Money Matters 13th November 2018

Positive risk sentiment returned to financial markets after President Trump and the Republican Party lost control of the House of Representatives to the Democratic Party. The risk-on mood fed through into emerging markets. As pressure eased on strained assets, many bounced after a long period of struggle. This begs the question, to what extent is such optimism justified? Although the outcome of the midterm elections may restore legislative checks and balances in the US, it does not automatically imply that President Trump will stop imposing tariffs. As such, noise surrounding international trade is unlikely to fade, as Democrats have not previously opposed President Trump’s approach to foreign trade. Trade tensions do appear to induce additional volatility though and are regarded as just noise. That said, tensions appear to be deterring investors’ attention from the structural shifts that are brought about by the Fed’s gradual balance sheet reduction.
This week is going to be relatively quiet in terms of economic data releases in developed markets. The October CPI inflation data will be released in the US and is unlikely to upset financial markets. The Eurozone will reveal the aggregate Q3 GDP statistics for the whole bloc and then publish the final read of inflation data for October. Additionally, both Japanese GDP data from Q3 and October’s trade statistics are scheduled for this week, the latter of which should shed some light on the impact of trade tensions.
Market players are set to focus on emerging markets, principally China. China publishes some of the most relevant high-frequency indicators, such as retail sales, industrial production and fixed asset investments this week. Global market sentiment could improve if the Chinese data confirms that stimulus measures by the authorities have started to finally feed through into the domestic economy. Furthermore, India’s CPI inflation will be published, whilst the Philippine central bank decides on the policy rate. In Latin America, the Mexican central bank might lift the policy rate by 25bp to 8% and Colombia will release Q3 GDP growth. African markets are set to have a relatively calm week, apart from the Egyptian central bank’s monetary policy decision, the economic diary is rather empty.
United States 13 Nov 2018UNITED STATES
S&P 2,781 +2.13%, 10yr Treasury 3.18% -3.02bps, HY Credit Index 368 +0bps, Vix 17.64 -2.15Vol 
Stock markets in the US finished the week on a positive note, with the majority of stock indices rising. The S&P 500, led by health care (4%) and utilities (3.1%), gained the most and rose 2.1%. The broad dollar index (DXY) strengthened 0.4% during the week and the Treasury curve flattened, with the 2-year yield rising 2bp to 2.92% and the 10-year yield easing 3bp to 3.18%.
The rate setting meeting of the FOMC was a non-event. In line with expectations, the Committee kept the Fed funds rate unchanged at 2.00-2.25%. Furthermore, they also left the tone and the wording of the statement broadly unchanged and reaffirmed that ‘further gradual increases’ of the policy rate are in the pipeline.
The minutes (scheduled to be released on the 29th November) will be of greater importance and relevance, as they may contain guidance on the longer-term trajectory of interest rates.
Europe 13 Nov 2018EUROPE
Eurostoxx 3,221 +0.02%, German Bund 0.39% -2.10bps, Xover Credit Index 289 -3bps, USDEUR .888 +0.46%
European stock markets delivered a mixed performance, three out of the big four countries’ indices fell: Italy by 1.1%, France and Germany by 0.4-0.4% (all in USD). The Spanish and Dutch markets outperformed, edging up 1.1% and 1% (all in USD) respectively. No major movements were seen in yields of core countries. As a result, the 10-year German yield was at 0.41% at the end of the week. In contrast, risk premia on periphery bonds widened, with the 10-year Italian yield rising 8bp to 3.38%, lifting the spread over the German Bund to 297bp.
German industrial production rose 0.2% MoM in September. In addition, the August print was revised from a decline of 0.3% MoM to a gain of 0.1% MoM. Despite these improvements, industrial production fell by 0.9% QoQ in Q3.
