- Global equity markets are back under pressure as global growth concerns mount
- Eurozone preliminary December PMIs were very weak; the ECB and Draghi delivered a rather dovish hold
- China reported weak November retail sales and IP
- US November retail sales will be the data highlight today
- Japan’s Q4 Tankan report was mixed
- Russia central bank unexpectedly hiked rates 25 bp to 7.75%
The dollar is broadly firmer against the majors as risk-off sentiment takes hold on weak global data. The yen and Swissie are outperforming, while the Antipodeans are underperforming. EM currencies are broadly weaker. TWD and MYR are outperforming, while ZAR and TRY are underperforming. MSCI Asia Pacific was down 1.5%, with the Nikkei falling 2%. MSCI EM is down 1.3% so far today, with the Shanghai Composite falling 1.5%. Euro Stoxx 600 is down 0.9% near midday, while US equity futures are pointing to a lower open. The US 10-year yield is down 4 bp at 2.88%. Commodity prices are mostly lower, with Brent oil down 0.5%, copper down 1.1%, and gold down 0.3%.
Global equity markets are back under pressure as global growth concerns mount. China started the ball rolling with weaker than expected retail sales and IP data, and the eurozone followed suit with much weaker than expected PMI readings. US reports retail sales today and we suspect markets are wary of a bearish trifecta from the world’s three biggest economies.
Markit reported very weak eurozone preliminary December PMIs. Eurozone composite came in at 51.3 vs. 52.8 expected, as both manufacturing and services PMIs fell to 51.4. The country breakdown is even more alarming. Its composite came in at 49.3 vs. 54.0 expected, as both manufacturing and services PMIs fell below 50 to 49.7 and 49.6, respectively. Germany fared better but still weakened, as the composite came in at 52.2 vs. 52.4 expected. The manufacturing and services PMIs fell to 51.5 and 52.5, respectively.
We thought the ECB and Draghi delivered a rather dovish hold. As expected, growth and inflation forecasts were revised down modestly. More importantly, Draghi acknowledged that the balance of risks is moving to the downside. While policymakers reportedly thought of changing the official balance of risks assessment, they decided not to do so at this time.
Markets took the euro lower after the ECB but only got as far as $1.1330 before it rebounded. Today’s data pushed it below to trade at the lowest level since November 28. The daily trendline drawn of the November low has now been broken and sets up a test of that low near $1.1215.
The eurozone data so far in Q4 have been disappointing. If it carries over into 2019 as we expect, the ECB revisions to growth announced yesterday remain too optimistic. Last week, eurozone Q3 GDP growth was revised down a tick to 1.6% y/y due to weaker net exports, investment, and government spending. We think doubts are growing with regards to the ECB’s intent to hike rates after next summer.
China reported weaker than expected November retail sales and IP. The former rose 8.1% y/y vs. 8.8% expected and the latter rose 5.4% y/y vs. 5.9% expected. PMI readings for last month improved marginally, and so the weak readings are doubly disappointing. The ongoing trade war remains a headwind, truce or no truce. Here, signs are improving as China confirmed it will lift the retaliatory tariffs on US auto imports for three months effective January 1 as talks continue.
US November retail sales will be the data highlight today. Headline sales are expected to rise 0.1% m/m and ex-autos by 0.2% m/m. However, the so-called control group used to calculate GDP is expected to rise 0.4%. Strong auto sales last month suggest potential for an upside surprise, while lower gas prices could work the other way. November IP and Markit preliminary December PMIs will also be reported Friday.
The Fed meets December 19 and is still widely expected to hike rates 25 bp. The ongoing market debate is really about what happens in 2019. The yield on the January 2020 Fed Funds futures contract has sunk back to 2.58%, barely above the cycle low of 2.56% on Monday. With the effective Fed Funds rate at 2.20%, the market is basically saying it sees no hikes next year after next week’s expected hike.
Japan’s Q4 Tankan report was mixed. The large manufacturing index was steady at 19 while the outlook fell to 15 from 19. Elsewhere, the large non-manufacturing index rose to 24 from 22 while the outlook fell to 20 from 22. Planned capex was higher than expected at 14.3% and up from 13.4% in Q3. For the most part, data have been coming in soft in Q3 and Q4. The Bank of Japan meets December 20, and it is expected to underscore its commitment to maintain stimulus until 2021.
Russia central bank unexpectedly hiked rates 25 bp to 7.75%. The market was split. Of the 42 analysts polled by Bloomberg, 26 saw no hike and 16 saw a 25 bp hike to 7.75%. CPI rose 3.8% y/y in November, just below the 4% target and rising. The bank forecasts inflation rising to 5.0-5.5% at end-2019, suggesting more hikes will be seen next year. The bank also said that it would resume its regular FX purchases starting January 15.
EM remains under pressure. With global growth showing further signs of slowing, the backdrop is not constructive for EM. US rates are falling but this is not enough of a positive to offset the risks to the EM economic outlook. When the three largest economies of the world are potentially moving into a synchronized slowdown, it’s a concern.