You lose a trench-war by slow retreats, giving up non-essentials until you have lost the ground that matters and by extension the confidence of the soldiers as they suffer seemingly endless battles with nothing to show for their pain. The word retrenchment today has become synonymous with unemployment, downsizing, and cutting back excess from bloated budgets. Economies are the same, and as central bankers have become the generals they find little room to maneuver now. The spate of weaker global growth data mixed badly with the turnabout of central bankers deciding to ease back on normalization, as was the story fro the RBA or even ease as was the case of the RBI. Central bankers looked behind the curve of market confidence as many continue to fear geopolitical hits from Brexit and China trade cascading into their own economies. Take some chips off the casino table, run a bar-bell risk portfolio, fade January gains for a February snowstorm of renewed volatility – that is what investors heard from analysts this week.  Yet the price action was more 2018 divergence with US equities squeaking out a gain, most of Asia was closed for the Lunar New Year Holidays and reopened lower, while Europe suffered another set of growth doubts with the ECB Bulletin and EU Commission forecasts for 2019 growth sharply lower. The BOE also cut growth expectations for 2019 thanks to Brexit and deadlocked politics. The bond markets rallied sharply last week, as the central bank turnabout on normalization brought relief. The problem ahead is one about retrenchment and how globalization plays against divergence. The 4Q 2018 earnings have helped US shares but they also plant the seeds for trouble into 2019. The earnings for US globally facing companies highlight this point as earnings growth for them is almost half that of more domestic companies in 4Q and expected to be less than 1/3 in 2019.   

Question for the Week Ahead: Is this the inflection point for markets? The week ahead brings more US/China trade talks, more central bank meetings (Riksbank and RBNZ), more Brexit political moves as May presents Plan C and more hopes for a US Trump/democrat deal on the border wall even as talks breakdown over the weekend. The economic data will continue to matter as well with 4Q GDP reports for Japan, UK, Germany, and with the return of China leading to the usual key monthly reports on CPI, money supply and Trade. US CPI/PPI, retail sales, Michigan consumer sentiment, and industrial production will also matter. The question is whether any of these news events will be an inflection point for the markets. The retrenchment in central bank forecasts last week put the burden back onto China and its growth dynamics with the usual noise from front-loading lending into the new year key. Whether the credit push works in China like it did in 2009 or 2016 matters and seems very much in doubt. 

So the first inflection risk this week will be in the China data with imports viewed as a signal of internal demand, with total social finance seen as a signal on the credit/GDP pump continuing and with auto sales seen as the biggest consumer link to the rest of the world’s growth. Markets are geared up for CNY and 6.83-6.90 retest risks as well as something new from the government to spur demand. The reports on travel for the New Year Holiday are positive up 8.2% y/y to CNY613.9bn with travel up 16%. The money outflow from travel matters as does the rate for CNY upon the return of the market next week. Watch 6.7575 (200-day m.a. resistance) for upside risk Monday and through the week for 6.8380 55-day test risk. 

The second inflection risk this week is that German Bunds remain below the 0.15% breakdown and return to 0% or even negative rates. The 30Y Bund sale will be watched for the pain of funding with short rate. The spread of Bunds to BTPs are also in play with 3% Italian rates another factor.  Italian recession confirmation last week doesn’t play well with higher rates and weaker bank shares.

The biggest problem for investors into next week is that the rally back in global shares stalled last week after a 6-week run. The flow of money however has been paired with bonds– making this a central bank risk-parity blow-back with the risk-on and risk-off games likely to follow should volatility from any of the news events listed above come back to haunt as investors try to climb the wall of worry as 4Q earnings stories slow and real economic reports become the focus. 

Market Recap: The US/China trade war continues to be front and center as a concern, even with China closed for the New Lunar Year holiday this week, the pressure from China growth fears and trade issues dominated – with Trump casting doubt on a March 1 deal. Most still believe that the President won’t hike tariffs from 10% to 25% despite the deadline. The other issue for the week was European growth. German industrial production dropped in December, off 0.4% from November. Manufacturing orders fell 1.6% during the same time, led by a sharp drop in orders from outside the Eurozone. Compared with December 2017, orders dropped 7%.

Equities: The MSCI all-country World Index fell 0.55% to 488.72 on the week – ending a six-week winning streak. The MSCI EM Index fell 1.36% to 1036.03 on the week. With 66% of the S&P500 reported for 4Q earnings, 71% beat EPS and 62% beat revenue estimates. The blended earnings growth rate is now 13.3% - above the 12.1% at end of December and the 5thquarter of double-digit gains.  

