January 25, 2019

Markets Today: Europe’s weakening economy

European PMIs came out weaker than expected. That, together with a downbeat Mario Draghi, saw the Euro weaken.

Today’s podcast:


Overview: Slip sidin’ away

  • AUD initially jumps after better than expected unemployment but then down on market’s read through that NAB’s mortgage rate rise increases odds of RBA easing; further USD strength on net has pushed it below 0.71 this morning
  • EC PMIs for Jan resonate with softening global economy
  • While ECB leaves policy steady, Draghi amps up by altering risks to the downside, clearly altering outlook assessment; Euro softens further
  • US Jobless claims print on low side but Leading Indicator softer, tilting another step toward recession risk
  • US Commerce Secretary  Wilbur Ross suggests still a wide trade policy gulf with China
  • US Government shutdown enters day 34; US Senate considering a wall-free shutdown bill as we go to press; don’t hold your breath
  • Equities choppy; global bond yields lower, WTI higher, gold and base metals mostly softer; bulks mixed

Markets are again choppy overnight in the midst of OK US earnings, especially from a better performance from semi-conductor stocks overnight, markets overall weighed down by continuing concerns over a global slowdown without resolution on trade issues, the shutdown, and Brexit if you wanted to throw that in too.   ECB President Draghi made clear that they have downgraded the outlook from balanced to clear downside risk, Euro PMIs were mixed but with distinct signs of trade-related softness.  US Jobless claims printed very low, but the US Leading Indicator for December was soft, tilting toward recession risk a little more


At the centre of the FX market overnight has been further weakness in the Euro and the AUD for their own reasons, while Cable has seen some more support as a Brexit crash out on March 29 looks increasingly unlikely.  The USD is on net stronger but has had its own whippiness, getting some support from EUR/AUD softness, but not helped by US Commerce Secretary Wilbur Ross’s comments in an interview suggesting still some gulf between the US and China over trade policy.

To recount yesterday’s events for the AUD, it rose in the immediate aftermath of a better than expected labour market report for December, unemployment back down to 5% (below 5% unrounded).  But then the market saw NAB had increased mortgage rates, the market joining the dots that, reading through that this would put more pressure on the RBA to ease, supporting bonds and scuttling the AUD.  It was pulled down also with EUR weakness, only supported for a time by a whippy USD.  It’s now trading near its overnight lows.

The EUR was volatile in the aftermath of a mixed set of French/German/Euro PMIs released earlier in the evening, but then a downbeat Draghi laid his risk growth risk cards on the table, the ECB formally changing its risk outlook from balanced in December to downside risk from a combination of geopolitics, protectionism and global factors.  This meeting was one to take stock rather than delve into policy implications, Draghi said, but the read through was very much that a previously-posited rate rise after the summer now looks a very distant prospect, one that’s Slip Slidin’ Away as Paul Simon wrote many year back.  It’s always a worry too when central banks assert that the risk of recession is low.

The suite of preliminary French, German, and Eurozone PMIs readings for January had their soft parts, especially the German Manufacturing PMI that printed sub-50 at 49.9 (51.5 expected), as did the French Services index (again) at 47.5 (French banks?).  The Composite indexes were a little better than expected for Germany, worse for France and the Eurozone.  There was particular weakness in German manufacturing orders, especially export orders, coming with ongoing softness in the German auto industry from softer offshore demand.

US Commerce Secretary Wilbur Ross did a TV interview making clear that while he expressed some confidence a deal could/would be done with China (what would it look like and when?), he made clear there’s still quite a gulf between the US and China over trade and especially intellectual property and technology, much more prickly areas to come to any mutually acceptable agreement.  Chinese Vice Premier is to meet with US Trade Representative Lighthizer next week, Jan 30-31.  The US Government shutdown enters day 34 with unpaid US government workers unable to get unemployment benefits and some availing themselves of food stamps.

US Jobless claims thus remained low.  In fact they printed below 200k at 199K, a sign of a still strong US labour market.  Despite this, the US Leading Indicator (a key recession risk indicator, one of the most reliable) for December again wavered, down 0.1% as it has in recent months, held down by lower ISM orders, building permits and of course the rout in stocks.


With markets still choppy and global slowdown chatter continuing, the bid tone for global bonds continued, US 2s down 1.87bps and 10s down 2.52bps to 2.7157%, testing 2.7%.  There were even deeper falls in benchmark Euro yields, 10y bunds down 4.5bps to 0.18%.


Oil has been steadier, WTI seeing a modest recovery, up 1.2%, the LMEX base metals index was down 0.2% and copper by 0.5%.  Gold was also somewhat lower (-0.4%) while bulks were more mixed, Dalian iron ore futures and Chinese steel rebar futures also higher, looking at Chinese macro growth support measures.

Coming up

  • It’s very light on for the calendar today.  The only release of passing interest would be the January reading for Tokyo’s CPI, released as it is ahead of the national figure.  It’s another test for the BoJ’s forecasts for the year ahead, but today’s read won’t close the books on this story.  The key ex-fresh food CPI (what the BoJ regards as the core CPI) is expected to be steady at 0.9% y/y, the BoJ still aiming to get to 2%.
  • It’s a larger night ahead, even aside from any news on Brexit, the US Government shutdown, or the trade issue, and Davos sound bites.
  • Tonight sees the German Ifo for Jan, regarded as the most reliable short term read on the economy.  It’s moved lower in recent months, but not as much as the Manufacturing or even the Composite Germany PMI.  The market expectation is that the Current Assessment Ifo index (it’s the one to watch for mine) will tick down from 104.7 to 104.2.  Now downside risk there.
  • The US is scheduled to release its durable goods report for December, but will it be added to a growing inventory of US releases delayed by the shutdown?
  • Something to tuck into the back of your mind for next week locally, there’s the NAB Business Survey for December on Tuesday and the CPI on Wednesday.  NAB’s forecast for headline is 0.3%-0.4%, below/in line with the market’s 0.4%, with 0.4% for the trimmed mean and weighted median.  The market median for TM and WM is 0.4% and 0.5%.  Annual rates for headline and core are expected to be 1¾%, the RBA’s November forecast looking for 2% on headline and 1¾% on core.

Market prices

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Markets Today – It’s oh, so quiet

Markets Today – It’s oh, so quiet

28 November 2023

US and European markets have begun the new week a subdued mood. But core global bond yields are showing some life, lower across the board while the USD is a tad softer too

Markets Today – It’s oh, so quiet