Money Matters 5th March 2019

The President of the US was very vocal this weekend about his dissatisfaction with how the Fed conducts monetary policy. The POTUS lashed out at Jerome Powell, as he referenced the Fed Chair as a person who “likes raising interest rates,” “loves quantitative tightening” and “likes a very strong dollar.” Obviously, President Trump is not in love with any of the above. Although the President has the right to give voice to his opinion on the conduct of monetary policy, his remarks have little to no impact on the actual decision-making progress of the FOMC due to the strong institutional framework. 
The President’s claims can temporarily influence market sentiment and asset prices, but as long as no policy (re)action follows his jawboning, the landscape does not change fundamentally. Therefore, the Fed continue business as usual and decide on the appropriate course of monetary policy as before, i.e. based on the trinity of macroeconomic data, financial conditions and asset price developments.
United States 5 March 2019UNITED STATES
S&P 2,804 +0.39%, 10yr Treasury 2.75% +10.13bps, HY Credit Index 343 -2bps, Vix 13.74 +.06Vol
The broad dollar index (DXY) flatlined during the week marking the greenback’s inability to gain traction as long as expectations for further rate hikes remain muted. Meanwhile, the performance of the major stock indices was mixed: the Nasdaq Composite rose 0.9%, the S&P500 increased 0.4% and the Russell 2000 was flat. From a sectoral point of view, energy, IT and financials outperformed, while materials lagged. Meanwhile, Treasury yields rose, and the curve steepened, as the 2s10s spread widened by 4bp to 20bp. The 10-year yield was 2.76% at the end of the week. The Fed funds futures continue to imply no rate changes throughout this year.
Real GDP increased 2.6% in seasonally adjusted annualised terms in 4Q18, which implies that the US’ economy expanded by about 2.9% in full-year 2019. Details revealed that consumption rose 2.8%, while business fixed investments rose 6.2%.
GDP growth last year was very strong, probably above potential. Due to the partial government shutdown, economic growth could be weak in 1Q19. However, the weakness in 1Q is unlikely to persist in later quarter based on the view that both soft and hard economic indicators suggest the continuation of solid growth in 2019.
Looking forward: Investors face an exciting week, as the economic diary is full. Not only is the US is going to reveal the February jobs report, but six Fed policymakers will deliver speeches – including Chair Powell. In addition, the Fed releases its Beige Book on Wednesday in which the Fed highlights the most relevant underlying developments in the US’ domestic economy.
Europe 5 March 2019EUROPE
Eurostoxx 3,322 +1.44%, German Bund 0.18% +8.70bps, Xover Credit Index 274 -13bps, USDEUR .882 -0.18%
Investor sentiment in European markets was quite upbeat, as the stock indices of the Eurozone’s four largest economies headed north (0.9-2.3% in USD, respectively). Despite the Brexit-related jitters, the FTSE100 went sideways in USD. In the fixed income space, sovereign yields rose significantly on the back of elevated inflation expectations. Consequently, the German 10-year yield rose 9bp to 0.18%. Meanwhile, the Italian 10-year slipped by 11bp to 2.73%, bringing the risk premium to 255bp over the German Bund.
Looking forward: It is going to be a very busy week for European investors, as the Euro Area is going to release PPI inflation, retail sales and detailed GDP figures. Furthermore, the European Central Bank delivers its monetary policy decision on Thursday, when interest rates are likely to remain stable, while the communication and forward guidance of the ECB might be tweaked.
Asia 5 March 2019ASIA
HSCEI 11,576 +0.70%Nikkei 21,822.04 -0.42%, 10yr JGB 0.00% +0bps, USDJPY 111.910 +1.26%
The MSCI Asia Pacific ex. Japan index was flat in USD, marking a challenging week for the majority of the Asian stock indices. Chinese shares considerably outperformed their Asian peers, as “A” shares rose 6.9% in USD, while “H” shares gained 0.7% in USD. Despite the tensions with Pakistan, the Indian stock market rose 0.7% in USD. In contrast, the Philippine stock index delivered the weakest performance during the week, as it lost 3.8% of its value in USD.
Industrial production in Japan decreased 3.7% MoM in January, after stagnating in December. Due to the limited availability of data, it is difficult to assess whether the drop was of transitory nature.
Indian GDP growth slowed to 6.6% YoY in 4Q18, from 7% YoY in the previous quarter. The deceleration in economic activity was driven by slower growth in private demand and government expenditures. Although investments and exports strengthened to some extent, they were unable to offset the weakness in private and public demand.
Chinese manufacturing PMI slid to 49.2 in February, below the median market estimate and marking a contraction of industrial output in the next few months. The deterioration of the index was mainly driven by destocking of raw materials and weak production. In contrast, domestic demand expansions and industrial price recovery were supportive of the headline index. Meanwhile, non-manufacturing PMI eased to 54.3, remaining well above the 50-point mark that signal expansion.
The central bank of South Korea held the policy rate at 1.75%, in line with market expectations. The MPC remained on a wait-and-see stance citing the economic growth remains stable around its potential.
South Korean exports fell for the third consecutive month in February, by 11.1% YoY, while imports contracted by 12.6% YoY. As a result, the foreign trade surplus widened to USD 3.1bn.
