Money Matters 5th February 2019

Markets breathed a sigh of relief after Fed Chair Powell’s remarks on Wednesday. Mr. Powell delivered a speech which signified a policy U-turn compared to his thoughts presented in December. The Fed Chair not only claimed that the FOMC is ready to pause its rate hiking cycle, but he also stated that the Committee ‘will not hesitate to make changes [to the process of balance sheet normalisation] in light of economic and financial developments.’ This was the first time that Mr. Powell publicly and openly talked about the possibility of pausing the run-off of the central bank’s balance sheet should the environment call for it.
So, what’s next? Are the bears gone and is Goldilocks back in the game? Probably, yes, as the Fed has become ‘patient’ in an environment where inflation remains muted, the headlines from the US-China trade talks sound increasingly more constructive, and Chinese authorities have been delivering stimulus measures to boost the world’s second largest economy’s domestic drivers. These factors may allow investors to bask in the sunlight that finally radiates through the clouds. Consequently, emerging markets have the chance of performing well in the coming months, as risks are being persistently priced out. Should further risks dissipate (such as Brexit, a potential recession in the Euro Area, scrapping the tariffs between the US and China, etc.), the prevailing asset price momentum could be sustained on a longer-term horizon, but these will have to wait to be seen.
United States 5 Feb 2019UNITED STATES
S&P 2,707 +1.57%, 10yr Treasury 2.70% -7.43bps, HY Credit Index 356 -21bps, Vix 16.71 -1.28Vol
Fed Chair Powell’s remarks boosted asset prices, as most of the major US stock indices gained, while Treasury yields plummeted. The S&P500 index rose 1.6%, primarily led by energy, real estate and industrials. Consequently, the S&P500 is up 8% since the beginning of the year. Meanwhile, the Treasury curve flattened, as the 2-year yield decreased 10bp to 2.5% and the 10-year edged down by 7bp to 2.68%. The broad dollar (DXY) index decreased 0.2%.
The jobs report’s main message was that labour market tightness continued to persist in January. Non-farm payrolls rose 304,000, while unemployment rate slightly ticked up by 0.1ppt to 4%, as the labour force participation rate rose to 63.2%; the highest reading since August 2013. As a result of the tight labour market conditions, nominal wage growth hit 3.5% YoY.
Although unemployment rate rose to 4% (counterintuitively),  it is good news, as it is a sign that the labour market has been improving in a more broad-based manner than before: previously inactive people (i.e. unemployed people, who were not officially registered as job searchers) re-joined the market and are actively seeking employment. 
Looking forward: This week, two voting members of the FOMC are going to deliver speeches, namely Loretta Mester on Monday and Jerome Powell on Wednesday. Both could potentially reaffirm the message presented by Fed Chair Powell last week. Furthermore, President Trump will give a speech on Tuesday, which could highlight the President’s opinion on current economic and political developments both in the US and on the international scene. The economic diary contains several relevant macro indicators (e.g. 4Q18 GDP growth, PCE inflation, retail sales, etc.) that might be (or might not be) released once the partial government shutdown is over. 
Eurostoxx 3,158 +0.80%, German Bund 0.17% -2.70bps, Xover Credit Index 310 -13bps, EURUSD 1.145 -0.55%
European stock indices delivered a mixed performance. Out of the four largest Euro Area economies, the French index was the only one that increased in USD terms (+2.5%), while the German, Italian and Spanish benchmarks lost 0.4%, 0.6% and 1.3% of their values in USD, respectively, in spite of the fact that the euro appreciated vs. the USD, by 0.6%. Although there is still no clarity on Brexit, the UK’s FTSE100 index gained 2.4% in USD. Within the European fixed income space, German yields eased (10-year Bund yield decreased 3bp to 0.17%), while the risk premia on Italian sovereign bonds widened, as the 10-year yield increased 10bp to 2.75%.
Although GDP growth in the Euro Area remained positive, the headline figure was quite disappointing, as on a quarterly basis, growth was 0.2% in 4Q18 matching the pace observed in 3Q18Italian GDP contracted by 0.2% QoQ in 4Q18 following a 0.1% QoQ contraction in 3Q18. French GDP growth was a meagre 0.3% QoQ, while Spanish GDP growth slowed to 0.6% QoQ. Germany has not reported its growth figure yet. Overall, GDP in the Eurozone as a whole expanded by 1.8% in 2018, almost a whole percentage point weaker than expectations at the very beginning of the year.
Looking forward: The European economic diary is quite empty this week. The Bank of England’s rate-setting meeting is going to be the most relevant event, where the MPC is likely to keep the policy rate stable at 0.75%.
Asia 5 Feb 2019ASIA
HSCEI 1,103 +1.72%, Nikkei 2,088.00 + 0.26%, 10yr JGB- 0.01% 0bps, USDJPY 109.910 -0.10%
The majority of Asian stock indices rose, as global market sentiment improved on the back of the Fed Chair’s dovish remarks. The MSCI Asia Pacific ex. Japan index’s gain of 1.5% in USD well-reflected the strengthening of global risk appetite. The Sri Lankan (+2.9%), Thai (+2.5%) and Pakistani (+2.4%) benchmarks delivered the strongest performance expressed in USD. In contrast, Bangladesh (-2%) and Taiwan (-0.6%) lagged in USD.
Official manufacturing PMI in China rose 0.1pt to 49.5 in January, exceeding the median market estimate. The figure signalled the contraction of manufacturing output for the second consecutive month. Primary components for new orders (down 0.1pt to 49.6 due to soft external demand for Chinese export products) and employment (down 0.2pt to 47.8) weighed on the headline index, while the sub-indices for production (0.1pt to 50.9) and inventory lifted the headline. In contrast with the official figure, the Caixin manufacturing PMI slipped to 48.3.
Meanwhile, non-manufacturing PMI – capturing primarily the strength of the underlying domestic economy – rose 0.9pt to 54.7. The sub-index for services increased 1.3pt to 53.6, while construction gained 1.7pt to 60.9 – both very strong forward-looking numbers.
The trend remained intact from 2H18, i.e. softness in external demand for Chinese products continue to persist, while the domestic economy remains resilient. The government’s stimulus measures have been gradually feeding through and they are yet to fully impact the underlying economic activity.
The majority of Asian manufacturing PMIs worsened in January compared to December:

