With the Pacific G10 Macro Rates Team
Global Macro Overview
Last week financial markets experienced their first episode of panic since the end of Q3 2019. Apart from a few outsized surprises, fundamentals were not driving market pricing. Instead, the outbreak of the Coronavirus from China generated negative headlines that resulted in a risk-off dynamic. It was the worst week for the S&P since November 2019, as oil was down almost 10% on a week and global government bonds rallied towards 3-months lows.
US: Markit PMIs were released on Friday and driven by consumers showed continued moderate expansion in the US economy: Manufacturing PMI 51.7 (52.5 exp., 52.4 prev.) and Services PMI 53.2 (53 exp., 52.8 prev.). Housing and labour market indicators also remained strong with Existing Home Sales at 5.54mil (5.43mil exp., 5.35mil prev.) and jobless claims at cyclical lows.
Canada: Headline and core CPI measures stayed around 2% last week, giving comfort to the Bank of Canada (BoC). Retail Sales surprised to the upside on Friday with 0.9% MoM increase (0.6% exp., -1.1% prev.). The BoC meeting however showed that the Central Bank is concerned about the growth prospects, despite remaining stable at target inflation. Governor Poloz put interest cuts back on a table and financial markets priced a full 25bps cut by Q3 2020.
Eurozone: Strong data out of Germany was balanced by the weakening data in other countries. The ZEW Survey has improved dramatically beating expectations with Current Situation component improving from -19.9 to -9.5 (-13.5 exp.) and Expectations improving to 26.7 from 10.7 (15 exp.). In addition, preliminary PMIs were significantly stronger: Manufacturing at 45.2 (44.4 exp., 43.7 prev.) and Services at 54.2 (53 exp., 52.9 prev.). French data was weaker, as the economy is being disrupted by the weeks of protests sparked by the proposed pension reform, hitting business and consumer confidence. Despite that, composite PMI stayed in an expansionary territory at 51.5 weaker than expectations for no change (52).
Sweden: Unemployment was lower in December at 6% (6.6% exp., 6.8% prev.), however the less volatile measure of trend rate stayed at 6.9%.
Norway: Unemployment was slightly higher at 4% against the expectations for no change (3.8%). The Norges Bank meeting did not produce any surprises as rates were left unchanged.
Nothing was expected from the Bank of Japan (BoJ) meeting and these expectations were realised. As usual, BoJ had to lower its CPI forecasts and increase its growth forecast. All industry Activity index was stronger in November at 0.9% (0.4% exp., -0.9% prev.), as were the PMIs that showed improvement in Manufacturing and Services sentiment. The December inflation report continued the trend of just sub-1% CPI as headline came at 0.8% YoY (0.7% exp., 0.5% prev.) and core at 0.9% YoY slightly above 0.8% previously.
Last week saw several releases of key data ahead of the Bank of England (BoE) meeting. Several Central Bank officials expressed concerns recently about the strength of the economy, as Q4 2019 data has been indicating weakening activity. Market participants were placing a lot of weight on the data and it mostly came out stronger. Labour market data has stayed strong with the unemployment rate at 3.8%, 208k extra jobs in the 3-months to November and resilient wage growth of 3.4%. PMIs on Friday showed a rebound of Services and Manufacturing after pre-election slow-down, with the former improving to 52.9 (51.1 exp., 50 prev.) and the latter improving to 49.8 (48.8 exp., 47.5 prev.). Finally, public sector borrowings in December were lower than forecasted and previous numbers revised down.
Australia: A lower unemployment rate forced several Banks to revise their forecasts for an interest rate cut by RBA in February. However, numbers were not strong enough to revise expectations for the year with many economists still expecting two further cuts.
New Zealand: CPI data was slightly above expectations with YoY increase to 1.9% (1.8% exp., 1.5% prev.).
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