- Global equity markets remain under pressure this week as risk-off sentiment continues to impact global markets
- Markets continue to reprice Fed tightening potential; we do not think there is a Powell Put
- The focus now turns to US inflation and retail sales readings this week
- China is speaking out against the arrest of Huawei’s CFO Meng Wanzhou; trade data for November came in much weaker than expected
- UK parliament is scheduled to hold its Brexit vote Tuesday
- The ECB and Norges Bank meet Thursday; the central banks of Turkey, Brazil, and Peru meet this week
The dollar is mostly softer against the majors as equity markets remain under pressure. Nokkie and Kiwi are outperforming, while sterling and yen are underperforming. EM currencies are mostly weaker. TRY and CZK are outperforming, while INR and KRW are underperforming. MSCI Asia Pacific was down 1.6%, with the Nikkei falling 2.1%. MSCI EM is down 1.4% so far today, with the Shanghai Composite falling 0.8%. Euro Stoxx 600 is down 0.6% near midday, while US equity futures are pointing to a lower open. The US 10-year yield is up 1 bp at 2.86%. Commodity prices are mostly lower, with Brent oil down 1.2%, copper down 0.7%, and gold down 0.1%.
Global equity markets remain under pressure this week as risk-off sentiment continues to impact global markets. Global bond yields continue to fall. Within this backdrop, the dollar is softer against the majors and firmer against EM today. We do not think this divergence will last and look for the dollar to resume its climb against the majors.
Ahead of the upcoming FOMC meeting December 19, the media embargo is now in effect and there are no Fed speakers this week. Last week, Chairman Powell was upbeat on the US economy and the labor market, but his comments fell on deaf ears.
Markets continue to reprice Fed tightening potential. WIRP shows 72% chance for a hike next week, which we think understates the risk. The implied yield on the January 2020 Fed Funds futures contract is now 2.57%, the lowest since May 31. With the effective Fed Funds rate now at 2.20%, this implies only one more hike in this current cycle with a small chance of a second. Not to belabor the point, but we continue to believe that markets are overestimating the risks of a US recession.
We’ll say it again: we do not think there is a Powell Put. His shift in messaging was meant to prepare markets for a period of greater policy uncertainty next year, not to send a message that the Fed will prop up the stock market.
After last Friday’s jobs report, the focus now turns to US inflation readings this week. November PPI will be reported Tuesday followed by CPI Wednesday. Headline and core PPI measures are both expected to ease to 2.5% y/y. Headline CPI is expected to ease to 2.2% y/y, but core CPI is expected to rise a tick to 2.2% y/y. If so, these readings are not going to help get US long end rates up very much.
Also, US November retail sales will be reported Friday. 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 0.5%. Strong auto sales last month suggest potential for an upside surprise. November IP and Markit preliminary December PMIs will also be reported Friday.
After an uncharacteristic period of silence, China is speaking out against the arrest of Huawei’s CFO Meng Wanzhou. Vice Foreign Minister Le Yucheng has summoned the US ambassador in protest and pledged “further action” if needed. China also summoned Canada’s ambassador and threatened to punish Canada if Meng is not released immediately.
Any hopes of separating this issue from that of the trade negotiations are likely to be dashed. We simply cannot imagine that China will take this lying down, and so we expect tensions between the two nations to remain high. China reports November money and loan data sometime this week, though no date has been scheduled. On Friday, it reports IP and retail sales.
Over the weekend, China trade data for November came in much weaker than expected. Exports rose 5.4% y/y and imports by 3% y/y. Also, CPI came in lower than expected at 2.2% y/y, while PPI rose the expected 2.7% y/y. We expect further stimulus measures in the coming weeks.
UK parliament is scheduled to hold its Brexit vote Tuesday. However, there have been press reports that this may be delayed for May to drum up more support and/or press the EU to change some of the terms. Brexit Secretary Barclay denied any plans to delay, even though most unofficial vote counts point to a sure defeat for May.
The top EU court just ruled that the UK can unilaterally revoke Brexit. There has been some growing speculation of a second Brexit referendum, but we think that is unlikely. How can the government justify throwing out the first one? What if Brexit passes again? The idea is fanciful but most likely unworkable.
There is a full week of UK data reports. October trade deficit was reported today and was wider than expected. Industrial production came in weaker than expected at -0.6% m/m while monthly GDP rose 0.1% m/m. Labor market data will be reported Tuesday. The BOE has warned of the potential negative impact on the economy of a no-deal Brexit. However, the economy has already weakened due to the ongoing uncertainty.
The ECB meets Thursday. It is expected to announce that QE will end this year and it will likely reaffirm its intent to hike rates after the summer. What’s more important are the new staff forecasts. They will have to recognize the ongoing slowdown in Q4, so perhaps there will be some very minor tweaks to the growth and inflation forecasts. However, we do not think the revisions will be significant enough to suggest any changes in the ECB’s policy stance.
Markit reports eurozone preliminary December PMIs Friday. The data so far in Q4 have been disappointing. December readings are expected to come in steady from November, but the levels would remain near the lows for this move. 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.
Norway’s Norges Bank also meets Thursday and is expected to keep rates steady at 0.75%. It started the tightening cycle with a 25 bp hike in September and laid out a modest rate path. Bloomberg consensus sees the next hike in H1 2019 and the one after in H2 2019.
Of more interest will be Sweden’s Riksbank meeting next week. It has signaled an intent to hike rates on either December 20 or February 13. It will be a tough call. The data have been coming in largely softer than expected, but Inflation at 2.3% y/y is above the 2% target. We lean towards a February hike in light of the ongoing market turmoil, as the bank may benefit from a little more time before moving on rates.
Japan’s Q4 Tankan report will be released Friday. Ahead of that, forward-looking machine tool orders and core machine orders will be reported Tuesday and Wednesday, respectively. Q3 GDP contraction was revised to -2.5% SAAR from -1.2% previously earlier today. It was expected at -2.0%. The main drivers were softer private consumption and business spending. Soft data continue to come in ahead of the Bank of Japan meeting December 20, and the central bank will underscore its commitment to maintain stimulus until 2021.
EM remains vulnerable to periodic (and seemingly more frequent) bouts of risk-off sentiment, and this week should be no different. We think markets are overemphasizing US recession risks and expect the yield curve to steepen in the coming weeks. If so, this would most likely be negative for EM. In a sense, it’s a lose-lose situation for EM no matter what.
The central banks of Turkey, Brazil, and Peru meet this week. None are expected to move on rates. However, there is growing concern that Turkey will cut rates too soon, and that Brazil will hike rates too late.