Market movements were totally driven by the coronavirus epidemic, the exponential rise in the number of infections and deaths and the WHO (World Health Organisation) announcements. Virtually no other news headlines moved markets during the week. Unsurprisingly, Chinese and Hong Kong equities were worst hit whereas the US was the most resilient market. A weak Chicago PMI on Friday derailed US equities a little, but at the end of the week, US equities were still the least affected, together with Japan and domestic UK shares.
January market returns are negative for most stock markets, except for a few sectors and countries. The US failed to keep its year-to-date profit. For sterling investors, there is a small pick-up in return, but most markets are down round 2-3% year-to-date, with Asian and emerging markets losing 5% or more. The biggest slump, however, has been in commodities, with oil prices collapsing more than 15%. Government bond yields have fallen sharply, with US treasury bond yields dropping the most, 41 bps, vs. 30 bps for gilts. Other than government bonds, the most resilient investment has been gold, up 5% this year.
The reopening of Chinese markets today has been met with an 8% drop, with the Chinese government blaming the US for the panic situation.
On Thursday and Friday, sterling rose, driven by the lack of Bank of England rate cut and then perhaps by Brexit Day on the next day.
The week ahead
Monday: US ISM manufacturing
Concerns rumble on over the US manufacturing sector, and rightly so when you consider the plunging ISM Manufacturing PMI, which has fallen from 60.8 in August 2018 to the most recent December reading of 47.2 – in fact, it has been in contractionary territory (i.e. below 50) since August 2019. Whilst concern is justified, as the ongoing trade war with China continues to take its toll on the sector, what has been comforting investors for now is the fact that the corresponding Markit US Manufacturing PMI has actually held up much better and indeed remains in expansionary territory (i.e. above 50). Bloomberg consensus indicates a forecast for the reading to rise to 48.4 – although bear in mind that the last six consecutive monthly readings have disappointed and came in below expectations.
Wednesday: Finalised eurozone PMIs
While we will get finalised Manufacturing PMIs across the eurozone this morning, we have to wait until Wednesday to receive finalised Services and Composite PMIs. The broader eurozone Composite PMI looks like it will remain unchanged from December’s level, at 50.9. Having said that, on a country level, Germany looks to be making a slight resurgence – the Composite PMI is comfortably out of contractionary territory at a healthy 51.1, dragged up by its strong services sector. As the eurozone’s largest economy, Germany teetered close to a technical recession last year, and if the manufacturing sector continues to strengthen, recession fears should soon dissipate.
Friday: US Nonfarm Payrolls
As this Friday is the first of the month, we will receive the latest Nonfarm Payrolls reading. Alongside this will be the wider employment report, including the unemployment rate and wage growth. The labour market remains very strong and one of the bright spots of the US economy. Having said that, what has been concerning us is the steady fall in wage growth, with the year-on-year average hourly earnings falling to 2.9% in December. For this reason, we will be focusing on the updated wage growth numbers – current estimates for January forecast a monthly increase of 0.3%.
The numbers for the week
No changes from central banks, despite market noise
The US Federal Reserve (Fed) made no changes: no change in the Fed Funds rate (1.50-1.75%) and little change to its statement and rhetoric. There was a long discussion on the future of inflation, with Chair Jay Powell signalling that a symmetric overshoot should probably offset the persistent undershoots to inflation, hence a greater tolerance for higher inflation in the hope of getting an average of 2% (right now we are at 1.6% in core PCE). In the meantime, the yield curve is inverting (i.e. long-term rates are falling below short-term rates). Interest rates are similar for 10 years and 1 month (the difference was as high as 40 bps not that long ago) and there is an inversion of about 20 bps between 1 month and 3 years. The Fed has clearly stated that it won’t move that soon even if the market is heavily signalling the need to have one more cut.
On Governor Carney’s swan song meeting before incoming Governor Bailey takes over, the Bank of England left rates unchanged and asset purchase targets and corporate bond targets unchanged. Since 50% of the market was expecting a rate cut, the reaction was for sterling to rise by one US$ cent.
