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G10 Macro Rates Market Analysis – Weekly Review – 18th Nov 2019

Monday, November 18, 2019

With the Pacific G10 Macro Rates Team

Global Macro Overview
CPI: Most countries released their inflation data last week. It was untroubling for central banks, apart from European inflation which is low, but as expected.

Politics: In what may turn out to be a warning to those who want an election, Spain’s 2nd general election this year (and 4th in 4 years) is now over: the government lost 3 seats. The centre-right and right of the political spectrum gained at the expense of the centrists. This result continues the general political trend of coalitions and hung parliaments, political fragmentation and the erosion of support for the centre. To emphasise what political gridlock actually means to an economy, note that Spain’s bourse slipped lower to become the worst-performing European market this year.

Geo-political: Keep an eye on Hong-Kong, as economic consequences are starting to creep in. GDP has taken a hit, as expected, however little noticed was a 30bp move wider in the Hibor-Libor spread. This move indicates increased stress in the interbank funding markets and will have more severe consequences if it continues or persists. This week’s risk-off tone really set in on Monday due to the uptick in the intensity of the demonstrations, with declines in stocks and a rally in bonds. The tone of the protest has now darkened, employees are now being urged to work at home and schools and universities are now closed to students through Sunday and mainland students are retreating back home. Top officials are meeting with CEO Lam and one wonders what the official response will be?

China: The economy continues to slow with weaker IP at +4.7% vs +5.4% (exp. and prev.) and weaker retail sales +7.2% vs 7.8% (exp. and prev.) Some mitigation of the retail sales number may come from the exuberance of “singles day”, which will appear in next month’s data, however this will not be enough to arrest the trend which is firmly downwards for both series. 

North America
US: US Trade – Markets choose to focus on Trump, indicating tariffs would be raised very substantially if there was no deal, rather than the proximity of a deal. Later in the week NEC Director Kudlow comments were largely the same but were taken to be more reassuring, although the response was more limited. 

US – CPI (ex food & energy) +2.3% vs +2.4% (exp. and prev.)

Federal Reserve – 13 members made 15 speeches in a week. All of it can be summarised with the statement “monetary policy, economy in a good place”, which was reiterated like the chorus of a seasonal song. 

Europe
Eurozone: EU – GDP +0.2% (as exp. and prev.), CPI +1.1% (as exp. and prev.)

Germany – In what feels like a rerun of last year’s GDP data, Germany just managed to dodge the recession label with GDP +0.1% vs -0.1% exp. However, with the previous quarter’s level simultaneously revised from -0.1% to -0.2% we may only be a revision away from the official declaration. CPI +1.1% as exp. and the ZEW indicator, a measure of economic sentiment, had a strong uptick in expectations. Sentiment upticks aside, Germany is really suffering from the global trade disruptions and if this situation persists then the government will be forced to act more meaningfully than this weeks the official response: a very quick declaration of victory. Germany’s response, however, might not occur in an obvious manner, as demonstrated by the recent shift in tone on talks surrounding a banking union. This development would be a start of a common market in services and would be a much needed complement to the existing common market in products.
France – Unemployment higher +8.6% vs 8.4% exp. and +8.5% prev. CPI +0.8% vs +0.7% (exp. & prev.)
Spain – CPI (core) +1.0% vs +1.1% exp.
Italy – IP lower due to energy and utilities, but manufacturing IP surprised higher +0.3%!

Scandinavia:
Norway – CPI was a little weaker at +2.2% vs +2.3% forecast and GDP +0.7% vs +0.8% expected. Neither of these are a challenge to the Norges bank’s forecasted rate path.

Sweden – CPI (ex Energy) +1.7%, this is lower than the Riksbank’s forecast, but not enough to worry them. The biggest story was a drop in unemployment to 6% from 7.1%, unfortunately it was due to revised data. Statistics Sweden politely noting “Quality flaws” in its Labor Force Survey and Riksbank member Ohlsson, who is an economist not a mathematician, referred to it as a “catastrophe”!

Japan
GDP was weak at +0.1% vs exp. +0.2% and +0.3% prev. (simultaneously revised lower), core machinery orders and small firms’ sentiment was also lower, all of which confirms the Q3 soft patch. 

UK
UK – CPI(core) +1.7% & RPIx +2.1% vs +2.2% exp. and +2.4% prev., private consumption held up despite an employment drop of -58,000 people. A lower print of 3.8% in the unemployment rate and weaker retail sales at 2.7% vs 3.4% exp. and 3% prev. lead to mixed messages. This data covers October, the period of final Brexit negotiations, so weakness was probably to be expected and its immediate relevance may well be limited, but for an election on the horizon. So, a quick reversal in this weakness may not be likely and the consumer may well have a lower contribution to GDP in Q4 than otherwise thought. 

Australasia
Australia: Inflation expectations moved to 4% from 3.6%, broadly in line with the average over recent years. This upward change is reflective of recent cuts by the RBA. Employment data looked more concerning however, with a drop of -19k vs +15k exp. and a small uptick of +0.1% in unemployment. These numbers, combined with a downtick in participation rate, suggests a more watchful eye from the RBA over the coming summer months.
New Zealand: RBNZ – A surprise decision, on hold, despite the markets pricing an 80% probability of a cut just before the decision. Governor Orr, in his press conference, said that “we have very stimulatory monetary conditions”, indicating no urgency to cut further. Subsequently, at the NZ Treasury select committee, Governor Orr emphasised a more dovish tone, stressing that rates need to stay low for a long period. With 2y inflation expectations headed in the wrong direction at +1.8%, lower than previous +1.86% and credit card spending quite a bit lower at -0.6% vs +0.4% exp. that forward guidance was less of a surprise. The RBNZ also announced they will be exploring other policy tools.

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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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