Below trend growth to continue
Plenty of official hand-wringing regarding downside risks to global growth and which was reflected in the communique issued on Saturday after the 2-day G20 meeting of finance ministers and central bankers in Shanghai.
Plenty of official hand-wringing regarding downside risks to global growth and which was reflected in the communique issued on Saturday after the 2-day G20 meeting of finance ministers and central bankers in Shanghai. This included – presumably at the urging of the UK government contingent and largely for the benefit of its domestic constituency – ‘Brexit’ as an additional risk to the global recovery.
Yet consistent with US treasury Secretary Jack Lew’s pre-G20 comments that we shouldn’t expect a crisis-response to a non-crisis situation, there were no hard policy commitments from anyone. This included on fiscal policy, where the declared need to ensure that debt to GDP ratios remained on a ‘sustainable path’, adequately reflects the public opposition of German finance minister Wolfgang Schaeuble heading into G20 to calls for looser fiscal policy to support growth. The public commitment to refrain from competitive currency devaluations was a ‘gimme’ that means absolutely nothing in practise. We doubt the 25 members of the ECB Governing Council are about to invite representatives of their 19 fellow G20 members to express their views on 10 March; ditto the BoJ when it next meets on 15 March.
Expectations for any substantive commitments out of G20 were sufficiently low such that we shouldn’t expect any significant market response early this week to what are a whole lot of weasel words. That said, there is some risk they aggravate the risk-negative reaction to Friday’s jump in the Fed’s preferred core PCE deflator inflation readings (to 1.7%) and which present a challenge to the market’s hitherto confident pricing out of 2016 Fed tightening risks.
The dollar jumped, money market rates and bond yields rose, and US equities sold off. These directional moves were already underway ahead of the PCE release thanks to an unexpected upward revision to Q4 US GDP to 1.0% from 0.7%, albeit inventory driven. US Treasury yields pushed higher throughout Friday’s NY session, 2s finishing 7bps higher at 0.79% and 10s +5bps at 1.76%.
Weaker than expected German CPI at -0.2% y/y on the HICP measure from 0.4% previously, and deterioration in EC confidence survey readings, conspired with the stronger US data to pull EUR/USD below 1.10 on a closing basis for the first time since 2 February. The S&P500 finished -0.2% at 1948, the Dow -0.3% and NASDAQ +0.2%. The VIX finished +0.7 at 19.81, very close to its long term average of around 20.
In FX, the narrow DXY index rose by 0.89% to 98.15 (its best level since 3 Feb). AUD was the worse perfuming G10 currency, -1.52% to 0.7126 closely followed by the NZD, -1.4% to 0.6629%. CAD was the surprise outperformer, +0.13% to 1.3513. In explaining these relative moves, it is worth noting that judging from Friday’s IMM/CFTC data, the speculative trading community extended long AUD positioning in the week through last Tuesday while positioning in the CAD was still substantially net short.
Commodities saw crude 20-30 cents lower, while the LMEX index of industrial metals rallied by 1.64% (out of kilter with the stronger dollar). In contrast, iron ore gave back $1.5 of its recent strong rally, down to $48.29.
Yesterday’s CoreLogic RP data weekend housing report shows Australia’s combined capital cities auction clearance rate holing above 70 percent for the fourth consecutive week (first time since last September). Sydney cleared a preliminary 73.3% from 76.5% the week before and Melbourne 75% up from 74.1%.
With confidence in steady Fed policy for much of 2016 challenged by Friday’s inflation news, there will be particularly keen interest in this week’s triumvirate of heavyweight US economic releases – manufacturing and non-manufacturing ISMs (Tuesday and Thursday respectively) and then Friday’s payrolls report.
Tomorrow is ‘Super Tuesday’ and where we may end up closer to knowing the identities of both the Republican and Democratic presidential election nominees. This has not yet impacted markets, but could be about to, in particular if Donald Trump looks increasingly a shoo-in.
Elsewhere, EZ inflation tonight after Friday’s weka German print is important, while China has official and Caixin manufacturing PMI data on Tuesday. China will also reveal its new 2016 growth target on Saturday.
Here, the RBA on Tuesday and GDP on Wednesday dominate proceedings. On the latter, we get inventory and company profits data today. NZ today has the ANZ business outlook, to be watched for any signs of weaker confidence at the beginning of the year,
On global stock markets, the S&P 500 was -0.20%. Bond markets saw US 10-years +4.66bp to 1.76%. On commodity markets, Brent crude oil -0.54% to $35.1, gold-1.5% to $1,220, iron ore -2.9% to $48.29. AUD is at 0.7133 and the range since Friday’s local close has been 0.7118 to 0.7233.
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