Today’s podcast

Overview:  Up around the bend

• Equities rise in a sedate session; bond yields too
• AUD a little choppy; trading just below 0.67
• China said to be reviewing its growth target and considering more economy support measures
• Sterling unloved on the day despite better EC-UK mood music from Barnier and Johnson
• US ISM much better than expectations
• RBA today: no change expected; focus on the statement

While yesterday’s APAC session was dominated by Chinese markets playing catch-up after their post Lunar New Year opening, the overnight session was mostly measured.  The market was rather sedate in the morning session with European equities making some gains, flowing over into the New York session, helped by news that the Chinese authorities were supplying additional liquidity to the Chinese market.

Bond yields drifted somewhat higher as news drifted in that Spain and Italy’s Manufacturing PMIs in January increased by 1-2 index points, though still in sub-50 territory.  Those reports complemented the improvements seen in the larger economy readings last week.  The Eurozone final Manufacturing PMI for January was revised up a little from 47.8 to 47.9.  The Euro languished in the mid to higher 1.10s, currently trading at around 1.1060/65.

Chinese officials are evaluating whether the target for economic growth this year should be softened. The target is normally revealed in March and economists had already expected a softening to “around 6%” from 6-6½% in 2019. In our view, the coronavirus is currently inflicting a heavy blow to its economy so it stands to reason that growth will be much weaker, even if there is ultimately a rebound of sorts next quarter on a quick passing of the viral epidemic. Bloomberg reported that Chinese officials are hoping the US will agree to some flexibility on pledges in their Phase 1 trade deal with the US, given the economic hit inflicted by the coronavirus. The deal has a clause that allows for natural disasters or unforeseeable events.

There was understandable interest in the Pound given important scene-setting speeches today from chief EC trade negotiator Barnier and a set piece speech by UK PM Johnson to business leaders setting out his vision and direction for trade.  Sterling was been sold lower ( -1.6% @1.2998) despite headlines from both sides suggesting a less confrontational approach, with more give and take.

For his part, Barnier spoke of wanting an ambitious partnership with the UK and that they will offer the UK a highly ambitious trade deal, even though there must be a level playing field to get a deal.  With the issue of “regulatory alignment” at front of mind for the market and whether that would prove to be a stumbling block given their entrenched positions, Barnier noted that the EC was not asking for regulatory alignment but “consistency”, that he didn’t want British divergence from EU rules to result in unfair competition.

Setting out his vision

PM Johnson spoke of the need for the UK to champion free trade that’s done more than any other economic idea to raise people out of poverty.  He said that trade tensions are letting the “air out of the tyres” of the global economy.  Not surprisingly, he said that the UK wants a thriving trade and economic partnership with the EU and that the UK will “not engage in (a) cut throat race to the bottom, the UK will not engage in dumping.  In his opinion, the UK should be worried about state aid, not the EU and that the NHS is not on the table for US trade talks.   He said that they want a comprehensive trade deal like Canada’s. Johnson was saying that his vision is to adopt standards that are even stronger than the EU’s.

Johnson was asked how important a UK trade deal with Australia is. He said it is “hugely important” and that he’d had a text from PM Scott Morrison on Friday to say how eager he is that a deal is struck. Johnson said it’s one of the first four priorities outside of the EU, the four being US, Japan, Australia, and NZ.

In our view

These are relatively positive opening bids from both parties.  Even so, Sterling has struggled.  This might in part have reflected some dollar strength – given a push later in the day by a US ISM Manufacturing Survey that was stronger in January (see below), or still  lingering disquiet ahead of negotiations, mood music better or not.  EUR/GBP was bid from the London opening of the morning session from just over 0.842 to currently trade at just below 0.851.  Cable sits at just below 1.30, while the AUD/GBP has risen to the mid 0.51s.

The US ISM manufacturing index was much stronger than market expectations, bouncing back above the 50 mark from a post-GFC low, likely supported by the signing of the phase-one US-China trade deal. The headline index came in at 50.9, an increase of 3.1 points from December’s reading.  It was the first positive above-50 growth reading since July 2019. The details were also strong, with much higher new orders and export orders. But clearly the data there is any damage yet to be inflicted by the coronavirus, so the market reaction of slightly higher rates didn’t last long.

In the wake of the ISM release today (and the US Construction spending), the Atlanta Fed increased its estimate of Q1 US GDPNow from 2.7% to 2.9%, lifting its estimates for consumption and private investment.

Coming up

• The RBA 2.30 rate announcement today is the main local event.  The short term interest rate market is priced for no change, RBA futures pricing in a 23% chance of the RBA cutting today.  All bar three of the 25 local economists surveyed by Bloomberg are picking no change.
• The market will be paying close attention to the essence of the growth forecast changes likely to be summarised in this afternoon’s press release, then laid out in more detail in Friday’s quarterly monetary policy statement and ahead of then, Governor Lowe’s speech tomorrow at the National Press Club. An easing bias would not surprise at all with the RBA still well short of their inflation and unemployment goals.  NAB looks for the RBA to ease at the April Board meeting when the RBA will have had time to review December quarter growth including consumer spending.  By then, there’ll also be more readings of spare capacity in the labour market as well hopefully  more clarity on nCoV.
• Also keep an eye out for progress with the Iowa caucuses as the first of the “primaries” on the long road to the Presidential election at the end of the year and who has early momentum in the campaign for the Democrat nomination.

Market prices

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