.7% m/m, but civil engineering rose 0.4% m/m. The biggest weakness in the EU was in Slovenia -12.4% m/m, Germany -4.1% m/m and the UK -3.8% m/m.
- Italy December industrial sales -3.5% m/m, -7.3% y/y after 0.1% m/m – weaker than the -0.3% m/m expected. Domestic sales -2.7% and foreign sales down 4.7% m/m. The new orders index fell 1.8% m/m, -5.3% y/y after -0.2% m/m – also weaker than the +0.5% m/m expected. Domestic orders rose 2.5% m/m while foreign fell 7.4% m/m.
- German February ZEW economic sentiment rose 1.6 to -13.4–as expected – still below the long-term +22.4 average. The current conditions fell to 15 from 27.6 – much worse than the 20 expected. For the EU, sentiment gains with the index up 4.3 to -16.6 – better than the -20 expected – while current conditions fell 8.3 to -3. “At the moment, we do not expect a rapid recovery of the slowing German economy. The economic situation in Germany has been weak, especially in the manufacturing sector. The figures for industrial production have once again seen a decrease, incoming orders are stagnant and foreign trade currently provides no fresh impulses. All of this is reflected in the fact that the assessment of the current situation has experienced a considerable decline. For the next six months, the financial market experts in our survey do not expect any improvement,”
- UK January claimant count up 14,200 after 20,200 – worse than the 12,400 expected. The ILO Oct-Dec unemployment rate holds steady at 4% - 44-year lows – as expected. The average earnings steady at 3.4% - a bit less than the 3.5% expected – but the ex-bonus 3.4% from revised 3.4% - as expected.
- 4Q labor productivity flash per hour +0.2% q/q after -0.4% q/q – less than the +0.5% q/q expected. The productivity per worker fell 0.1% q/q, -0.2% y/y.
Market Recap:
Equities: The S&P500 futures are off 0.3% after a 1.09% gain Friday. The Stoxx Europe 600 fell 0.5% to 368 – focus is on HSBC and BHP earnings. The MSCI Asia Pacific fell 0.1% on the day as Hong Kong shares reverse – still near 4-month highs.
- Japan Nikkei up 0.1% to 21,302.65
- Korea Kospi off 0.24% to 2,205.63
- Hong Kong Hang Seng off 0.42% to 28,228.13
- China Shanghai Composite up 0.05% to 2,755.65
- Australia ASX up 0.22% to 6,184.20
- India NSE50 off 0.34% to 10,604.35
- UK FTSE so far off 0.55% to 7,179
- German DAX so far off 0.25% to 11,271
- French CAC40 so far off 0.50% to 5,142
- Italian FTSE so far off 0.8% to 20,160
Fixed Income: France and Cyprus launch syndicated bond deals today. France has E11bn in interest for a new 30Y bond while Cyprus is issuing 15Y debt. The push of issuance doesn’t matter as the pull of fear about growth drives with ECB and FOMC speeches and minutes key. German 10-year Bund yields off 1bps to 0.10%, French OATs off 1bps to 0.53% and UK Gilts off 1bps to 1.16%. The periphery mixed with Italy up 5bps to 2.82%, Spain off 1bps to 1.22%, Portugal off 2bps to 1.50% and Greece up 2bps to 3.79%.
- US Bonds are mixed with focus on equities and earnings– 2Y off 1bps to 2.51%, 5Y off 1bps to 2.49%m 10Y flat at 2.67%, 30Y flat at 3.0%.
- Japan JGBs rally after Kuroda comments – 2Y flat at -0.18%, 5Y flat at -0.17%, 10Y off 1bps to -0.03%, 30Y off 1bps to 0.59%.
- Australian bonds flat with focus on US/China– 3Y flat at 1.69%, 10Y flat at 2.13%.
- China bonds lower with focus on PBOC– 2Y flat at 2.63%, 5Y up 1bps to 2.90%, 10Y up 2bps to 3.13%.
Foreign Exchange: The US dollar index is up 0.15% to 97.05 – In EM, the USD is bid, EMEA: RUB flat at 66.225, ZAR off 0.6% to 14.181, TRY off 0.1% to 5.307; ASIA: INR off 0.15% to 71.453, KRW off 0.2% to 1127.15.
- EUR: 1.1280 off 0.25%.Range 1.1276-1.1325 with 1.1250-1.1350 now the consolidation with ECB v. FOMC focus along with data.
- JPY: 110.75 up 0.15%. Range 110.45-110.82 and EUR/JPY 124.90 off 0.15%. The focus was on BOJ goosing with 110-112 the consolidation.
- GBP: 1.2910 off 0.1%.Range 1.2896-1.2935 with EUR/GBP .8735 off 0.15%. Labour splits and better wage story helping but Brexit remains
- AUD: .7105 off 0.35%.Range .7103-.7144 with commodities and China driving - .7050-.7200 holding. NZD off 0.45% to .6820 with focus on .6880 resistance.
- CAD: 1.3255 up 0.15%.Range 1.3233-1.3263 with BOC and data driving along with oil – watching 1.32-1.34 still.
- CHF: 1.0055 up 0.15%.Range 1.0035-1.0060 with EUR/CHF 1.1345 off 0.2%. Focus is back on risk for growth/EUR/ECB 1.00 pivotal.
- CNY: 6.7655 flat. Range 6.7590-6.78. Some doubts about trade/growth nagging with PBOC policy in doubt.
Commodities: Oil mixed, Gold up, Copper -0.25% to $2.8370.
- Oil: $56.44 up 0.8%. Range $56.00-$56.73 with focus on $55 WTI as base – OPEC/trade talk hope driving vs. US inventories/China data – Brent off 0.2% to $66.36 with $67 next pivotal resistance.
- Gold: $1331.50 up 0.7%. Range $1323.80-$1333.50 with USD grinding, geopolitics moving market India/Pakistan key. $1340 next hurdle. Silver up 0.15% to $15.77, Platinum up 0.75% to $813.00 and Palladium up 3.45% to $1455.10 – all about autos.
Conclusions: Will the US economic data shift the FOMC language further? The question about the US economy is whether the Fed pause is sufficient or whether the December and January weakness is more than a soft-patch. The weaker Friday industrial production and the retail sales before that add to the view. The US economic surprise index puts the 1Q growth outlook at 1%-1.5% that is down from 2.5% a week ago. Markets have priced in some of this pain but perhaps not all of it. The way the FOMC reacts to data this week will be telling. The FOMC minutes tomorrow and the focus on the balance sheet plans maybe a sideshow should other data like the flash PMI reports and Philadelphia Fed manufacturing show even more trouble ahead.
Economic Calendar:
- 0850 am Cleveland Fed Mester speech
- 1000 am ECB Praet speech
- 1000 am US Feb NAHB housing market index 58p 59e
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