Below trend growth to continue
A glance at Friday’s New York opening and closing levels for major FX rates tells us that the latest flurry of US data, including a slightly softer than expected Q4 GDP print and downside miss on headline durable goods orders, came and went without much fanfare. US yields dropped on the 1.9% headline GDP print while currencies and stocks did very little.
In the Trumposphere, the US president signed an executive order making major changes to America’s policies on refugees and immigration. He suspended the US refugee program for 120 days, banned all immigrants from seven Muslim countries for 90 days and ordered his administration to develop “extreme vetting” measures for immigrants from those countries to keep “radical Islamic terrorists” out of America. This is bound to reverberate with risk of tit-for-tat responses (e.g. a ban on US citizens travelling to those countries most affected?). Short term market impact, if any, is not obvious though these actions do have the potential to undermine global risk sentiment.
Under the hood, the detail of the U.S. GDP report were more positive than the headline, with a big subtraction from growth from net exports (-1.7%) and where a reversal of the Q3 surge in soybean exports was largely to blame. Consumer spending at 2.5% was in line with expectations and business was also a reasonably healthy +2.4%.
Ditto for durable goods orders where the core measures (ex-transport and ex-defence ex-aircraft) at 0.5% and 0.8% were both better than the -0.4% headline print.
The S&P500 finished 0.09% lower at 2,296.68 (+1% on the week) and the Dow -0.04% at 20,093.78 (+1.3% on the week). Some note should be made of the VIX, which fell just 0.05 to 10.58 but is a point lower on the week and to its lowest since July 3rd 2014. The FT’s John Authers’ Friday night note (wittily titled VIX VapoRub ) highlighted research showing the cyclical low in the VIX tends to lead cyclical downturns in US stocks by a couple of months. He suggests it may be time to buy the VIX, but not (just yet) to sell US stocks.
In bonds, US Treasury yields were modestly lower in a slight bull flattening move. 2s -0.6bp to 1.22% (+2.9bps on the week); 5s -1.9bps to 1.947% (+1.0bp on the week) and 10s -2.0bps to 2.485% (+1.7bps on the week).
In G10 FX, USD/JPY was the biggest mover, +0.5% to Y115.10, most likely reflecting catch-up to the rise in US Treasury yields earlier in the week and buoyant risk sentiment, rather than responding to Friday’s post-US GDP dip. The BBDXY index finished just -0.01% lower to be 0.6% down on the week; DXY +0.15% to 100.53 and -0.21% lower on the week. EUR/USD +0.16% to 1.0699; AUD/USD ended NY +0.21% to 0.7551 and compared to a week-ago close of 0.7555. It’s a touch higher at the re-open.
In commodities, gold and oil were down smalls; gold -$1.40 to $1188.4, Brent crude -$0.70 to $55.52 and WTI -$0.60 to 53.17. LME index +0.2%+1.45%. Iron ore (China import price) didn’t trade due to the start of the Lunar New Year holiday, neither did coking coal. Steaming coal lost $0.95 to $83.50.
China is out Monday through Thursday and Hong Kong Monday and Tuesday, welcoming in the year of the rooster and which will make for a relatively subdued APAC market this week. This won’t stop the release of the official China manufacturing and non-manufacturing PMIs on Wednesday and the Caixin manufacturing version on Friday.
It’s U.S. non-farm payroll week and which comes on the heels of the FOMC’s first meeting of the year and while not a press conference/fresh forecasts affair, will be parsed for any hints that the next Fed move could come as early as the next meeting (March 15). If so, this would be despite the fact that there is as yet little flesh on the bones of Trump administration trade or fiscal policy for the FOMC to be any more informed about the potential implications for the economy than was the case when they met in mid-December.
The BoJ also meets this week, on Tuesday, and can confidently be expected to hold policy where it is.
The current consensus on U.S. payrolls is for a 168k gain with the unemployment rate steady at 4.7% and annual average hourly earnings growth ticking down to 2.8% from 2.9%. We also get the ISM surveys for manufacturing (Wednesday) and services (Friday).
In this part of the world, we get the NAB business survey (for December) on Tuesday and trade figures and building approvals on Thursday. Trade numbers could print a record surplus – NAB has $3.05bn – driven by the surge in coal and iron prices and too a probable rise in LNG volumes.
New Zealand has trade and retail sales data on Monday (Auckland is closed for the Anniversary holiday) and the key release of the week, Q4 employment data, on Wednesday.
On global stock markets, the S&P 500 was -0.09%. Bond markets saw US 10-years -2.00bp to 2.48%. In commodities, Brent crude oil -1.28% to $55.52, gold-0.1% to $1,188, iron ore +0.0% to $83.34, steam coal -1.1% to $83.75, met.coal +0.0% to $185.25. AUD is at 0.756 and the range since Friday 5pm Sydney time is 0.7512 to 0.7573.
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