With the Pacific G10 Macro Rates Team
Global Macro Overview
Despite many countries releasing Q4 GDP and inflation data, along with two major central bank meetings (The Fed and the Bank of England), last week’s fundamental information was largely ignored, with the focus firmly on the outbreak of the Coronavirus and its potential impact on global growth.
With very little clinical data on the virus, its economic impact is extremely difficult to estimate. However, the markets priced in some risk of negative outcomes and the result of this was a flattening in the UST curve and a rally in UST 10y of 20bp – which brought the 10y very close to the yield lows seen last August. Going forward, we expect the pace of the virus’ progression will determine the market’s reaction. Globally, China reported good PMIs with services stronger at 54.1 (vs 53.0 exp. & 53.5 prev.) and manufacturing stable at 50.0 (vs 50.0 exp. & 50.2 prev.) Also, South Korea IP came in very strong 4.2% (vs 1.0% exp. & -0.3% prev.). Both numbers point towards better global growth ahead if they can maintain their positive nature.
US: The FOMC met and left the Fed’s target rate unchanged, as expected. The committee’s statement was almost identical to their previous one and in the subsequent press conference Chair Powell did not upset that stance. Of note was his emphasis on the asymmetric nature of the inflation target, which is fast becoming the consensus view as the main outcome of their year-long internal review. The Core PCE Deflator, the Federal Reserves preferred measure of inflation, printed +0.2% (vs +0.1% exp. & prev.) and Q4 GDP came in slightly better at +2.1% (vs +2% exp.), Conference Board measures of sentiment (Consumer, Expectations & Present situation) all printed more positively. The only fly in the ointment was the Chicago PMI, which printed at +42.9 (vs +49 exp. & +48.9 prev.).
Canada: Monthly GDP printed slight better at +0.1% (vs 0 exp. & -0.1% prev.).
Eurozone: Core CPI disappointed, printing slightly lower at 1.1% (vs 1.2% exp. & 1.3% prev.) with the individual French and German prints also 0.1% lower than expected. German retail sales were disappointing at -3.3% (vs -0.5% exp. & 2.1% prev.) Also, GDP YoY printed lower at 1% (vs 1.1% exp. & 1.2% prev.) All these negatives were contrasted by a small improvement in unemployment which printed at 7.4% (vs 7.5% exp. & 7.5% prev.) and this was backed up by consumer confidence printing slightly higher in German, France and Spain. However, the much-watched German IFO business confidence disappointed (both current conditions and expectations) printing 2 to 3 points lower. These numbers back up the wait and see the approach the ECB is taking and will not hurry the central bank into moving one way or the other.
Sweden: Retail Sales was much better than expected at +0.5% (vs -0.5% exp. & -0.4% prev.) which jarred with consumer confidence at 92.6 (vs 93.5 exp. & 94.1 prev.). The biggest surprise was manufacturing confidence which printed much better at 101.8 (vs 94.5 exp. & 94.5 prev.).
Norway: Retail Sales printed at -2.0% (vs -0.6% exp. & 1.0% prev.) and unemployment at 2.4% (vs 2.4% exp. & 2.2% prev.).
The biggest news was a reduction of the Bank of Japan buying operations in longer maturity government bonds, this resulted in a 5bp selloff in the 40-year sector and a steepening of the JPY IRS curve. On the data front, Tokyo CPI was stable at 0.9%, as was unemployment at 2.2% and IP printed strongly at 1.3% (vs 0.7% exp. & -1% prev.).
With a limited set of data released this week, the UK focus was the Bank of England meeting and press conference, which was also Mr Carney’s last as Governor. The result was a vote of 7-2 in favour of no change to the bank rate. This result came in spite of the committee seeing inflation missing its target in the medium-term if the rate path remains unchanged. Before the meeting, the markets were fully pricing a 25bp cut by June and they responded to the Bank’s communications by moving this date out to November.
Australia: The trimmed mean CPI was stable at 0.4% (as exp. & prev.) resulting in the YoY measure ticking up to 1.6%. This upward movement is towards the RBA’s target, but the change might not be quick enough to keep them on the side-lines. Business conditions and confidence weakened slightly.
New Zealand: Consumer confidence weakened slightly.
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