E Skinny Tuesday?

Trading markets is all about sequencing. You have to have a calendar and a keen sense of expectations to get through the noise of news and events. Today is Fat Tuesday, the end of Carnival, and the last day before the start of Lent with Ash Wednesday. While few will see this calendar as important to markets, it does make the number of people paying attention smaller if only because of the holiday atmosphere from Brazil to Germany. There is no joy for risk today as the unwinding of expectations about US/China trade deals and global growth hits the complexity of reality. China National People’s Congress started today and the 2019 GDP target released at 6-6.5% from around 6.5% last year. A CNY2trn tax cut was also announced with VAT reductions and a budget deficit increase goal of 2.8% from 2.6% in 2018. All that seems skinny not fat and while China shares gained, most of the rest of the world is in the red. The economic data today was all about services and most of them were better with Japan growing, Australia getting worse, China getting worse, Europe stabilizing and the UK getting worse. This makes the hope for a 1Q soft-patch continue but in a modest way leaving anyone looking for value hoping for something bigger out of the US. The barometer for today in FX is the CAD with the BOC next on the list tomorrow for sounding dovish against geopolitical issues like China/Huawei, commodities and politics. The data and the BOC stalwart tightening bias seem at odds and in play with markets expecting something to give and the escape value for pressure is the currency first with 1.34 the pivotal resistance. 

Question for the DayDoes the China GDP target at 6.0-6.5% matter? There is a sense of expectations being met today but nothing more given the start of the China National People’s Congress and the announcements on plans to bolster the economic performance after a sharp slowdown – blamed on both US/China trade issues and the credit tightening induced by policy to deleverage the shadow banking sector. Markets are watching to see if the efforts by China work and with a nominally positive US trade deal expected, many are pricing in a recovery of sorts. This makes the 6% bottom seem almost modest except for the fact that the pressures on the Chinese continue to be about debt and the shift from corporate to government exposures maybe something to also fear particularly if foreigners don’t help with enough capital inflows. 

What Happened?

  • Australia February AIG Services PMI improves to 44.5 from 44.3 – better than 43.8 expected – 2nd month of contraction. By sectors, 5 trended lower and 3 were higher with retail trade off 2.9 to 39.9, hospitality -6.4 to 41.9, health/education -3.8 to 42.7, wholesale trade -0.1 to 45.2 and transport/storage up 0.6 to 49.1 while recreation rose 1.9 to 54.9, finance/insurance held flat at 50.4 and business/property services fell 0.8 to 50.2


  • Australia February CBA Services PMI drops to 48.7 from 51 – weaker than 49.3 expected – first contraction on record. The drop was linked to drought-related impacts and bank regulation changes. New business inflows contracted for the first time on record.  The business outlook remained strong at 56. The Composite PMI fell to 49.1 from 51.3 – also weaker than 51 expected. 
  • Australia 4Q Current Account deficit narrows to A$7.2bn from A$10.7bn in 3Q – better than A$9.2bn expected– even with trade drag.   Trade surplus narrowed by A$781mn to A$1.241bn from A$2.022bn in 3Q as exports fell 0.2% of GDP after +0.4% gain in 3Q – worse than the -0.1% drop expected.  The net IIP liability also widened to A$975.7 in 4Q from A$939.1bn. 
  • Australia RBA no change in cash rate at 1.5%- as expected – notes downside risks. On the global front, the RBA statement said: “The outlook for the global economy remains reasonable, although downside risks have increased. The trade tensions remain a source of uncertainty. In China, the authorities have taken further steps to ease financing conditions, partly in response to slower growth in the economy.” On the domestic front, addressing housing, the RBA noted: The adjustment in the Sydney and Melbourne housing markets is continuing, after the earlier large run-up in prices. Conditions remain soft in both markets and rent inflation remains low. Credit conditions for some borrowers have tightened a little further over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed.”
  • Korea February CPI 0.4% m/m, 0.5% y/y after -0.1% m/m, 0.8% y/y – less than 0.5% m/m, 0.7% y/y expected. Ex-food and energy, CPI rose 0.5% m/m, 1.1% y/y. 
  • Korea 4Q final GDP unrevised at 1% q/q, 3.1% y/y after 0.6% q/q, 2% y/y – as expected.
  • Japan February Nikkei Services PMI rises to 52.3 from 51.6 – better than 52.1 expected – best gain since November 2018. New business rose at the best rate since May 2013. New orders outstanding grew at the fastest pace in 18-months, supporting employment. Outlook for firms remains optimistic.  The composite index fell to 50.7 from 50.9 reflecting the weakness in manufacturing production – the sharpest drop since May 2016. 
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