The Italian composite PMI dropped sharply to 49.3 in October, from 52.4 in September. The services sector PMI declined substantially, by 4.2ppt to 49.2. According to the report ‘services companies continued to feel the squeeze on profit margins as selling prices declined for the ninth consecutive month, while operating costs rose solidly.’
Quarterly GDP growth was already flat in Q3 18. This data poses further downside risks to Italian economic activity Q4 and makes the government’s budget projections even less achievable.
Asia 13 Nov 2018ASIA
HSCEI 10,440 -2.49%, Nikkei 22,269.88 -0.49%, 10yr JGB 0.12% 0bps, USDJPY 114.000 +0.52% 
Investor sentiment in Asian markets was gloomy as most of the broad stock indices decreased in USD terms. The negative mood was captured by the MSCI Asia Pacific ex. Japan index, which fell 2.3% in USD. Losses were not extensive, the majority of Asian stock indices remain at higher levels compared to their values at the beginning of November.
Chinese exports soared in October, growing 15.6% YoY and outpacing imports, which rose 14.3% YoY. As a result, the foreign trade surplus widened to USD 34bn. Exports to the US remained solid, increasing 13.2% YoY as opposed to imports from the US, which contracted 1.8% YoY.
The skyrocketing of exports is most probably due to the front-loading of products that are targeted by the tariffs imposed by US President Trump. Consequently, the current pace of exports growth may continue for the rest of 2018 but may not be sustainable in to 2019 when higher tariffs are scheduled to kick in.
Chinese CPI inflation was unchanged in October, coming in at 2.5% YoY. Food price inflation moderated compared to previous months (-0.3% MoM), i.e. inflationary pressure stemming from pork and unprocessed food eased. Non-food inflation gained (0.3% MoM), mainly due to fuel prices. Meanwhile, producer prices (PPI) rose 3.3% YoY in October; 0.3ppt slower than a month before.
Indonesian GDP growth slowed to 5.2% YoY in 2018 Q3, as compared to 5.3% YoY in Q2. Slowing growth was mainly due to the deceleration of agricultural output growth, while domestic demand expansion was solid at 5%. Government spending remained robust at 6.3% YoY, sharply accelerating from Q2.
Economic growth this year may hit 5.2% due to strong domestic demand and propped up public expenditures.
Philippine GDP growth was 6.1% YoY (1.4% QoQ SA) in 2018 Q3, while in the first three quarters of the year, the rate of economic expansion hit 6.3% YoY. In Q3, government spending and investments bolstered GDP growth, as household consumption visibly slowed to 5.2% YoY. Net trade remained a substantial drag on growth, as imports significantly outweighed exports.
Manufacturing PMI rose 2ppt to 54 in October, signalling further strength in the Philippine manufacturing output. Although new export orders declined, the increase in domestic demand more than offset the decrease in export orders.
Headline CPI inflation in the Philippines was 0.3% MoM in October, slowing from 0.8% MoM in September. In annual terms, inflation hovered at 6.7%, unchanged compared to September. Core inflation was 4.9% YoY in October, up 0.2ppt compared to September. Although the acceleration of headline inflation came to a halt, the core measure remains on the rise. This suggests that both negative supply shocks and domestic demand pushed up inflation. Headline CPI inflation continues to be very far from the central bank’s inflation target band of 2-4%.
Since the last monetary policy meeting, the MPC has sent mixed messages to the market. It’s therefore unclear whether the MPC will hike the policy rate at the next rate setting meeting on 15th November.
The Vietnamese government released its key economic targets for 2019, which stipulate that the Vietnamese economy is targeted to grow by 6.6-6.8% next year, while average annual inflation may be flat at 4%.
In the first four months of FY2018-19 (July-October), the value of remittances to Bangladesh rose 12.2% YoY and hit USD 5.1bn. The value of remittance inflows to the country increased primarily due to the weaker currency but were also encouraged by the rebound in the economic activity of Middle Eastern countries (stemming from oil price increases in Q3). Bangladeshi consumer price inflation was 5.4% YoY in October, matching the pace seen in September. The continuous fall in food price inflation drove the deceleration of the headline index, as it more than offset the rise in non-food prices.
