Money Matters 30th January 2019

The IMF presented its updated global macroeconomic outlook, in which the organisation admitted that their previous GDP growth forecast for 2019 and 2020 was too optimistic. As a result, they revised the forecast for global growth down to 3.5% and 3.6% in 2019 and 2020, respectively. Within the developed world, Germany’s growth prospects deteriorated to the greatest degree (-0.6ppt to 1.3% in 2019), while the US’s outlook remained unchanged at a solid pace (2.5% in 2019). Within the emerging universe, the GDP growth estimates for China (6.2%), India (7.5%) and Brazil (2.5%) were broadly unchanged for this year.
Although the IMF, again fell behind the proverbial curve in terms of forecasting, the fact that the global economy has been slowing should be no surprise to investors, as both soft and hard indicators have been signalling the direction of travel. A significant degree of economic slowdown has already been priced into financial asset throughout 2H18, probably more than fundamentally warranted. There is the view that the extent of the slowdown is over-discounted by markets, partly due to the prevalent political noises globally (e.g. trade tensions, Brexit, the partial government shutdown in the US, etc.). The spurring effect of the Fed’s ‘patient’ stance and the stimulus measures taken by the Chinese authorities will certainly materialise, the only question is whether it materialises sooner or later.
United States 30 Jan 2019UNITED STATES
S&P 2,665 -0.22%, 10yr Treasury 2.74% -2.57bps, HY Credit Index 374 -7bps, Vix 18.57 -.38Vol
Stock markets in the US were flat during the week, as the major indices went sideways. The broad dollar index (DXY) decreased 0.6%, reflecting the US dollar’s broad-based weakness. Meanwhile, the Treasury curve flattened, as the 2-year yield eased by 1bp to 2.6% and the 10-year declined by 3bp to 2.75%, bringing the 2s10s spread to 15bp. Once the government deadlock in the US is resolved, a wide range of macroeconomic data will be released, which in turn will trigger the repricing of assets.
Looking forward: Although the economic diary is extremely packed this week, markets might not get the chance to assess any data at all, unless the partial government shutdown is resolved. In addition to the January jobs report (incl. ADP, NFP, earnings, unemployment rate, etc.), 4Q18 GDP growth and the December PCE inflation are on the agenda. Due to the lack of data availability, the Fed will need to deliver a cautious message on Wednesday not to upset financial markets. Starting this year, Fed Chair Powell is going to hold a press conference after each and every FOMC monetary policy meeting. Furthermore, trade negotiations between the US and China may continue, however, new relevant information might not be released this week.
Eurostoxx 3,147 +1.33%, German Bund 0.20% -6.90bps, Xover Credit Index 325 0bps, USDEUR .877 -0.41% 
European stock markets were lifted partly due to the ECB President Draghi’s relatively dovish statement and also due to the broad-based US dollar weakness. In USD terms, the Spanish stock index gained 1.7%, outperforming France (1.5%), Germany (1.1%), Italy (0.9%) and the UK (flat). During the week, long-dated sovereign yields rallied, as the German 10-year yield dropped by 7bp to 0.19%, followed by the Italian 10-year (-9bp to 2.64%) and the Spanish 10-year (-12bp to 1.23%).
The European Central Bank (ECB) left the policy rates stable, in line with expectations. President Draghi cited that the Governing Council (GC) unanimously agreed that the balance or risks in terms of the Eurozone’s GDP growth outlook worsened. The President argued that a recession is unlikely. Despite the fact that the GC see balance of risks tilted to the downside, the forward guidance has not been changed, i.e. the ECB’s policy rates are to ‘to remain at their present levels at least through the summer of 2019.
Although the ECB’s view on the Eurozone’s growth outlook has become bleaker, the President did not offer any convincing arguments how the GC would address a cyclical downturn.
According to the November jobs report, the UK’s economy added 141,000 jobs in the three months to November, while the unemployment rate decreased to 4%. Nominal wage growth (excluding bonus payments) was 3.3% YoY in the month of November, surpassing annual consumer price inflation of 2.3%.
