The week was marked by improving confidence that China’s coronavirus outbreak could be contained despite the soaring number of cases and fatalities, momentous US political events and good economic data in the US and elsewhere. Trump’s triumphant State of the Union address foreshadows a bitter campaign, but he starts on a firm footing thanks to the buoyant economy. The Iowa Democratic Party caucuses were indecisive with Pete Buttigieg and Bernie Sanders leading and seemed to damage the reputation of the primary process. President Trump’s impeachment acquittal by the Senate on a party-line vote was a foregone conclusion and hence a non-event for the markets.
China announced that it would halve import tariffs on US$75bn of US goods, in reciprocity for the US cutting tariffs as part of the Phase 1 trade deal with the US. This is likely a quid pro quo for postponing the purchase of additional US goods given the virus outbreak.
On Friday, the US jobs report looked very strong on the surface (225,000 jobs created) but the details looked less impressive and raised some questions about wage growth, causing markets to take some profits after one of the strongest weeks on record.
In the end, risk markets had one of their strongest weeks, with many equity markets up 5%. The UK was the laggard. Government bond yields edged somewhat higher cautiously. Oil prices were still in the doldrums despite talk of OPEC cutting output. Sterling was one of the weakest currencies, due to the ongoing dispute with the EU about a trade deal.
The week ahead
Tuesday: UK Gross Domestic Product (GDP) estimate for Q4 2019
Our thoughts: this week we will see how the UK economy fared over the final quarter of 2019 through the release of the quarterly GDP estimate. The month of November was a weak period for the UK economy, with GDP declining by 0.3%. This means that for the UK to avoid a contraction in activity over the final quarter of 2019, the economy will need to have expanded by over 0.2% in December. Considering December was a month plagued by political uncertainty and retail sales have already shown a more cautious consumer over the period, this figure looks challenging. While a contraction in activity over the quarter will likely dampen sentiment towards the UK, it may not totally alter the outlook for 2020, as recent data has shown enough green shoots to raise hopes for a ‘Boris bounce.’
Friday: Germany Gross Domestic Product (GDP) estimate for Q4 2019
Our thoughts: Germany was the sick man of the developed world throughout 2019, as its more economically sensitive economy felt the greater pain of the broader slowdown in manufacturing and global growth. The GDP estimate for the fourth quarter of 2019 will show the extent of the sickness. The economy narrowly avoided a technical recession (defined as two consecutive quarters of negative GDP growth) in the third quarter, by growing at a meagre 0.1% quarterly rate. All signs suggest growth is likely to remain at similar levels this quarter, which would mark a significant slowdown to the 0.4% average quarterly pace of growth seen since 2012.
Friday: US Retail Sales (January)
Our thoughts: The US consumer was the driving force behind the economy throughout 2019 and the release of retail sales figures for January will show whether this trend continued into the new year. All signs are positive for consumers to remain upbeat – the jobs market remains robust, with employment levels rising and wages growing above the rate of inflation. House prices and equity markets are also on the rise and borrowing rates are low – all encouraging signs for household budgets. Trade wars are also less of a concern after the signing of a phase one trade deal between the US and China. Retail sales therefore are expected to continue to grow at a healthy rate of 0.3% in January, which will be a positive outcome for the prospects of the US economy. The one curve ball that could throw consumer spending off track could be the coronavirus, however, news of its outbreak was only seen towards the end of the month, suggesting it may be too early to have had an impact on this month’s data.
The numbers for the week
No changes from central banks, despite market noise
At the beginning of the week, the People’s Bank of China (PBoC) injected RMB 1.2trn (US$170bn) liquidity through reverse repurchase (repo) agreements into the banking system. The PBoC also cut its rates on 7-day and 14-day reverse repo by 10 bp, to 2.4% from 2.5% and to 2.55% from 2.65%, respectively. This helped stabilise financial markets in the midst of coronavirus panic.
European Central Bank (ECB) President Christine Lagarde addressed the European Parliament, warning that central banks have less room to stimulate the economy in case of a recession and urged governments to use fiscal spending to support the economy.
Markets are still expecting a cut in rates from the US Federal Reserve (Fed) and from the Bank of England (BoE) this year but the timing seems to be pushed forward to the second half of the year.