Latin America 13 Nov 2018LATIN AMERICA
MSCI Lat Am 2,624 -3.68%
Latin American markets had a challenging week, as the broad MSCI EM Latin America lost 3.7% of its value in USD. The loss was led by Argentina and Brazil, whose respective indices decreased 4.6% in USD. Chile and Colombia outperformed their Latin American peers, rising by 3.2% and 1.2% (all in USD), respectively.
According to Brazilian President-elect Bolsonaro, some parts of the planned pension reform might be approved this year, e.g. raising the minimum retirement age. Mr. Bolsornaro’s proposal in its current form is somewhat softer than President Temer’s.
The fact that the incoming President might start by raising the minimum pension retirement age to a lesser extent than expected may imply that Mr. Bolsonaro could opt for a more cautious and gradualist approach to economic reforms, in order to limit the political costs of the reform process.
Colombian inflation was 3.3% YoY in October, rising from 3.2% YoY in September. Regulated prices rose 6.4% YoY, lifting headline inflation. Despite the recent depreciation of the Colombian peso and the low base last October, tradable goods inflation slowed further in October. Overall, inflation remains comfortably within the central bank’s inflation target band of 2-4%.
Credit rating agency Fitch affirmed Argentina’s long-term rating at ‘B,’ but revised the outlook to ‘negative’ in the context of a broadly weaker economy, rising debt-to-GDP ratio and the more uncertain fiscal outlook.
Imacec, the monthly GDP proxy index in Chile, grew 2.3% YoY in September, exceeding the median market estimate. The stronger than expected performance was mostly due to non-mining activity, which rose 2.5% YoY, led by services. Overall, economic activity strengthened 2.9% YoY in Q3, according to the Imacec index, suggesting that the economy went through a soft patch in Q3 compared to the first half of the year.
The October Imacec figure confirmed that despite the soft patch in Q3, Chilean GDP growth may hit 4% this year.
The monetary policy meeting minutes of the Chilean central bank from October, when the MPC hiked the policy rate by 25bp to 2.75% emphasised that starting a tightening cycle was fundamentally justified. However, members underlined that the cycle may be gradual and shallow.
Africa 13 Nov 2018AFRICA
MSCI Africa 759 -0.05%
African markets delivered a mixed performance, the MSCI EFM Africa Index went sideways in USD. Egypt clearly outperformed by gaining 4.4% in USD, while the South African stock market lost 2.3% of its value in USD.
Egyptian GDP grew 5.3% YoY in FY2018-19 Q1 (or July-September 2018) according to preliminary figures. The Planning Minister cited that GDP growth was driven by the gas, ICT and construction sectors as well as by Suez Canal revenues.
PMI for the Egyptian non-oil private sector remained below 50 for the second consecutive month, at 48.6 in October. A reading below 50 indicates that non-oil private sector output might decline in the next couple of months. The below-50 figure was mostly due to lower domestic and export demand. On the bright side, firms remained optimistic on the longer-term prospects.
The central bank of Egypt may begin targeting inflation as an integral part of its monetary policy framework, according to the deputy governor. No further specifics have been released.
Transitioning to such a regime implies that the central bank might gradually shift away from the exchange rate peg vis-à-vis the USD and, consequently, let the currency float.
Unemployment in Morocco decreased to 10% in September (vs. 10.6% a year ago). According to the Moroccan Planning Agency, unemployment rate may be 10.4% on average in 2018, slightly higher than the year before.
A lawmaker from Kenya’s ruling party proposed limiting foreign involvement in public contracts. The proposal would prevent foreigners from bidding for any public contract valued at up to KES 1bn (ca. USD 9.8mn). The proposal may be brought to the Parliament for debate at the beginning of 2019 at the earliest.
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