Despite the Brexit-related uncertainties, the UK’s labour market has been consistently tightening and driven up wage growth to a level that could lead to higher inflation. Should the labour market tightness persist, the Bank of England will face a dilemma very soon between higher-than-target inflation and stronger economic activity, or containing inflation through a higher policy rate at the cost of somewhat slower GDP growth.
Looking forward: The European economic diary is quite empty for the week. Markets will have time to digest ECB President Draghi’s statement from last Thursday and then evaluate the latest CPI inflation figure from the Euro Area in the appropriate context.
Asia 30 Jan 2019ASIA
HSCEI 10,292 +4.17%, Nikkei 20,359.70 +4.12%, 10yr JGB 0.02% +0bps, USDJPY 108.160 -0.04%
Asian markets were lifted as investors sentiment improved, triggered by a weaker USD and a decent Chinese real GDP growth figure from 4Q18. As a result, the MSCI Asia Pacific ex. Japan index gained 1.4% in USD. South Korean (+3.4%), Thai (+3.3%) and Pakistani (+2.6%) shares outperformed, while the Indian and Sri Lankan indices decreased by 0.7% and 0.1%, all in USD terms.
The Bank of Japan (BoJ) kept its quantitative and qualitative easing programme (QQE) with yield curve control and its forward guidance unchanged. The BoJ cut the inflation outlook significantly, and also revised down its growth forecast for the current fiscal year.
The fact that the BoJ’s did not tweak its QQE programme signals that the Japanese economy remains far from reflation, and consequently sustaining the current degree of stimulus may be needed in the medium-term.
A wide range of high-frequency indicators were released by the Chinese Statistics Office:

  • Retail sales growth (adjusted for CPI inflation) bounced to 6.2% YoY in December, reaching 6.7% in 2018.
  • Industrial production growth rose to 5.7% YoY in December, hitting 5.7% in 2018.
  • Cumulated fixed asset investments rose to 5.7% in December.
  • Real GDP growth slowed to 6.4% YoY in 4Q18,in line with the median market estimate. In 2018, GDP growth was 6.6%.

South Korean real GDP growth rose to 3.1% YoY (1% QoQ SA) in 4Q18. In comparison, annual growth was 2% in 3Q18. Revved up government expenditures substantially boosted growth in the final quarter of last year. In addition, the build-up of inventories contributed positively as well. Although the contribution from domestic private demand was positive, its extent was smaller than that of the public sector’s. Meanwhile, net exports became a large drag. Overall GDP growth slowed to 2.7% for full-year 2018, vs. 3.1% in 2017.
Unless the government continues spending, the sustainability of real GDP growth above 3% may become questionable and instead, real GDP growth could lie between 2-2.5% in 2019.
The South Korean central bank kept the policy rate at 1.75%, while slightly worsened its GDP growth outlook for 2019 (down 0.1ppt to 2.6%) and reduced its inflation forecast in 2019 (down 0.3ppt to 1.4%). The Governor indicated that the MPC is very unlikely to consider a rate cut anytime soon.
In the Philippines, annual real GDP growth was virtually flat compared to 3Q, at 6.1% YoY in 4Q18,underdelivering relative to the median market estimate. As a result, full-year GDP growth was 6.2% in 2018 (vs. 6.7% in 2017). In 4Q18, industrial production grew 6.9% YoY, services rose 6.3% YoY, while agricultural output expanded 1.7% YoY. The rate of GDP growth was in a stark contrast with the government’s expectations of around 7%.
Due to elevated inflation and tighter financial conditions, GDP growth may not be able to strengthen in the coming quarters.
The Malaysian central bank’s monetary policy statement noted that economic activity may remain solid, while underlying inflationary pressures could remain muted throughout 2019.
The statement implied that the MPC might shift to a more dovish stance soon, which likely means that the probability of a rate hike this year has lowered.
Looking forward: Investors will have a lot to digest this week as a wide variety of monthly macroeconomic data will be released in Asia. South Korea, Indonesia and Thailand will publish inflation data from January, Vietnam is scheduled to release a broad set of high-frequency macro variables, while Chinese, Indian and the ASEAN PMI figures are also due.
