Money Matters 16th October 2018

Eurozone member states, Japan and the UK publish inflation statistics this week. The broad spectrum of inflation data will help financial market players assess to what extent higher oil prices translated into domestic price increases. Should there be obvious signs of second-round effects, fixed income assets might reprice – especially on the longer-end of the curve. In addition to inflation figures, the minutes of the September FOMC meeting will be released, which should provide guidance not only on the number of planned rate hikes in 2019 by the FOMC but also members’ sensitivity to macroeconomic data volatility, i.e. how easily rate-setter might change their mind, should actual data deter from their current projections. On the political front, markets will most certainly keep a close eye on the strains between Italy and the EU, as the Italian government is unlikely to back down from the idea of a large(r) fiscal deficit in 2019. Furthermore, financial markets can easily be disrupted by President Trump’s comments, should he keep expressing his discontent with the way Chair Powell conducts monetary policy.
Chinese macroeconomic data return to the limelight this week, as both consumer and producer price inflation figures from September are scheduled to be released. Later, Q3 GDP will be subject to scrutiny demonstrating to what extent trade tensions and adverse financial market sentiment weighed on China’s economic growth. Both metrics are likely to give impetus to financial markets to reprice risk. In Latin America, market players will evaluate Brazilian political polls and put the Argentine central bank’s credibility under scrutiny by assessing LELIQ auctions that will help to evaluate whether the central bank is sticking to its promise of keeping the nominal money supply stable. The release of the Mexican central bank’s minutes from its last monetary policy meeting or the policy rate announcement by the Chilean central bank will be of secondary nature. The African economic diary is very light this week. Consequently, financial markets will focus mostly on the news flow related to South Africa’s fiscal plans.
United States 16th Oct 2018UNITED STATES
S&P 2,767 -4.10%10yr Treasury 3.15% -7.15bps, HY Credit Index 354 +17bps, Vix 21.31 +6.49Vol
The overall weekly performance of stock markets in the US was disappointing, as the S&P 500 fell 4.1%, while the Russell 2000 dropped 5.2%. It is almost impossible to find any market segment or industry that did not heavily sell off. Industrial and material indices delivered the worst performance, as they lost about 6.4% and 6.6% of their values, respectively. Meanwhile, the yield curve slightly flattened, since the 2s10s spread eased to 30bp, as the yield on the 10-year US Treasury moderated 7bp to 3.16%.
Core inflation in the US surprised to the downside, as the annual rate was unchanged at 2.2%. Shelter and used car prices kept the core gauge cool.
This was the second month in a row when inflation in the US proved to be weaker than Bloomberg consensus. If the Fed carries on with the tightening cycle in the absence of mounting price pressures, markets will most likely continue the re-pricing of risk assets similarly to last week.
Eurostoxx 3,196 -4.10%, German Bund 0.49% -7.50bps, Xover Credit Index 294 -13bps, USDEUR .864 -0.43%
Similarly to their peers in the US, European stock markets had a forgettable week as each of the major benchmark indices lost 3-5% of their value in USD. Capital flows targeted safe sovereign debt instruments, and as a result, dampened the recent spike in bond yield within the Euro Area. By the end of the week, the 10-year German Bund yield compressed 8bp to 0.50%, while its riskier counterparts on the periphery spiked. Due to the political tensions between the EU and Italy, the 10-year Italian yield rose 15bp to 3.58%, which in turn raised the spread over the Bund to 308bp, a level not seen since 2013, when the Eurozone was going through a deep political, debt, and banking crises.
The minutes of the European Central Bank’s last rate-setting meeting were released and revealed the diverging views of members on the Governing Council on the state of the Eurozone’s economy. Some members argued that there are considerable downside risks to GDP growth through various sources, foreign demand being one of them. The Council added that there is a need to remain ‘patient, prudent and persistent’ with regard to the conduct of monetary policy.
Intl Monetary Fund 16th Oct 2018ASIA
HSCEI 10,115 -2.19%, Nikkei 22,271.30 -3.17%10yr JGB 0.15% 0bps, USDJPY 111.760 -1.45%
Asian markets went through a rough week, as the vast majority of stock indices lost considerable value in USD. The MSCI Asia Pacific ex. Japan index captured this unfavourable pattern by decreasing 3% by the end of the week. The Pakistani market performed the worst, by plummeting 9% in USD. The collapse of Pakistani stock prices (in USD) was partly due to the devaluation of the rupee. Chinese ‘A’ shares underperformed their Asian peers as well, since the broad stock index fell 8.3% in USD. India, Bangladesh and Indonesia were the only bright spots last week, as their stock indices bounced, and gained 2.2%, 1.5% and 0.7% in USD, respectively.
China’s export growth accelerated in September, as it hit 14.5% YoY in USD terms, while the value of imports rose 14.3% YoY. As a result, the external trade surplus reached USD 31.7bn. Exports exceeded expectations, most probably due to frontloading shipments to the US before higher tariffs of 25% in January 2019 kick in.
Headline CPI inflation in India slightly accelerated, to 3.8% YoY in September, after slipping to 3.7% YoY in August, a 10-month low.
In contrast with the headline figure, the core gauge remained elevated at 5.7% YoY, though it eased 0.2ppt compared to the previous month. In the context of higher oil prices and increased Minimum Support Prices (MSP) of crops, domestic inflation dynamics looks puzzlingly benign.
The latest inflation data bolstered the Reserve Bank of India’s (RBI) case to keep the policy rate stable at the last monetary policy meeting in early October. The case for rate hikes by the RBI looks weak with such slow inflation. Unless there is an unexpected spike in inflation or a significant deterioration in either the fiscal or the current account, the RBI can comfortably stay put for the remainder of this year.