• The S&P500 rose 0.05% to 2,707.88 on the week. The DJIA rose 0.17% to 25,106.33 on the week. The NASDAQ rose 0.47% to 7,298.20 on the week. The Cboe VIX fell 0.42pp or 2.6% to 15.72% on the week. 
• The Stoxx Europe 600 fell 0.46% to 358.07 on the week. The German DAX fell 2.45% to 10,907.78 on the week. The French CAC40 fell 1.15% to 4,961.64 on the week. The UK FTSE rose 0.73% to 7,071.18 on the week while the Italian FTSE MIB fell 1.15% to 19,351.90. 
• The MSCI Asia Pacific Index fell 0.88% to 154.88 on the week– with much of the region closed during the week for new lunar year celebrations. The Japan Nikkei fell 2.19% to 20,333.17 on the week. Hong Kong fell 0.16% to 27,946.32 on Friday – the only day it opened this week. The China Shanghai Composite was closed all week. The Korea Kopsi fell 1.20% to 2,177.05 on the week (also closed for much of the week). The India CNX Nifty index rose 0.46% to 10,943.60 on the week. The Australian ASX jump 3.38% to 6,136.20 with the RBA shift driving bonds sharply higher. 

Fixed Income: Supply was met by bigger demand this week as the US auctions and the EU sales were a sideshow to the central bank meetings and forecast cuts. The biggest mover was in Australia as a rate hike was flipped to a rate cut.  Europe saw more yield curve flattening with German negative rates creeping from 5Y to 9Y back to 2016 lows. The drop in EU rates wasn’t universal as the bank pain trade hit Italy further.  

• US bonds rallied despite supply, curve bull steepens– For the week - 2Y off 4bps to 2.47%, 3Y off 6bps to 2.43%, 5Y off 6bps to 2.44%, 10Y off 5bps to 2.63%, 30Y off 3bps to 3.00%. 
• Canadian 10-year bond yields fell 8bps to 1.88% on the week– despite strong jobs report, BOC and oil counter. 
• Japan JGB yields fell 1bsp to -0.03% on the week– US/China trade, weaker confidence driving.
• Australian 10-year bond yields fell 17bps to 2.08% on the week– RBA SOMP cut on growth, Lowe’s neutral stance driving. 
• UK Gilt yields fell 10bps to 1.15% on the week– Brexit politics still driving along with weaker data and BOE cutting forecasts, rate path shift.
• German Bund yields fell 8bps to 0.09% on the week– further growth forecast gloom, more safe-haven buying with 0% and 0.15% keys.
• French OAT yields fell 4bps to 0.54% on the week– mixed data and confidence but focus is on debt dynamics and politics.
• Italian BTP yields rose 24bps to 2.97% on the week– recession, bad banks, ugly politics and 3% as key for next pain trade
• Spanish Bono yields flat at 1.23% on the week– gained against Italy, focus is on election next, better growth.
• Portugal 10-year bond yields rose 1bps to 1.65% on the week– focus is on growth/budget.
• Greek 10-year bond yields rose 10bps to 4.02% on the week– again 3.90% key resistance with Italy comparisons driving. 

Foreign Exchange: The US dollar index rose 1.1% to 96.64 on the week. US rate spreads were one factor for the bounce, growth concerns and relative equity gains the other. In emerging markets, lighter volume given Asia holidays, mixed result - LATAM mixed: MXN 19.07 up 0.1% on the week, BRL 3.7290 off 1.9% on the week – all about Vale fallout, ARS off 1.9% to 37.82; EMEA weaker: TRY off 075% to 5.246 on the week, RUB flat at 65.46, ZAR 13.618 off 2.3%; ASIA mixed: KRW off 0.45% to 1123.50 and INR up 0.35% to 71.16 despite RBI surprise. 

• EUR: 1.1330 off 1.1% on the week with 1.13-1.15 still holding but ECB views and growth doubts clash with 1.1180 risk.
• JPY: 109.75 up 0.25% on the week despite weaker equities, rates spread to US wins with 108.70-110.20 big picture holding. EUR/JPY 124.25 off 0.95% with 125.50 cap for 122.50 risk again. 
• GBP: 1.2945 off 1.05% on the week– tracking EUR with Brexit still the shadow, BOE policy shift key with 1.28-1.3050 focus. EUR/GBP .8745 off 0.1%. 
• CHF: 1.000 up 0.45% on the week– safe haven meets SNB with EUR/CHF 1.1325 off 0.7% and 1.1280-1.1450 keys – 1.00 USD pivot still. 
  AUD: .7090 off 2.2% on the week with RBA surprise driving .7050 still important. NZD .6745 off 2.2% - tracks A$ with China fears next. 
  CAD: 1.3275 up 1.35% on the week– despite better jobs, it’s about rates, oil and politics with 1.3050 base for 1.34 still. 