The outbreak doesn’t seem to have affected any numbers yet
Surveys: US Dallas Fed survey was slightly better at -0.2 vs. -3.2. The Conference Board consumer confidence survey rose from 128.2 to 131.6, with both underlying indices doing better (present situation and expectations). The Richmond Fed manufacturing index soared from -5 to 20, way above expectations. The MNI Chicago PMI dropped quite sharply from 48.2 to 42.9. The University of Michigan sentiment survey, however, rose from 99.1 to 99.8, driven by expectations rather than current conditions.
Housing: New home sales fell -0.4% in December and, with a downward revision of the previous month, they went from 719K to 694K, but it still looks like a rising trend. US pending home sales fell 4.9% in December but the trend on the series is still strongly up. MBA mortgage applications were up 7.2% for the week. The Case-Shiller house price index rebounded from 3.25% to 3.54% (and 2.22% to 2.55% for the 20-city series).
Real Economy: The advance goods trade balance got a little worse at US$68.3bn vs. US$63bn. Durable goods orders were stronger, up 2.4% in December vs. -3.1% previously, ex-transportation -0.1% vs. -0.4%. GDP beat estimates, up 2.1% for Q4, same as Q3. Personal consumption was weaker, at 1.8% vs. 3.2% and the GDP price index fell from 1.8% to 1.4%. GDP for Q4 seems to have been driven by exports. Personal income rose by 0.2% in December, below estimates, whereas personal spending was in line at 0.3%.
Inflation: Inflation was slightly higher, with the PCE deflator (personal consumption expenditures) rising from 1.4% to 1.6% in December and the core PCE up from 1.5% to 1.6%, in line with expectations. The inflation expectations portion of the University of Michigan sentiment survey remained at 2.5% both for 1 year and 5 to 10 years.
Employment: Jobless claims fluctuated, at 216K vs. 223K, revised up from 211K, with continuing claims falling from 1747K to 1703K. The spike in initial and continuing claims in December seems to be unwinding and we are back to the average since H2 2018.
Surveys show some recovery.
Finance loans for housing were very strong at 46,815 vs 44,058, in an uptrend since the beginning of last year. House prices jumped 0.5% in December or 1.9% from a year earlier, the most since November 2018. The CBI Retailing reported sales were flat at 0, whereas the CBI total distribution reported sales rose from -3 to +11. This is a series that bottomed in Q3 2019. The BRC shop price index was still negative, though, at -0.3% in January vs. -0.4% in December.
The Lloyds business barometer rose from 10 to 23 in January, a high since 2018. The GfK consumer confidence edged up from -11 to -9.
Mixed numbers everywhere.
In Germany, the bellwether IFO was a tad softer at 95.9 vs. 96.3, with the drop coming from expectations rather than the current situation. Also in Germany, the GfK consumer confidence was 9.9. vs. 9.7. French consumer confidence went up a notch from 102 to 104 whilst Spanish retail sales came down more than a notch at 1.9% vs. 3.0%.
Eurozone economic confidence rose to 102.8 from 101.3, led by industrial confidence rather than services confidence. Consumer confidence was unchanged at -8.1. The unemployment rate dipped to 7.4% from 7.5%. Eurozone GDP barely grew during Q4, up 0.1%, with French GDP negative, at -0.1% for Q4 and Italian GDP down 0.3%. Spain fared a little better, up 0.5% vs. 0.4%. French consumer spending fell 0.3% in December but year-on-year was up 2.0%, above estimates. German retail sales had a big drop, -3.3% in December vs. +1.6%, which was revised down from +2.1%.
The eurozone M3 money supply was a bit softer at 5.0% vs. 5.6% previously.
Too early to see the economic impact of the virus on China, but it’s a bad start
Chinese industrial profits plunged 6.3% in December, compared to +5.4% previously. The unofficial Caixin manufacturing PMI feel from 51.5 to 51.1.
The Japanese consumer confidence index was unchanged at 39.1. Housing starts fell 7.9% year-on-year in December, better than estimates and falling less than the previous month (-12.7%). Construction orders bounced back, up 21.4% vs. -1.2%.
The American Petroleum Institute reported stockpiles falling by 4.27 million barrels, the biggest drop in a long time. Oil prices rebounded after closing at a 3-month low on Monday due to the coronavirus scare. Expectations increased that OPEC will deepen output cuts in March. Crude oil inventories rose by 3.55 million barrels during the week.
Altogether, oil had a very poor week, down 5%, copper fell 6%, whereas the gold price rose 1%.