Money Matters 15th January 2019

The principal worry I would have is really global growth,” said Fed Chair Jerome Powell. The Fed Chair added that the FOMC will be “patient” and “flexible” when it comes to the degree and pace of monetary tightening. Although no tangible pieces of information were released after the talks between the US and China were concluded last week, it was just enough for markets that the two countries released coordinated statements that talks were productive and may continue very soon. The combination of these two factors improved global market sentiment and strengthened the appetite for risk. Should the macroeconomic data from the US and China be convincingly solid this week, upbeat investor sentiment might just be sustained for more than just a couple of days.
Financial markets will need to digest a whole bunch of macroeconomic data coming from the US, again, such as PPI inflation, new home sales, factory orders, retail sales, industrial production and the sentiment index produced by the University of Michigan. Meanwhile, on the other side of the Atlantic, both the UK and the Eurozone are going to reveal consumer price inflation figures from December.
Within the emerging Asian space, markets are going to focus mainly on Chinese foreign trade data, Indian consumer price inflation and the rate setting meeting in IndonesiaIn Latin America, various high-frequency macroeconomic indicators will be released such as the November economic activity indicators from Peru and Brazil. African markets face a light economic diary this week, as no major released are scheduled apart from monetary policy decision in South Africa, Nigerian consumer price inflation, and Egyptian foreign trade statistics.
United States 15 Jan 2019UNITED STATES
S&P 2,596 +2.54%, 10yr Treasury 2.67% +3.30bps, HY Credit Index 404 -29bps, Vix 19.81 -3.19Vol
US stock markets finished the week on a positive note as the major indices gained. As a result of the positive sentiment, the S&P 500 rose 2.5% during the week. From a sectoral point of view, industrials led the market, as their respective index increased 4.1%, while consumer staples lagged behind, since their respective benchmark edged up 0.6%. Meanwhile, Treasury yields lifted along the curve on the back of rising inflation expectations. Consequently, the 2-year yield arrived at 2.54%, while the 10-year was 2.7% at the end of the trading week. Fed funds futures continue to price no rate hikes throughout 2019 and imply a 25bp cut in 4Q20.
Headline CPI inflation slowed to 1.9% YoY in December, in line with the median market estimate. Meanwhile, core inflation remained at 2.2% YoY, as it us unaffected by volatile energy prices as opposed to the headline gauge.
The ISM non-manufacturing index declined to 57.6 in December from 60.7 in November. Although the components for supplier deliveries and business activity declined to the greatest extent, both continue to signal growth in the months ahead. New orders remained at an extraordinarily high level of 62.7.
Despite the headline decline, an index level of 57.6 is still indicative of very strong growth in the non-manufacturing sector going forward. Strong new orders indicate that the service sector remains strong.
The minutes from the December FOMC meeting emphasised the idea that the Fed’s policy has become more data dependent. In this context, subdued inflation may allow FOMC members to remain patient with the continuation of the rate hiking cycle. Furthermore, in the FOMC’s view, financial market volatility and slowing global growth justify a cautious approach to monetary policy, as both volatility and slowing growth make “extent and timing of future policy firming less clear than earlier.” Separately, “several” members made a vague point that “very gradual MBS [mortgage-backed securities] sales” may be appropriate “sometime after the size of the balance sheet had been normalised.
Europe 15 Jan 2019EUROPE
Eurostoxx 3,054 +1.61%, German Bund 0.22% +3.10bps, Xover Credit Index 342 -18bps, USDEUR .872 -0.67%
European stock markets gained both in local currency and in USD terms. Italy’s stock market delivered the best performance out of the four largest Euro Area economies, as the index rose 3.1% in USD terms. Despite the Brexit-related uncertainties, the UK’s FTSE 100 index rose 2.3% in USD. Meanwhile in the fixed income space, the German Bund yields slightly rose due to inflation expectations rising moderately. Consequently, the 10-year German sovereign yield rose 3bp to 0.24%. In contrast, risk premia on Italian and periphery country bonds eroded.
Industrial production contracted both in Italy (-2.2% YoY) and Spain in November (-2.6% YoY). Both indicate softness in economic activity, as both domestic and external drivers of Spain’s and Italy’s industry weakened.
The UK’s GDP rose by 0.3% in the three months to November compared to the previous three months vs. 0.4% in October. In November, real GDP rose by 0.2% MoM. The services sector (0.3% MoM) and construction (0.6% MoM) delivered a strong performance. In contrast, industrial production contracted (-0.4% MoM). Export-oriented manufacturing was the main drag on GDP in November.
Asia PacificASIA
HSCEI 10,292 +4.17%, Nikkei 20,359.70 +4.12%,10yr JGB 0.02% +0bps, USDJPY 108.160 -0.04%
The 4.1% rise (in USD terms) by the MSCI Asia ex. Japan reflects investors’ increased risk appetite in the emerging Asian universe. Due to the positive market sentiment induced by the broad-based US dollar weakness, the majority of the Asian stock indices gained during the week. The Pakistani stock market was one of the best performers in USD terms, as the country’s Karachi 100 index rose 4.3% in USD. The Pakistani index was followed by Chinese “H” shares (+4.2%) and by Taiwan (+4%). In contrast, the Indian and Sri Lankan markets under delivered last week.
Although talks between the US and China in Beijing have been extended (instead of being concluded), global market sentiment improved as some positive pieces of information were recently revealed:

  • US Secretary of Commerce Wilbur Ross commented that a trade deal has a good chance
  • US President Trump tweeted that negotiations are “going very well
  • There are plans for a cabinet level meeting between the US and China led by US trade representative Robert Lighthizer and China Vice Premier Liu He, respectively
  • There may be a high-level meeting between the US and China at Davos
  • China approved five genetically modified crops for import from the US, which had been an early demand by the US in trade talks dating back to 2017

Chinese inflation gauges slowed in December and surprised to the downside vs. the median market estimate:

  • CPI inflation slowed to 1.9% YoY in December from 2.2% a month ago. Although food price inflation picked up due to seasonally higher vegetable prices and the African swine flu’s impact on pork supply, non-food inflation slowed – mostly due to lower energy vis-à-vis oil prices.
  • PPI inflation decelerated to 0.9% YoY in December from 2.7% YoY a month ago. Prices of metals and automobiles experienced deflation, while prices in telecommunication-related industries exhibited very low inflation.

Indonesia may struggle to hit its growth target of 5.3% for 2019, according to finance minister Sri Indrawati. The government however, continues to be confident that momentum remains intact and that growth will still likely be above 5%.
The Moody’s sees Malaysia’s GDP growth slowing to 4.7% in 2019 and further to 4.5% in 2020, below the 2015-18 average rate of 5%. The credit rating agency sees no threat to the country’s ‘A3’ rating (with ‘stable’ outlook). The agency noted that Malaysia’s “large and diversified economy with healthy medium-term growth prospects, and relatively high government debt partially offset by a favourable debt structure and large domestic savings” are supportive of sovereign credit profile. 
Latin America 15 Jan 2019LATIN AMERICA
MSCI Lat Am 2,818 +2.90%
The improvement in global market sentiment spilt over into Latin American markets, as the majority of benchmark indices gained in USD terms. The Argentine stock index outperformed its Latin American peers, as it rose 6.2% in USD, followed by Chile and Mexico each rising 4.3% in USD.
The Brazilian government’s Chief of Staff Lorenzoni and Finance Minister Guedes together suggested that the pension proposal presented to President Bolsonaro will be deeper and more comprehensive, i.e. going beyond changing the current rules and creating a capitalization system (where the individual’s benefits are calculated based on their own contributions).
Industrial production in Brazil increased 0.1% MoM SA in November. In an annual comparison, industrial output dropped 0.9%. The reading for October was revised down.
Recent weakness in industrial production was probably driven by lagged effects of financial conditions becoming tighter in 3Q18 combined with slowing global growth.
Inflation in Colombia fell to 3.2% YoY in December, due to a broad-based deceleration in consumer price inflation. Food inflation remained moderate at 2.4% YoY. Non-food inflation decelerated to 3.5% YoY. Tradable goods inflation (excluding food and regulated goods) stood and eased to 1% YoY, while non-tradable goods inflation dropped to 3.8% YoY.
The central bank of Peru held the policy rate stable at 2.75%, with a broadly unchanged statement. The MPC reiterated that the current monetary policy stance is appropriate, as inflation expectations remain anchored and GDP growth runs below its potential.
Imacec, the monthly proxy for Chilean GDP grew 3.1% YoY in November, surprising to the upside. Activity in the month was boosted by a bounce in mining and services, reflecting that domestic demand remains robust. Furthermore, nominal wage growth remained strong as it hit 4.1% YoY in November.
The strong figures in November imply that GDP growth is likely to remain solid in the coming quarters, which also supports the central bank’s intention to gradually tighten domestic financial conditions.
Industrial production in Mexico decreased 1.3% YoY in November, as output in all sectors contracted. Looking at the breakdown, mining activities contracted further, strongly associated with a fall in oil production. Construction activity decreased as well.
Africa 15 Jan 2019AFRICA
MSCI Africa 797 +3.60%
Within the African equity space, the broad South African index gained 3.8% in USD last week. The Egyptian stock index (+1.2% in USD) delivered a decent performance as well. In contrast, Nigeria underperformed, as the country’s benchmark index lost 2.8% of its value expressed in USD.
The monthly business confidence index fell to 95.2 in December from 96.1 in November, due to lower exports, fewer new vehicle sales and a decline in planned construction. Seven of the survey’s 13 sub-indices had a negative impact in December. According to the survey: “The general assessment is that the present-day administration acknowledges the huge challenges ahead and the role a sound economy could play in addressing it.
In contrast with the business confidence indicator, South Africa’s PMI in December rose above the 50-point threshold signalling that manufacturing output may grow in the coming months. New orders and business activity were at their highest level in 2018 last month, but the survey’s employment sub-index slumped to its lowest since 2014.
Egypt’s non-oil private-sector activity contracted in December. The rate of contraction slowed, as the headline PMI figure rose to 49.6. Although new orders and employment continued to fall, the pace of their fall decelerated indicating that an inflection point in economic confidence may be just around the corner.
Urban consumer price inflation in Egypt fell sharply in December, as monthly food prices dropped. Headline CPI inflation decelerated to 12% YoY in December (vs. 15.7% YoY in November), while core inflation increased to 8.3% YoY in December (vs. 7.9% YoY in November).
Egypt’s current account deficit in narrowed to USD 1.8bn in the 3Q18. The trade deficit increased to USD 9.9bn, with exports rising 16% to USD 6.8bn and imports 13% to USD 16.7bn. Remittances from workers abroad, edged up to USD 5.9bn. Meanwhile, net foreign direct investment fell to USD 1.1bn.
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