Below trend growth to continue
US stocks are weaker for a second day running, the S&P down a little 1% heading into the close, and the VIX is up to 15 from 11 at the end of last week.
US stocks are weaker for a second day running, the S&P down a little 1% heading into the close, and the VIX is up to 15 from 11 at the end of last week. Still well below its long run average (nearer 20) but a big percentage move in 48 hours. While part of the blame for weaker stocks can probably be laid at the feet of the break up in US 10 year Treasury yields through their 2015-2017 range highs this week and alongside increasingly shrill (but I’d say well argued) commentary about stretched valuations, there are also sector specific things going on. Namely, lower oil – now $2 off its recent highs – impacting energy stocks, and a particularly big hit to health care stocks where the sector is off about 2%.
Here the story is of Amazon, Berkshire Hathaway and JP Morgan announcing s joint venture aimed at lowering health care costs. Were it to succeed this could, at the macro level, have important implications; our BNZ colleagues have just noted that health care accounts for some 20% of the US PCE deflator. If costs come down here, that would further impede progress towards the Fed’s 2% inflation objective (albeit it would presumably also be good for consumption in other sectors). Watch this space.
There’s been limited spill over from weaker stocks to other asset classes, with bond yields holding their early week rise and the dollar in broad index terms fairly flat. The latter disguises the usual overs and unders for specific currencies, overs in this case being the British pound. This was rallying even before BoE Governor Mark Carney offered up some fairly hawkish words suggesting that the elimination of spare capacity in the economy meant that there was no longer quite the dilemma of dealing with Brexit-induced higher inflation but slower growth (even though he asserts that business investment has been some 4% lower than it would have been without Brexit uncertainty).
On the ‘unders’ the AUD is the ‘weakest’ currency of the past 24 hours – a term to use advisedly given it’s still trading comfortably above 80 cents. Here we’d point to that jump in the VIX this week, as well as softer oil and where the Aussie has proved just as sensitive to oil price volatility as the likes of CAD (and bearing in mind LNG prices are directly linked to oil). Latest price action does serve as a reminder that if we do get a much broader and deeper deterioration in risk sentiment in coming weeks or month, the AUD will be close to the front of the currency causality list.
In the meantime FX markets aren’t particularly convinced by US Treasury Secretary Steve Mnuchin’s latest attempt to persuade markets there is no change to the ‘strong dollar’ policy (after last week he extolled the benefits to US trade from a weaker dollar). At a Senate banking hearing he said that his comments on the dollar in Davos were blown out of proportion by media and were in no way intended to talk down dollar, adding that “…I strongly support we have a free currency market that we don’t intervene in”. That may be so, but the market still takes the view ‘that which has been said cannot be unsaid’.
Yesterday, AUD failed to draw any support from another decent NAB business survey. This showed activity still strong, with Conditions at +13 versus the long-run average of +5. There has been a strong pick-up in the mining states of WA and QLD in recent months which suggests the mining downturn is now done. NSW and VIC meanwhile remain very strong. Employment growth is set to continue with the survey consistent with jobs growth averaging +20k a month, while Capacity Utilisation points to a 5% unemployment rate over the next nine months or so. Prices indicators were, though, soft in December which may be a warning for today’s Q4 CPI (see Coming Up below).
There has been a bit of economic data to digest. US consumer confidence was higher than expected, running near a 17-year high. Annual euro-area GDP growth of 2.5% y/y was the strongest since the GFC. Economic confidence, a mixture of consumer and business confidence, was slightly weaker than expected, but coming off a 17-year high. German CPI inflation undershot expectations, setting the scene for a possible undershoot of euro-area CPI figures tonight (against already meagre market expectations – 1.2% down from 1.4% in December). The Euro took a small hit on this from which it later recovered.
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