Commodities: The S&P/GSCI total return index fell 1.63% to 2,394.56 on the week. Another great week for Palladium, with copper not far behind. Iron the leader with Vale mess driving supply concerns. NatGas led the losses off 5.5% with oil and platinum weakness not from behind it. 

• Oil: $52.72 off 4.6% on the week(March futures) with OPEC/Russia deal and Venezuela not enough to keep global gloom and US inventory build driving with $52 the WTI pivot for $50 retests. Brent $62.10 off 1.04% (April) does slightly better as spread drives on trade stories. 
• Gold: $1314 off 0.3% on the week. (Futures April $1318.50). Focus is on $1305-$1320 with USD gains driving. Silver $15.823 off 0.55% on the week with $15.50-$16.00 keys. Platinum off 2.9% to $798 on the week. Palladium up 3.8% to $1402.
• Corn: $374.25 off 1.05% on the week(Mar). USDA released all the pent up reports from the shutdown Friday with mixed stories and China still the key big picture fear – Swine flu there hurts Soybeans here. Wheat off 1.35% to $517.25 (Mar) and Soybeans off 0.35% to $914.50 (Mar). 
• Copper: $2.8170 up 2% on the week with March futures $2.8095 up 1.25%. Iron ore jump 9% to  $92 (62% fe China) up on Brazil Vale disruption, trade stock piling, thin volume. 

Calendar for the Week Ahead: RBNZ and Riksbank, 4Q GDP for Japan, Germany, UK. China PPI/CPI, M2 and Trade, US CPI/PPI, retail sales, industrial production, Michigan sentiment – OPEC monthly, US government shutdown deadline.

Monday, February 11: UK industrial production, 4Q GDP revised

• 0300 am China Jan FX Reserves $3.07trn p $3.079trn e
• 0330 am Sweden Dec industrial production -0.4% m/m, +3.4% y/y p
• 0430 am UK 4Q preliminary GDP (q/q) 0.6%p 0.2%e (y/y) 1.5%p 1.4%e
• 0430 am UK Dec industrial production (m/m) -0.4%p +0.2%e (y/y) -1.5%p -0.4%e / manufacturing -1.1%p -1.1%e / construction 3%p 1.5%e
• 1100 am US Jan consumer inflation expectations 3%p 3%e
• 1115 am Fed Bowman speech
• 1130 am US sells 3M and 6M bills

Tuesday, February 12: China auto sales, US NFIB, India inflation, Fed speaker.

• 0730 pm Australia Jan NAB business confidence 3p 3e
• 0730 pm Australia Dec home loans (m/m) -0.9%p -2%e 
• 0345 am China Jan auto sales (y/y) -13%p
• 0440 am Spain 6M-12M Letras sale
• 0545 am Italy 12M BOT sale
• 0600 am US Jan NFIB small business optimism 104.4p 103.2e
• 0700 am India Dec industrial production (y/y) 0.5%p 2%e / manufacturing -0.4%p +4%e
• 0700 am India Jan inflation rate (y/y) 2.19%p 2.48%e
• 1000 am US Dec JOLTS job openings 6.888m p 6.96m e
• 1245 pm FOMC Chair Powell speech
• 0430 pm US weekly API oil inventory 2.514mb p 1mb e
• 0530 pm Kansas City Fed George Speech
• 0630 pm Cleveland Fed Mester Speech

Wednesday, February 13: OPEC and IEA oil monthly report, Riksbank rate decision, UK PPI/CPI, US CPI

• 0350 pm RBA Heath speech
• 0600 pm Korea Jan unemployment 3.8%p 3.9%e
• 0630 pm Australia Feb Westpac consumer confidence 99.6p 99.2e
• 0650 pm Japan Jan PPI (m/m) -0.6%p -0.2%e (y/y) 1.5%p 1.1%e
• 0330 am Sweden Riksbank rate decision – 25bps easing to -0.5% expected. 
• 0430 am UK Jan CPI (m/m) 0.2%p -0.7%e (y/y) 2.1%p 1.9%e / core 1.9%p 1.9%e 
• 0430 am UK Jan PPI output (m/m) -0.3%p 0%e (y/y) 2.5%p 2.3%e / core 2.5%p 2.4%e / input 3.7%p 3.9%e
• 0500 am Eurozone Dec industrial production  (m/m) -1.7%p -0.4%e (y/y)-3.3%p -3.2%e
• 0540 am German 30Y Bund sale
• 0545 am Italy 3-7-30Y BTP sale
• 0715 am Atlanta Fed Bostic speech
• 0830 am US Jan CPI (m/m) -0.1%p 0.1%e (y/y) 1.9%p 1.5%e /core 2.2%p 2.1%e
• 0850 am Cleveland Fed Mester speech
• 1030 am US weekly EIA oil inventories 1.263mb -0.5mb
• 0200 pm US Dec budget statement -$205bn p -$12bn e

Thursday, February 14: German and Japan 4Q GDP, China trade, China M2 and new loans, USD PPI, retail sales. 