  • India: +0.7pt to 53.9
  • Vietnam: -1.9pt to 51.9
  • Philippines: -0.9pt to 52.3
  • Indonesia: -1.3pt to 49.9
  • Thailand: -0.1pt to 50.2
  • Taiwan: -0.2pt to 47.5 

In India, the increase in PMI was due to a broad-based strengthening of the underlying economy: higher external and domestic new orders, strengthening sales growth, rising production volumes, pre-increasing production inventories and expanding employment.
The decline in the Vietnamese PMI should be no reason to be concerned, as the country’s headline index is highly volatile and as a result, such swings are quite frequent. The figure remains in the expansionary territory, projecting higher manufacturing output in the coming months. 
The sharp decline in the Philippine and Indonesian PMI figures was primarily due to the weakness in new export orders from abroad. 
The Indian government announced their annual budget on Friday. The key highlights were:

  • Increased financial support for 120 million small farmers, who will receive INR 6000 (ca. USD84) per year directly
  • Increased tax rebates and exemptions for lower- and middle-income earners
  • Support for the housing sector, through income tax and capital gain exemptions for investment dwellings

This has been achieved whilst aiming to sustain fiscal discipline, with a deficit target of 3.4% of GDP for the coming year.  
The Governor of the Philippine central bank cited that a prudent approach is needed by the MPC. In addition, he was cautiously optimistic about the outlook and claimed that future policy rate decisions will be data dependent.
The central bank meets on the 7th February, when a policy rate may be kept stable. However, there is a chance for the central bank to reduce the reserve requirement ratio.
Looking forward: Although the Chinese market is going to be closed during the whole week, because of the Lunar New Year holiday, the economic diary within the Asian space is very busy with relevant macroeconomic data releases and policy decisions. There are central bank meetings in Thailand, in the Philippines and in India. Furthermore, the Philippine inflation figure, the Indonesian GDP statistics, and current account metrics will be revealed.
Latin America 5 Feb 2019 BLATIN AMERICA
MSCI Lat Am 2,950 +2.50%
The vast majority of Latin American markets delivered a very strong performance. The Brazilian (+3.5%), Peruvian (+2.7%) and Chilean (+2.4%) markets outperformed their Latin American peers in USD, while Mexico underdelivered by decreasing 0.5% in USD. Mexico’s remains one of the very few stock markets, which has decreased (in USD) since the beginning of the year.
The Colombian central bank kept the policy rate stable at 4.25% in a unanimous vote. The decision was in line with the market’s estimate. There were no major changes in the tone of the MPC’s statement, as members see economic developments progressing favourably going forward. In addition, the MPC remains comfortable with inflation.
The central bank is likely to remain cautious given the uncertainties stemming from the external environment, the volatility in the financial markets, and the expected widening of the current account deficit.
Peruvian headline inflation was 2.1% YoY in January (vs. 2.2% YoY in December). In contrast, core inflation (excluding energy and food items) accelerated to 2.4% YoY. Food and beverage prices decelerated to 1.5% YoY (from 2% YoY in December) and gasoline prices decelerated to 5% YoY in January (from 7.7% YoY in December).
The Peruvian central bank might hold its policy rate stable at 2.75% the next rate- setting meeting. The last statement’s tone did not imply a rate hike in the short-run, but possibly around the middle of this year.
Mexico’s main public finance indicators reflect the fiscal consolidation delivered by the previous administration. The headline fiscal balance posted a deficit of 2.1% of GDP in 2018, while the primary balance (excluding interest payments) posted a surplus of 0.6% of GDP. Both metrics were weaker than a year before.