The International Monetary Fund (IMF) forecast that Bangladesh’s GDP growth may be 7.1% in 2019. The IMF predicts Bangladesh’s long-term economic growth to be 7%. Furthermore, the IMF also projected that CPI inflation may be 5.8% in 2018 and 6.1% in 2019.
Pakistan has been seeking the IMF’s attention to negotiate a new financial bailout package. Pakistani officials met IMF representatives in Bali and formally requested the country’s 13th bailout since the 1980s. According to the IMF’s Managing Director, Christine Lagarde the country has to commit to absolute transparency with regards to its debt obligations, including those owed to China. According to Reuters, the central bank of Pakistan devalued the rupee in agreement with the IMF by about 7-8% vs. the USD.
Going forward, the central bank will probably lift the policy rate even further, while continuing the devaluation of the currency in order to attract capital flows to the ailing country and to replenish its depleted FX reserves.
Latin America 16th Oct 2018LATIN AMERICA
MSCI Lat Am 2,659 +1.01%
The broad MSCI EM Latin America index rose 1% in USD, as Argentina and Brazil had an outstanding week. As political noise gradually clears in Brazil and crisis management slowly produces tangible results in Argentina, assets in these two countries are paring back their previous losses. As a result, the MSCI Brazil index increased 3.2%, while the Argentine stock index rose 2.3% (all in USD). In contrast, the Colombian and Chilean markets struggled, as their respective values in USD slipped 2.4-2.7% during the week.
According to the latest political polls in Brazil, Jair Bolsonaro (PSL) is projected win 58% of votes vs. Fernando Haddad (PT) with only 42%. The second round will be held on the 28th October.
Brazilian retail sales growth in August strengthened to 1.3% MoM in seasonally-adjusted terms after three consecutive months of declines. In annual terms, retail sales rose 4.1%.
Consistent and persistent improvement in high-frequency macroeconomic data should help the recovery of Brazilian asset prices. The magnitude of gains will be amplified if polls show that Mr. Bolsonaro is able to sustain his advantage over Mr. Haddad.
Industrial production underwhelmed in Mexico. The performance in August was weak, as industrial output contracted 0.5% MoM in seasonally-adjusted terms, which translated into 0.2% growth in annual terms. The weakness stemmed from a fall in construction volume.
Annual inflation in Mexico hit 5% in September, rising from 4.9% in August. The acceleration of the headline figure was partly driven by a low base and partly by increases in energy prices. Core inflation was 3.7% YoY lifted by processed food prices.
Core inflation is likely to remain stable in 2018 Q4, as domestic inflationary developments are relatively well-anchored for the time being. However, non-core items such as energy prices pose upside risks to the headline figure. In addition, second round effects of persistently higher domestic energy prices can translate into faster core inflation, which ultimately can trigger a hawkish response by the central bank.
Chilean inflation accelerated to 3.1% YoY in September. Although, the annual headline figure broke through the central bank’s inflation target, the core gauge remains close to 2% YoY, as domestic inflationary pressures remain absent.
Inflation in Colombia hit 3.2% YoY in September, while the core rate eased to 3.7% YoY. Food prices and housing were the primary drivers of inflation.
Inflationary developments are expected to remain benign in the coming months both in Chile and Colombia. Consequently, neither of the central banks is likely to give up its wait-and-see stance, unless substantial upside surprises prevail.
Africa 16th Oct 2018AFRICA
MSCI Africa 742 +1.64%
The majority of African stock markets declined in USD terms. Egypt received the greatest blow, as the country’s stock index fell 6.2% in USD. The Kenyan market underperformed as well by falling 2% in USD. The Nigerian market was among the bright spots in Africa, as the Nigerian stock index slightly gained, about 0.2% in USD.
South African President Ramaphosa accepted the resignation of former Finance Minister Nene and appointed Tito Mboweni as his replacement. Mr. Mboweni used to be the governor of the central bank and before that he was the Minister of Labour.
Credit rating agency Moody’s did not release an updated assessment on South Africa on Friday. As a result, the credit rating of the country remained BBB- (lowest investment grade rating) with stable outlook. Previously, the agency stated that the probability of downgrading South Africa to ‘junk’ is very low in 2018. There are speculations that Moody’s might release a statement after 24th October, when the government is scheduled to pass a reviewed budget draft.
New Finance Minister Mboweni has to address several challenges simultaneously, such as kick-starting growth and stabilising the budget. The market sees Mr. Mboweni as a responsible technocrat, who possesses just enough political capital to deliver a credible budget proposal that commits to fiscal consolidation. Delivering such a budget is paramount to prove to Moody’s that South Africa’s public finances remain sustainable. Failing to do so, Moody’s can decide to downgrade the country to ‘junk’ category, which would automatically trigger the exclusion of the country’s bonds from broad benchmark indices. Consequently, asset prices, including the currency, would plummet.
According to Governor Emefiele, the Nigerian central bank will continue to intervene in the FX market, as the MPC wants to sustain a stable currency regime. The Governor added that the Council will remain in a hawkish stance, as monetary tightening will continue.
In a separate event, Nigerian President Buhari asked lawmakers in the upper chamber of parliament to approve the issuance of a USD 2.79bn Eurobond. The President argued that Eurobond issuance in the international capital market is needed to help finance the budget deficit and to fund infrastructure projects.
Inflation in Egypt rose to 16% YoY in September, from 14.2% YoY in August, due to a jump in the price of food and non-alcoholic beverages. Core inflation, a gauge that filters out volatile prices such as unprocessed food or energy, eased to 8.6% YoY.
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