Equity markets consolidated over the last week, following a powerful rally. The sharp increase in reported COVID-19 cases (the formal name ascribed to the coronavirus) was taken in its stride, since this was deemed to be based on a wider definition of clinical symptoms, rather than a more sinister acceleration.
Although the COVID-19 case-load increased markedly, the aggressive approach to quarantine deployed by the Chinese authorities has helped calm nerves, and the Chinese market rose by some 2.3%. This came even as company announcements and economic data flow created a growing chorus of concerns about the economic damage the lock-down of large parts of China is causing global supply chains.
In the US, the Democratic Party presidential nomination process continued, with a similar result in New Hampshire to the one from the Iowa caucuses the preceding week. Bernie Sanders is now leading a tight but scattered field from Pete Buttigieg, although only marginally. Long-time front runner Joe Biden is slipping in the polls and needs to see a sharp improvement in the next couple of weeks to be able to sustain his challenge. Meanwhile, we have yet to see the impact Mike Bloomberg may have on the race. The multi-billionaire former mayor of New York is estimated to have spent well in excess of US$350m on an advertising blitz across the 12 states holding primaries on so-called ‘Super Tuesday’ on 3 March, which is when his actual campaign formally starts.
News in the UK was dominated by Prime Minister Boris Johnson’s cabinet reshuffle and the shock resignation of Chancellor of the Exchequer Sajid Javid and his replacement by relative newcomer Rishi Sunak. With the date of the upcoming Budget now rumoured to be delayed to allow a more radical approach to infrastructure spending, sterling rose alongside UK bond yields.
More widely, sentiment remains dominated by COVID-19, with recoveries in oil and iron ore, a slight rise in bond yields and stable equities all showing considerable sang-froid in the face of the evidence of the short-term economic damage it has caused.
The week ahead
Tuesday: German ZEW index (February)
Our thoughts: There are two main business sentiment indices in Germany, both of which we regularly report on here. The IFO Index surveys businesses and the ZEW Index surveys analysts and economists. Consequently, the IFO is a better gauge of what is happening on the ground in Germany while the ZEW is a better gauge of investor sentiment. Interestingly, while the IFO Index of business expectations has gently bumped up since last summer, the ZEW Index of economic growth expectations has moved materially higher and is painting a rosier picture for the German economy. Whether this swift improvement in sentiment can be maintained remains to be seen. Indeed, analysts expect a slight pull-back in the index for February.
Wednesday: UK inflation – CPI (January)
Our thoughts: Expectations are for a pick-up in inflation from 1.3% recorded in December to 1.5% in January. This would be a timely welcome present for the new Chairman of the Bank of England, Andrew Bailey, who during his time on the monetary policy committee has seen CPI steadily fall from over 3% at the end of 2017 down to its current level. Many commentators are quick to point out that the weakness in inflation (which is also a global phenomenon) is structural in nature and likely to remain for some time. Should we see a meaningful tick-up in inflation for January, we could expect some downward pressure on the price of Gilts given current yields reflect a benign inflation environment.
Friday: Eurozone Manufacturing PMI (February preliminary)
Our thoughts: The European economy has clearly been caught in the cross-fire of the trade wars between the US and China. Exports are lower and the manufacturing sector has slowed. Business survey data suggests that confidence has picked up in the last few months and is firmly above its low of 45.7 recorded in September of last year. January’s figure was 47.9, however analysts expect this revival in confidence to be short-lived as they expect it to drop back down to 47.2. It is hard to see too far out when considering the fortunes of the eurozone. On the one hand, while a trade deal between China and the US is positive, the anxiety this has caused businesses has not really been shaken off. With US elections and trade negotiations with the UK approaching in the year ahead, it is hard to see how Europe can get into fifth gear with uncertainty so high. Looser monetary policy from the European Central Bank should help oil the gears for a bit, how long that can continue to work for will be keenly watched.
The numbers for the week
More mixed numbers this week
After last week’s generally strong numbers, the picture was more mixed this week. The NFIB small business optimism marker came in very slightly ahead of expectations at 104.3, while the University of Michigan sentiment indicator was in line at 100.9.
Inflation continued to be well-behaved, with CPI coming in at 2.3% over the preceding 12 months (note that the Federal Reserve focuses on a different measure that is currently below 2.0%).
However, industrial production missed consensus and showed a 0.3% decline month on month, possibly displaying the effects of Boeing’s problems with its 737 MAX aircraft (Boeing is the largest industrial manufacturer in the US).
The worst news of the week came from the JOLTS job openings series, which fell to 6.4 million available new jobs, sharply lower than the expected 6.9 million. The series is occasionally volatile but had rolled over from its cyclical high of 7.6 million in late 2018, and this move down represents a notable deterioration in the trend.
In the UK, GDP came in flat quarter on quarter and up 1.1% year-on-year. As yet, it is too early to see any effects from a ‘Boris bounce’ in these numbers. However, one is very evident in the housing market, with the RICS house price survey rebounding very sharply to +17 from 0 (revised upwards from -2). Elsewhere all eyes were on the cabinet reshuffle drama.
Anaemic data for the area
German GDP, at +0.3% year on year, and inflation at 1.7% were both subdued, although some had feared an even worse outcome for GDP given the pressure the important automobile sector is under there.
There was better news from French unemployment, which fell to 8.1% from 8.5%, the lowest level since the end of 2008.
China: There was very little official economic data, although other indicators are showing a very sharp fall in travel by road, rail or air. The People’s Bank of China continued to loosen monetary conditions in order to help stimulate the economy, and a raft of measures has been put in place by provincial and national government agencies to assist companies’ cash flow during the lock-down period.
Japan: There was a range of poor data from Japan. Machine tool orders showed a 35.6% year-on-year decline, continuing a recent trend. There was a 34.5% reduction in condominiums for sale in the metropolitan Tokyo area, and following the hike in sales tax to 10% from 8%, which was imposed in November, there was a precipitous decline in quarter-on-quarter GDP, which fell by 6.3% on an annualised basis. This mirrors the experience of the last time the government did something similar, back in 2014.
Following last week’s OPEC+ production cut, oil rallied, and other industrial commodities followed suit. Brent crude was up around 8% to US$57/bl, while iron ore climbed by 6%. Gold was unchanged at US$1580/oz. Emerging market equities tracked sideways, in step with their developed market peers.