• 0650 pm Japan 4Q GDP preliminary  (q/q) -0.6%p 0.4%e (y/y) -2.5%p +1.4%e / Price index -0.3%p -0.4%e / Capex -2.8%p +1.8%e
• 07000 pm Australia Feb consumer inflation expectations 3.5%p 3.4%e
• 1000 pm China Jan trade surplus $57bn p $33.5bn e / exports (y/y) -4.4%p -3.3%e / imports -7.6%p -9%e
• 0130 am French 4Q unemployment 9.1%p 9.1%e
• 0130 am India Jan WPI 3.8%p 3.65%e
• 0200 am German 4Q GDP preliminary (q/q) -0.2%p 0.1%e (y/y) 1.1%p 0.8%e
• 0200 am German Jan WPI (m/m) -1.2%p +0.3%e
• 0400 am China Jan M2 8.1%p 8.2%e / New Loans CNY1.08trn p CNY2.8trn e / TSF CNY1.59trn p CNY3.25trn e
• 0500 am Eurozone 4Q revised GDP 0.2%p 0.2%e (y/y) 1.6%p 1.2%e
• 0500 am Eurozone 4Q employment (q/q) 0.2%p 0.2%e (y/y) 1.3%p 1.5%e
• 0545 am UK 10Y Gilt sale
• 0830 am Canada Dec new home prices (m/m) 0%p 0%e (y/y) 0%p 0.1%e
• 0830 am US weekly jobless claims 234kp 225ke
• 0830 am US Jan PPI (m/m) -0.2%p +0.1%e (y/y) 2.5%p 2.1%e
• 0830 am US Dec retail sales (m/m) 0.2%p 0.2%e /ex-autos 0.2%p 0.1%e 
• 1000 am US Nov business inventories (m/m) 0.6%p 0.2%e

Friday, February 15: US government shutdown risk, China CPI/PPI, UK retail sales, US industrial production, Michigan consumer sentiment

• 0345 pm RBA Kent speech
• 0830 pm China Jan CPI (m/m) 0.0%p 0.5%e (y/y) 1.9%p 2%e
• 0830 pm China Jan PPI (y/y) 0.9%p 0.4%e
• 1130 pm Japan Dec final industrial production (m/m) -1%p -0.1%p (y/y) 1.5%p -1.9%e
• 0300 am Spain Jan final CPI (m/m) -0.4%p -0.4%e (y/y) 1.2%p 1.2%e
• 0430 am UK Jan retail sales (m/m) -0.9%p +0.1%e /ex fuel -1.3%p +0.2%e (y/y) 3.0%p 3.4%e
• 0830 am Canada Jan ADP employment change -13k p -3k e
• 0830 am US Jan export prices (m/m) -0.6%p -0.1%e / import prices -1%p -0.1%e
• 0830 am US Feb NY Empire Fed manufacturing 3.9p 7e
• 0915 am US Jan industrial production (m/m) 0.3%p 0.1%e / manufacturing 1.1%p 0.4%e
• 0955 am Atlanta Fed Bostic Speech 
• 1000 am US Feb preliminary Univ. Michigan consumer sentiment 91.2p 94.5e
• 0400 pm US Dec Long-Term TIC flows 

Conclusions: Is this just about uncertainty? The blinking of central bankers last week stands out and the link of this to the market and financial conditions worries many investors as a signal that independence of central bankers is waning and the rise of populist politics will continue. The global economic policy uncertainty remains at the heart of the problem. The Chart from the FT on this point seems clear and yet its not yet fully reflected in risk assets. The logical view maybe that faith in central bankers isn’t yet gone but will likely be tested as the year moves forward. 

The real issue isn’t about market stability but economic growth as the world seemingly stopped its easy expansion in 4Q. The indicators on global growth from industry are troubling to say the least. The ECRI report from last week is worth studying for those that are trying to square the rally up in copper and iron ore last week with the gloom of EU economic forecasts. 

For the week ahead, the relationship of the US dollar to break-even inflation and expectations of it are going to matter. This is a market waiting for policy mistakes and looking for them anywhere. The USD up trade hit risk appetites and maybe a signal for more trouble at home. The move lower in Fed rate moves leaves open the question about inflation risks going forward and puts the CPI/PPI data as key risks for trouble should they show any upside surprise.