With the Pacific G10 Macro Rates Team
Global Macro Overview
A very busy macro week with elections in Argentina and one region in Germany. There were central bank meetings in USA, Canada and Japan, whilst data was released for PMIs, jobs, inflation and GDP.
In general the story of weak manufacturing has been borne out, with economies dominated by trade or manufacturing seeing weaker or contractionary PMIs (Taiwan, South Korea, Japan, Sweden) and those that are more insulated from these economic forces in expansionary territory (Norway, Netherlands, Canada, USA). With China appearing on both sides, depending on which PMI you chose to look at and the USA’s ISM showing a similar split in subcomponents – does this indicate a turning point in the global economy?
Markets were, for the most part, dominated by moves in the USA and rallied, finishing the week approximately 7bps lower in the 10y sector. The route there was driven, in part by, a strong mid-week reaction to the thoughts that the phase 1 trade deal being “as good as it gets”. In contrast to the summer months, however, the 2-10s curve was quite unresponsive to the news flow and the benchmark rates mostly rallied in parallel. On Friday the interest rates market tried to selloff after the announcement of the positive jobs data, as it should do, however higher yields were not sustained until after the later ISM release with the 10y swap rate trading +3.5bps at the London close, a somewhat lacklustre response to what looked to be really strong data!
Finally, we note that this week saw Christine Lagarde’s first day as President of the ECB. This change of leadership has been viewed as a turn towards a more political direction, away from economics. However, with the constraints of an ECB mandate, the eurozone’s fractured banking system and the disparate directions of the underlying economies the realities of the role may prove otherwise.
Politics – Initially the USA-China trade truce / phase 1 trade deal was reported to be nearer to completion, then Chile cancelled the APEC conference, although this wasn’t thought to change the probability of the deal being signed. To round off trade news China announced that there might be difficulties in signing the deal, only to deny this shortly after. Finally, the House voted for the impeachment inquiry to move to an open hearing phase, resulting in Trump becoming the 4th president in history to undergo this process. Expect televised hearings and the release of depositions resulting in the generation of quite a number of headlines. This action lends the process a little more legitimacy and potentially indicates that it has more to run than just plain old electioneering.
The FOMC – changed its stance to a pause, noting that “consumer resilience has held up“ and that the main risks (a slowing of global growth, trade and inflation) “have shifted in a positive direction”. The markets viewed this as a “hawkish cut”, although the hawkish tone was quite mild so the while the curve flattened, it did so only by less than 2bps. The pricing of a December rate cut also changed from about -6bps (24%) to about -4bps (16%).
Data – In general the data, excluding manufacturing, was strong with Q3 GDP at +1.9% vs the +1.6% expected and +2.0% for Q2; PCE Core Deflator (the Fed’s inflation target) +1.7%; conference board consumer confidence better than expected; Chicago PMI weaker and contractionary. Payrolls, the main focus of the week after the FOMC, was strong printing approximately 50k more than expectations and backed up by strong upward revisions to previous releases and an increase in participation not seen since 2013. This strength was despite the UAW and census worker potential to disrupt the cleanness.
The BoC – rates were unchanged, as expected, but the bank’s statement indicated a shift in stance by dropping the reference to the policy rate being simulative resulting in a 20bps rally in interest rates. This change implied an weaker domestic outlook with the bank referencing a “worsening global outlook” and “risks are more tilted to the downside”. The conclusion was to “hold firm” as the resilience of Canadian economy will be tested.
Germany Data – CPI +1.1% vs +1.0% expected and +1.2% previous, so still weak and lower. Also, there was a regional election (Thuringia) resulting in no overall majority for any party, as expected.
Spanish Data – better than expected retail sales.
Eurozone Data – CPI +1.1% vs +1.0% expected and previous.
Data – Tokyo CPI +0.1% increase as expected, September retail sales better than expected. Job to applicant ratio dropped.
The BoJ – unchanged policy rate, as expected. Their forward guidance was adjusted, however, on both the short term and long term rates by changing the timeframe referenced from "at least through around spring 2020" to “at present or lower levels”. Governor Kuroda emphasised that this guidance will now persist while “close attention” to inflation momentum is required.
The Tokyo CPI, seen as a leading indicator to the wider Japanese CPI, has been viewed positively indicating signs of stabilisation with the retail sales data better due to the impending increase in VAT. Also, while the job to applicate ratio indicates a softening job market, this measure is still significantly stronger than it was in the 1990s bubble. This statement, in itself, says much about how difficult it is to generate inflation in Japan.
Elections! A date was final set for a general election on December 12th by a somewhat tortured path, involving two votes in parliament and a postponement of the Brexit date to Jan 30th.
Chances of a hard Brexit are now much lower with the prevailing view being that nothing of significance will occur before the election. This view has resulted in short dated implied volatility decreasing significantly with UK bonds, interest rates and currency though to be range bound in the short term.
Australia Data – CPI (the trimmed mean) +1.6% as expected and previous. This is lower than the RBA’s stated target of +2% to +3%, however given the previous stimulus via policy rate cuts and time lags involved in transmission to the economy very little movement is expected going forwards.
New Zealand Data – NZ business and consumer confidence both better.
Politics – NZ Treasury warned Jacinda Ardern’s government that their proposed budget may result in a credit downgrade from the country’s coveted AA status.
The better confidence data was seen as a response to previous cuts in the policy rate by the RBNZ and reduce the probability of the RBNZ cutting the policy rate to 50% from 100%.For further information on the Pacific G10 Macro Rates team, their experience and strategy please see below
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