Mexico’s GDP flash estimate disappointed relative to the median market estimate in 4Q18, as it was dragged down by the weakness in industrial output. Annual real GDP growth was 1.8% YoY, taking the annual growth to 2% in full-year 2018.
Mexican economic activity may further slow this year due to the uncertainty over the new administration’s policy direction and the remaining uncertainties over the approval of NAFTA by the U.S. Congress. In addition, deceleration in the US’ economy will also adversely impact Mexican growth.
Chilean industrial production recovered at the end of last year, as the volume increased 1% YoY in December (vs. 0.4% YoY in November), leading to a recovery of 2.9% in 2018 (vs. 1.1% contraction in 2017).
The Chilean central bank unanimously raised the policy rate by 25bp to 3%, as expected. This is the second hike in the tightening cycle, following last October’s increase of the same magnitude. The board continues to see the domestic economy consistent with the scenario outlined in the 4Q18 Inflation Report, i.e. economic activity remains robust and output gap-sensitive inflation measures have been on a gradual rise.
A gradual tightening cycle may carry on this year however, risks are tilted to only a smaller number of hikes. The timing for future rate hikes is broadly data dependent. 
Looking forward: The Latin American economic diary is very busy this week as three central banks bring monetary policy decisions, namely the Brazilian, Mexican and Peruvian. Furthermore, a wide range of high-frequency macroeconomic data are scheduled to be released, such as inflation from Colombia, Mexico and Chile.
Africa 5 Feb 2019AFRICA
MSCI Africa 829 +1.07%
The Egyptian stock index skyrocketed, as it gained 5.8% in USD. The country’s stock market benefitted from the improvement in global market sentiment and by supportive comments by one of the country’s central bankers. In addition, the central bank let the EGP freely float to some limited extent, which meant that the Egyptian currency appreciated against the USD. In contrast with the Egyptian market’s performance, the Nigerian market struggled, as the country’s benchmark index decreased 2.7% in USD.
The latest GDP reading encapsulates the increasing strength of Egypt’s domestic economy, as the country’s GDP grew 5.4% YoY in the first half of the current fiscal year (between July and December 2018). As GDP growth has been strengthening and inflation consistently slowing (12% YoY in December), capital flows have been gradually, but increasingly flowing into the country. The IMF’s Managing Director shared the market’s upbeat assessment on the progress Egypt has made, as she claimed that she would recommend the disbursement of a USD 2bn tranche out of Egypt’s USD 12bn loan programme. According to Mrs. Lagarde, the fact the Egyptian budget deficit and unemployment have been steadily decreasing since 2011 is commendable.
If Egypt successfully issues USD 3-7bn worth of USD- and/or EUR-denominated bonds in the open market in 1Q19 as planned, it will be a clear sign that the market believes that the country has hit important milestones in terms of the implementation of structural reforms.
Kenya’s central bank left the policy rate stable at 9%, in line with the median market estimate. According to the MPC, the economy has been ‘operating close to its potential.’ Inflation was 4.7% YoY in January, hovering slightly below the midpoint of the target band (2.5-7.5%).
It appears that the Kenyan central bank remains on a wait-and-see stance in the short-term. Should the improvement in global market sentiment trigger sustained flows towards the country’s capital market, the MPC might turn more dovish in the coming quarters.
Looking forward: A flurry of manufacturing PMI figures will be produced by Egypt, South Africa, Kenya and Nigeria.
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