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G10 Macro Rates Market Analysis – Weekly Review – 16th Dec 2019

Monday, December 16, 2019

With the Pacific G10 Macro Rates Team

Global Macro Overview
Last week saw two Central Bank meetings, the UK election and another round of twitter posts, rumours and official statements about the US-China trade conflict.

The Fed and ECB meetings have not provided us with any new information. The Fed is on hold and watching developments in the economy, they have removed ‘uncertainty’ from the official statement. The key message from the Economic Projections is that even with a tighter labour market and with unemployment below the long-term forecast for the foreseeable future, PCE inflation is not expected to pick up above the 2% target. This indicates that the Fed will need a significant surprise in inflation to increase short term rates in the near term. Chair Powell has also indicated that in addition to the current purchasing of bills, the Fed is ready to start purchasing Treasury bonds if year-end stress brings extreme volatility to the funding markets.

The UK election has resulted in an overwhelming Conservative majority, as the Labour party lost a number of its midland and northern stronghold constituencies. The result wasn’t too surprising to the market, and GBP strengthened just over 3% before losing back half of the move. This should be positive for the UK economy, as business confidence will likely improve in the near-term. A significant majority also makes it likelier that the trade deal with the EU will be reached in a more orderly fashion, as the PM Johnson will not require the support of the hard-BrExit backbenchers. However, strong performance of pro-independence parties in Scotland and Northern Ireland raises questions about the future state of the United Kingdom.

Thursday and Friday's market action was mostly driven by the trade headlines. Reported roll-back of the tariffs on Thursday sent global yields and equities higher, but both sides rejected the idea on Friday, nevertheless indicating that the text of the deal has been agreed and is currently being checked by lawyers. Under the deal China will increase purchases of the US products, while Trump won’t introduce tariffs scheduled for the 15th of December. The latter news disappointed financial markets and US Treasuries rallied back to be unchanged on the week, the short end of the USD curve did almost 20bps roundtrip in 24 hours.

North America
US: The main data this week was the November CPI report that came broadly in line with 2.1% YoY increase (2% exp., 1.8% prev.) in headline and 2.3% increase of the core CPI (2.3% exp., 2.3% prev.). Retail sales were weaker than expected in November +0.2% (0.5% exp., 0.4% prev.) and control group at 0.1% (0.3% exp., 0.3% prev.). Weak retail sales might have been driven by the calendar effects but negative revisions to the past months will weigh on Q4 GDP. The Small Business Optimism Index has improved in November to 104.7 from 102.4 above the expected 103 and remains close to cyclical highs.

Canada: Housing starts in November were slightly weaker than expected at 201.3k vs. 215k expected, with the October number revised down to 200.7k; October building permits were also weaker at -1.5% (2.8% exp., -5.9% prev.). 3Q Capacity utilisation came in at 81.7% vs. 82.1% expected and 83.3% in Q2.

Europe
Eurozone: Germany released strong export data that was driven by a 30% increase of exports to Turkey. The ZEW Survey showed improved expectations at 10.7 (0.3 exp., -2.1 prev.). Labour costs were solid +3.1% YoY in 3Q. France released strong Manufacturing and Industrial production numbers for October with 0.5% for the former and 0.4% increase for the latter, however both were down from last year. Industrial production in Italy weakened -0.3% MoM.

SwedenA strong CPI report showed inflation increasing to 1.8% YoY in November and CPIF index at 1.7% YoY. Both above expectations and previous numbers. These numbers should add confidence to Riksbank ahead of the pre-committed interest rate increase next week. On the downside unemployment increased to 6.8%, but trend rate remained unchanged. It is not clear how much attention Riksbank will put on this number given that methodology had to be revised dramatically.

Norway: Mainland GDP improved to 0.1% MoM from 0.0% in September but was weaker than the expected 0.2%. CPI numbers were in line with expectations, the headline number came in slightly weaker at 1.6% YoY (1.7% exp., 1.8% prev.), however Underlying measure remained unchanged at 2% as was expected.

Japan
The government has approved the 4.4 Tln Yen fiscal package for the next year. It is designed to protect the economy from a recession following the 2020 Summer Olympic Games in Tokyo. The ability to implement the package remains under question, given the capacity constraints of the economy. GDP numbers for Q3 were revised significantly higher to 1.8% ann. (0.6% exp., 0.2% prev.) driven by the CapEx. Capital expenditure intentions have been running very high for couple of years in Japan, so the revisions aren’t that surprising. Tankan survey has shown that on one hand sales tax increase didn’t weight on the economy too much with Non-Manufacturing companies reporting upbeat numbers and outlook, while recession in the Manufacturing sector has deepened. Finally, core machine orders came in very weak again dropping by 6% MoM (+0.5% exp., -2.9% prev.) indicating that strong CapEx may not last much longer.

UK
Apart from the General Election last week mentioned above, economic data had the monthly GDP report for October showed that the economy flatlining with 0% MoM growth (0.1% exp., 0% prev.). Services and manufacturing were stronger at +0.2% and +0.2% respectively, while industrial production increased 0.1% vs. 0.2% expected and construction dropped -2.3%.

Australasia
Australia: Strong house prices for 3Q showed 2.4% QoQ increase (1.5% exp., -0.7% prev.). The Business conditions index was up in November, but confidence slipped to 0 from 2. Consumer confidence numbers for December were disappointing at -1.9% MoM from +4.5%. 

New Zealand: Data has been strong this week: manufacturing activity improved to 0.9% from -0.5% in 3Q, total card spending increased 1% in November albeit driven by the Rugby World Cup, YoY house sales improved to -1.9% in November from -4% in October and finally manufacturing PMI was at 51.4 vs. 52.6 in October.

For further information on the Pacific G10 Macro Rates team, their experience and strategy please see below           

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IMPORTANT INFORMATION: Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.

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