Looking forward: The Asian economic diary is full of with relevant macroeconomic data releases for the week. At the beginning of the week, China and India will release the February services PMIs, which are indicative of the state of their respective domestic economies. Later, the central bank of Malaysia will most likely hold its policy rate at 3.25%. At the end of the week, China is expected to publish foreign trade and inflation metrics. Most importantly, the National People’s Congress (NPC) will take place in China, where further stimulus measures could be announced to provide additional cushion to Chinese GDP growth.
Latin America 5 March 2019LATIN AMERICA
MSCI Lat Am 2,776 -4.34%
Investor sentiment in the Latin American space was risk-averse, as the majority of the stock indices declined in USD terms by the end of the week. The Chilean stock market underperformed to the greatest extent (-5% in USD), followed by Brazil (-4.9% in USD) and Mexico (-3.5% in USD). Colombia was the brightest spot relative to its regional peers, as the country’s stock index gained 2.1% in USD.
Mexico’s GDP growth in 4Q18 disappointed, as the monthly GDP proxy stagnated in December in an annual comparison. The deceleration was driven by the weakness in industrial output. Later during the week, the central bank of Mexico published its latest quarterly inflation report, in which GDP growth forecast was lowered (by 0.6ppt to the range of 1.1-2.1% for 2019), while the inflation outlook was unchanged (3.4% for 4Q19).
According to the central bank, downside risks to GDP growth are high, due to several reasons, such as the trade tensions, the deceleration of the global economy, the downgrade of PEMEX’s credit rating, labour strikes, gasoline shortages, etc. Citing a very similar macroeconomic backdrop, S&P credit rating agency worsened the outlook on Mexico’s credit rating from ‘stable’ to ‘negative, while maintaining the country’s rating of BBB+.  In addition to the poor economic growth prospects, S&P claimed that the state’s and Pemex’s financial profiles are a great source for concern.
Since the balance of risks in terms of inflation are tilted to the downside and the risk premium required by the market remains bloated, the MPC has very limited room to conduct monetary policy. Should the credit rating agencies downgrade Mexico’s rating any further, the central bank will probably need to further raise the policy rate to stabilise the Mexican financial markets.
Economic activity in Colombia strengthened by 2.7% in 2018, accelerating from 1.4% in 2017. The acceleration of economic growth was led by domestic consumption and recovering investment activity, which in turn generated additional import demand. Due to the rising value of imports, the Colombian current account deficit amounted to 3.8% of GDP in full-year 2018, about 0.5ppt wider than in the previous year. The deeper current account deficit was primarily explained by the deterioration of the trade balance (vis-à-vis higher investment in the economy) and a wider income deficit.
Such a wide current account deficit could be a potential source of concern for the central bank. In order to address the issue and clamp down on it, the MPC could shift to a more hawkish stance in the short-run and decide to raise rates sooner rather than later. However, lower-than-potential growth and below-target inflation could mean the sustenance of monetary accommodation. Consequently, monitoring the MPC’s communication will be key.
Headline CPI inflation in Peru amounted to 2% YoY in February, slowing from 2.1% YoY in January. The headline inflation measure was brought down by lower transport and communication inflation. Meanwhile, the core gauge – filtering out the effect of volatile food and energy prices – was stable at 2.4% YoY.
The foreign trade surplus in Brazil hit USD 3.7bn in February, as both exports and imports declined during the month. The 12-month rolling surplus remained USD 58bn.
The Argentine central bank decided to tighten financial conditions due to rampant inflation in the domestic economy.
Looking forward: The Latin American economic diary is fairly packed for the week, as Mexico and Colombia publish their respective inflation metrics. At the back-end of the week, the Peruvian central bank is most likely to keep its policy rate stable at 2.75%. Furthermore, the market will most likely remain focused on the Brazilian pension reform.
Africa 5 March 2019AFRICA
MSCI Africa 791 -1.99%
African stock markets finished the week in the red. The Moroccan stock index decreased to the smallest extent, about 1.3% in USD, while the Kenyan one lagged its peers, as the country’s stock index declined by 2% in USD.
Muhammadu Buhari was newly re-elected as Nigerias President for a second term. The average national turnout was 35.6%, where Mr. Buhari and his APC party received 56% of votes. According to Mr. Buhari, his administration will intensify efforts to improve security and bolster the economy.
Now that the elections are over, confidence may slowly return to the Nigerian financial market, which in turn should help support asset prices. 
CPI inflation in Kenya slowed to 4.1% YoY in February (vs. 4.7% YoY a month before) on the back of easing inflationary pressure stemming from food prices and transport costs. The strengthening of the Kenyan shilling also contributed to the deceleration of the headline inflation gauge through lower fuel prices.
The Kenyan central bank sees inflation well-anchored within the target band of 2.5-7.5%.
Manufacturing PMI in South Africa fell for the second consecutive month in February, to 46.2 (a value below 50 indicates that manufacturing output is most likely to contract in the coming months). The direction of travel was primarily defined by the fact that blackouts returned, which disrupted the economy, as the country’s power utility company continues to struggle.
Looking forward: The economic diary contains several relevant macroeconomic data releases that are likely to impact African asset prices. South Africa, Morocco and Kenya are going to publish 4Q18 GDP statistics, while Egypt, Kenya, Nigeria and South Africa will reveal manufacturing PMI figures. Furthermore, Egypt publishes inflation metrics and FX reserves.
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