Today’s podcast

https://soundcloud.com/user-291029717/blue-day-after-a-blood-moon

Overview

• Risk sentiment deterioration accelerates – US equities open the week sharply lower
• President Xi speech interpreted as a worrying sign over China’s economic outlook
• News flows suggest US-China trade talks are not heading in the right direction
• USD indices edged a little bit lower with GBP and JPY outperforming while AUD is the G10 big loser
• NZ CPI the focus this morning. BoJ meeting, Richmond Fed Manufact. Index and Ford earnings report the other highlights

After observing MLK day on Monday, US equities have opened the week sharply lower reflecting a change in market sentiment amid a flurry of headlines suggesting US-China trade talks are not heading in the right direction, China’s president speech stressing the need to maintain political stability has been interpreted as a worrying sign over the country’s slowing economy while US data also printed on the softer side of expectations. UST yields are lower across the board and in spite of the risk off tone USD indices have edged a little bit lower weighted down by GBP’s outperformance (driven by data and Brexit news) while JPY benefited from a safe haven bid and its link to UST yields. AUD is the G10 underperformer not helped by the China news and a softer commodities backdrop with oil and copper leading the declines.

The recovering in risk assets has taken a breather this week, China’s data on Monday raised concerns over the degree of slowdown in the world’s second largest economy and yesterday’s speech by President Xi, at an unusual meeting of China’s top leaders, added further fuel to the notion that China may be slowing faster than what the official numbers suggest. In his speech President Xi stressed the need to maintain political stability adding that the Communist Party needed greater efforts “to prevent and resolve major risks”. The speech has been interpreted by many as a sign the party is becoming more concerned about the social implications of a slowing economy.

The US-China trade war remains front of mind as well with Trump tweeting yesterday for China to “stop playing around” and “do a real deal”.  The WSJ reports that in a joint report to the US Trade Representative, the US Chamber of Commerce and the American Chamber of Commerce in China say Beijing’s ambitious plan to become a global technology leader is being widely implemented, casting doubt on efforts by Chinese officials to play down its significance.

News overnight that the US will pursue the extradition of Meng Wanzhou, China’s Huawei Technologies CFO, has been an additional factor adding to concerns over US-China trade tensions while early this morning the FT reported the US negotiators turned down an offer of preparatory trade discussions. Overnight market were already trading with a risk off tone, but the FT news accelerated the deterioration in risk sentiment.

So given the above mentioned backdrop, US equities have opened the week sharply lower with the S&P500 currently down 1.82%. IT, telcos and consumer discretionary sectors have led the decline. The NASDAQ is -2.35% and the Dow is -1.7% with Caterpillar and DowDuPont the big underperformers. After closing Friday with a 17 handle, the VIX has been on a steady upward trajectory overnight and currently sits at 20.62.

USD indices have edged a  little bit lower (DXY now trading at 96.282) reflecting outperformance by GBP and JPY while commodity linked currencies have underperformed with AUD at the bottom of the pile.

The pound is up 0.56% to 1.2960 supported by a strong labour market report (see more below) and increasing optimism that a no-deal Brexit can be ruled out. there are continuing signs that the UK Parliament will be more in control of the Brexit process with a number of amendments proposed by various MPs, including staying in a customs union with the EU, a second referendum on Brexit, an Article 50 extension which would significantly delay any Brexit outcome, and ruling out of a no-deal outcome.  The speaker will decide which amendments can go to a vote. The FT reports that the Cooper-Boles amendment to stop a no-deal Brexit looks to have a good chance of being selected next week and voted on in early February.

In addition to the China and trade news above, the decline in commodity prices led by falls over 2% in oil and copper have weighted on the AUD. The pair currently trades at 0.7116, 0.50% lower relative to yesterday’s level. Ahead of the CPI release this morning, NZD has had a pretty steady night, the pair currently trades at 0.6711, about 0.1% lower over the past 24 hours.

Our BNZ colleagues note that NZ’s Headline CPI inflation for the quarter should be very soft – close to flat – weighed down by much lower petrol prices and seasonal factors. But we expect core inflation to show signs of holding up.  Indeed, the risk is that non-tradeables inflation overshoots the RBNZ’s estimate of 0.4% q/q. NZ inflation tends to be a good guide for Australia’s CPI, due for release next week.

UST yields have move lower across the board with the 10y note currently trading at 2.7338%, 5bps lower relative to Friday’s close.

Key data releases summary

• German ZEW mixed with Expectations showing a small improvement, albeit still in negative territory climbing 3.5 points to -18.5, but current situation weakened a fair bit to 27,6 against 43.0 expected.
• UK Labour Market data stronger than expected in November with Unemployment falling a tenth to 4.0% (4.1% expected, 4.1% previously) and Headline Earning beating a tenth at 3.4% y/y (3.3% expected, 3.3% previously). Jobs growth was also stronger than expected at +141k 3m/3m against +87k.
• Philly Fed Non-manufacturing Index fell to -0.2 in January from +6.4 and is the first negative reading since October 2011
• S. existing home sales (m), Dec: 4.99 vs. 5.24 exp.
• At Davos, Axel Weber (former Bundesbank) said he expects the ECB to delay its tightening, and expects the Fed to pause and then hike once or twice more in 2019. (note ECB meets on Thursday

Coming up

• NZ  CPI – Market and BNZ expectations are for a flat result for the quarter, trimming annual CPI inflation to 1.8%, from 1.9%
• AU  Westpac Leading Index Dec
• JN  Trade Balance Dec
• NZ  RBNZ Sectoral Factor Inflation Gauge 
• JN  BOJ meeting – Bank to stand pat, but the inevitable inflation downgrade will increase negative side effects debate
• JN  All Industry Activity Index Nov
• US  MBA Mortgage Applications 18 Jan
• CA  Retail Sales Nov
• US  FHFA House Price Index            Nov
• US  Richmond Fed Manufact. Index            Jan
• Ford Earnings report

Market prices