Good numbers throughout
Surveys: The Markit manufacturing PMI was slightly up at 51.9 vs. 51.7 but the ISM manufacturing survey soared from 47.8 to 50.9, with new orders at 52, production at 54.3 and 8 of 18 industries growing. The Markit US services PMI was a smidge better at 53.4 vs. 53.2 and the ISM non-manufacturing index rose to 55.5 from 54.9. It is also likely that exports and imports will both rise with the completion of the USMCA and Phase 1 deal with China, although the latter will be delayed due to the virus.
Housing: MBA mortgage applications rose 5%, after a 7.2% rise the previous week. Construction spending fell 0.2%.
Employment: Initial jobless claims fell again to close to their lows, at 202K vs. 217K the previous week, although continuing claims rose from 1703K to 1751K. The monthly addition to non-farm payrolls surged to 225K in January from 147K in December, although both the unemployment rate (U-3) and the underemployment rate (U-6) rose to 3.6% and 6.9%, respectively, as the labour force participation rate edged up to 63.4% from 63.2%. The less market-friendly part of the data was an increase in average hourly earnings from 3.0% (revised up from 2.9%) to 3.1%, highlighting some wage pressure.
Industry: Wards total vehicle sales rose from 16.7 million to 16.84 million. US factory orders rose 1.2% in December vs. -1.2% previously. Durable goods orders were unchanged at 2.4% and ex-transportation also unchanged at -0.1%.
Other Data: The trade balance was worse at US$48.9bn vs. US$43.7bn. Non-farm productivity recovered to 1.4% during Q4 from a negative Q3. Unit labour costs this time were also up 1.4%, lagging the market’s expectations of 0.3% more in productivity than labour costs, but a lot better than Q3’s horrible 2.7% lag of productivity to costs.
All surveys are rising
Surveys: The manufacturing PMI was up to 50.0 from 49.8. The Markit/CIPS construction PMI rose sharply from 44.4 to 48.4. The Markit/CIPS services PMI rose from 52.9 to 53.9.
Housing: UK house prices rose by 0.4% in December, the highest in more than seven months, according to the Halifax. Prices were up 4.1% from one year earlier.
Other: New car registrations at -7.3% vs. 3.4% year-on-year.
Mixed data for the area
Surveys: The eurozone manufacturing PMI was almost unchanged at 47.9 vs. 47.8. In the service sector, the Swedish Swedbank/Silf services PMI soared from 48.7 to 52.2. The Spanish services PMI, fell from 54.9 to 52.3. Italy from 51.1 to 51.4, France from 51.7 to 51.0, Germany was unchanged at 54.2. Overall, the eurozone services PMI went from 52.2 to 52.5. The Markit German construction index rose from 53.8 to 54.
Prices: In the eurozone, the PPI (producer price index) rose from -1.4% to -0.7%. This means manufacturing is recovering but from a low level.
Real Economy: Eurozone retail sales fell 1.6% in December vs. +0.8%, 1.3% year-on-year vs. 2.3%. German factory orders fell 2.1% vs. -0.8%. German industrial production slumped 3.5% in December (seasonally adjusted), although the non-seasonally adjusted headline rose 6.6%. French industrial production also fell 2.8%, both much worse than expected. On the other hand, the German trade balance soared from €24.1bn to €29.4bn, way above estimates and the French trade deficit improved from €5.4bn to €4.1bn.
Chinese reserves still strong and PPI is finally positive
China: The Caixin PMI services fell from 52.5 to 51.8, although it’s unclear whether it reflects the coronavirus yet. Chinese foreign exchange reserves rose a little to US$3.11 trn from US$3.05trn, still by far the largest number in the world. Inflation is moving up: CPI (consumer price index rose from 4.5% to 5.4% in January, mostly due to food prices, but the most important number was PPI (producer price index) which finally moved back to positive territory (0.1%) and seems to indicate a manufacturing recovery, but this will likely be derailed by the economic impact of the coronavirus.
Japan: The services PMI dropped from 52.1 to 51.0. Labour cash earnings were flat in December vs. 0.1% the previous month. Household spending year-on-year fell 4.8% in December vs. 2.0% before. The Leading Index rose from 90.8 to 91.6 but the Coincident Index stayed at 94.7.
OPEC+ Joint Technical Committee recommended a cut in crude output of 600,000 bbls/ day to offset the drop in demand due to the coronavirus. A Chinese copper smelter declared force majeure on material-purchasing contracts due to logistical disruptions across China. Shipments have been delayed due to Chinese port shutdowns.
For the week, oil prices continued to fall but copper started to recover, despite the Chinese not taking deliveries.