Latin America 30 Jan 2019LATIN AMERICA
MSCI Lat Am 2,878 +0.34%
Latin American stock markets were broadly flat. Peru and Brazil outperformed their regional peers, as each rose 0.8% in USD terms. In contrast, Mexico underperformed, as the countries stock index lost 0.4% of its value in USD.
Brazilian President Bolsonaro reinforced his commitment to the implementation of pension reforms. The President added that the plans to sell a number of state-owned enterprises are nearly ready. Later, Finance Minister Guedes reaffirmed the aforementioned plans and added that eventually the budget may be balanced in the medium-term.
Both steps aim to ease fiscal strains and promote the stability of the central government’s budget. By restructuring the budget, fiscal sustainability may improve, which in turn may translate into stronger structural GDP growth outlook.
Colombian President Duque stated that his government has been working out the details on how the fiscal deficit can be brought down to 1% of GDP by 2022. The President reiterated that the government plans to meet the fiscal rule, but also thinks that the impact of mass migration from Venezuela needs to be taken into account.
Import growth in Colombia remains solid, and led to a large trade deficit in November, USD 920mn. Compared to a year ago, the deficit increased by about USD 300mn. As a result, the 12-month rolling foreign trade deficit hit ca. USD 6bn.
Argentina posted a large foreign trade surplus of USD 1.4bn in December. Despite the surplus in December, the full-year trade balance registered a deficit of USD 3.8bn, narrower than the USD 8.3bn deficit in 2017.
The economic activity index in Mexico grew 1.7% YoY in November, slowing for 2% in October.  Services and agricultural output increased in a monthly comparison, while industrial production contracted MoM.
Looking forward: Mexico’s 4Q18 GDP growth report is going to be one of the most prominent data releases this week. In Brazil, the market is going to pay attention to the new legislature’s inauguration and a wide variety of macroeconomic data releases. Meanwhile in Chile, the central bank is expected to deliver a 25bp rate hike, lifting the policy rate to 3%.
Africa 30 Jan 2019AFRICA
MSCI Africa 820 +2.19%
Investor sentiment in the African space was mostly positive, as the Kenyan, South African and Nigerian stock indices gained 2.9%, 2.4% and 1.6% in USD terms. In contrast, Egypt underdelivered, as the country’s benchmark index lost 0.4% of its value in USD.
CPI inflation in South Africa slowed to 4.5% YoY in December, vs. 5.2% YoY in November. The deceleration was mainly driven by lower oil prices. Meanwhile, core inflation – filtering out volatile items, such as food, fuel and energy – was flat at 4.4% YoY. Headline consumer price inflation was 4.7% in 2018.
The budget deficit in Egypt was 3.6% of GDP in the first half of FY2019 (i.e. between July 2018 and June 2018). In comparison, Egypt’s budget deficit was 4.2% a year ago. The primary budget balance (excluding interest payments) swung to a surplus of 0.4% of GDP vs. a 0.3% deficit in the same period of the previous year.
The decreasing budget deficit in proportion of the country’s gross domestic product is also a positive sign that the government’s economic reforms are improving the structural deficiencies of the Egyptian economy.
Inflation in Morocco rose to 1.9% YoY in December, according to the country’s Planning Agency. Compared to November, the rate of inflation rose by 0.6ppt due to higher food prices.
Morocco’s full-year foreign trade deficit rose to MAD 204bn (ca. USD 21.4bn) in 2018, as the value of imports rose by 9.3% to MAD 478.7bn, while the value of exports increased by 10.2% to MAD 274.2bn. The growth of imports was mainly driven by the energy bill, which edged up 18.4%. Due to the widening trade gap, Morocco’s international reserves eroded by 5.2% to MAD 229bn by the beginning of January. The amount of reserves covers about five months of import needs.
Looking forward: The Kenyan central bank holds a rate setting meeting where the MPC is likely to leave the policy rate flat at 9%. Later, South Africa releases the latest information on the state of the budget. At the end of the week, South African and Nigerian manufacturing PMIs are revealed.
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