- Risk appetite stabilizes despite the spreading of the new virus
- Italian bonds and banking stocks are under pressure on political uncertainty
- Malaysia’s central bank surprised markets with a rate cut
- South Korea posts a solid Q4 GDP print
The dollar is a touch weaker against most major and EM currencies. Nokkie and Stokkie are outperforming, while the safe-haven yen and Swiss franc are slightly weaker. In the EM space, ZAR is the only notable mover, appreciating 0.4% against the dollar, while most Asian currencies are 0.1-0.2% stronger. The yuan is little changed. Equity markets were broadly higher in Asia with the Nikkei gaining 0.7% and the Shanghai Comp up 0.3%. The EuroStoxx 600 index is flat but the Italian MIB is off some 0.6%. US equity futures are up 0.4%. Treasury yields are little changed as are yields in the UK and core European countries. Of note, Italian 10-year yields are up 4 bps on increased political uncertainty.
Risk appetite bounced back somewhat despite reports that the coronavirus is spreading. The number of confirmed cases has increased to 440 with the death toll at nine, and one case confirmed in the US. Chinese authorities are acting aggressively to counter the spread by imposing nationwide screenings, but this is a travel-heavy season in China with the Lunar New Year holiday about to start.
The US economy is still doing well. The Atlanta Fed’s GDPNow model estimates Q4 GDP growth at 1.8% SAAR, steady from the previous reading. Elsewhere, the NY Fed’s Nowcast model has Q4 growth at 1.2% SAAR, up from 1.1% previously, while its estimate for Q1 growth rose to 1.7% SAAR from 1.2% previously. We are clearly far from recession and the Fed is right to pause for now to assess the landscape. The media embargo has gone into effect ahead of the January 29 FOMC meeting. As such, there will be no speakers until Powell’s post-decision press conference.
After last week’s huge US data dump, releases this week are fairly light. The most important one is the Chicago Fed National Activity Index for December, released today. It remains the best indicator of US recession risk and it rose to 0.56 in November from -0.76 in October. It is expected at 0.13 in December. If so, the 3-month average would fall to -0.02 from -0.25 in November and would be the best reading since August. It remains far from the -0.7 recession threshold. A value of zero shows an economy growing at trend, positive values represent above trend growth, while negative values represent below trend growth. December existing home sales (1.5% m/m expected) will be reported today.
Bank of Canada is expected to keep rates steady at 1.75%. Please see our recent BOC preview for an in-depth look at the Canadian outlook. Hours ahead of the decision, Canada reports December CPI and November wholesale trade sales. Inflation is expected to tick higher to 2.3% y/y. If so, inflation would be the highest since October 2018 and will likely keep the central bank on hold near-term. Yesterday, November manufacturing sales fell -0.6% m/m vs. -0.5% expected). Wholesale trade sales will be reported today (-0.4% m/m expected).
Italian yields are a bit higher on rising political uncertainty. Speculation about the integrity of the ruling M5S-PD coalition is nothing new but is intensifying ahead of regional elections this weekend. Local media claims that M5S leader Di Maio is on the verge of quitting as party leader after a string of desertions and declining support (from 33% in the 2018 elections to only 16% now). While the possibility of new elections (and a return of an anti-EU Lega) is a source of short-term uncertainty, we think that investors have learned to live with the turbulent political landscape in Italy. In fact, a change in the M5S leadership might help extend the longevity of the coalition. Yields are up 2-5 bps across the curve today, a bit more than the move in Spain or Portugal. Spreads to equivalent German bunds have widened over the last few days but remain well within recent ranges. Local banking stocks might have been the most impacted, with the sector down 1.4% compared to the EuroStoxx banking sub-index falling only 0.6% on the day.
Malaysia’s central bank surprised markets by cutting rates by 25 bps to 2.75%. The vast majority of analysts were calling for no change. The bank justified the move as a “pre-emptive measure to secure the improving growth trajectory amid price stability.” It also noted a host of external factors as risks for Malaysia’s growth prospects. The decision comes against a string of relatively positive, data including manufacturing PMI and industrial production earlier in the month. December CPI, released today, came in at 1.0% y/y as expected. The ringgit is little changed despite the surprise, but local equity markets are underperforming.
South Korea’s Q4 GDP came in well above expectations at 2.2% y/y (1.9% expected). On a quarterly basis, the 1.2% print was the fastest expansion since Q3 2017. The strong figures result from exports and government spending, with public investment rising 6.7% y/y after the supplementary budget passed in August. The Kospi index is outperforming in the region, up 1.2% while the won is slightly stronger against the dollar.