Money Matters 9th April 2019

One of the obstacles hindering further improvement in global market sentiment is the trade dispute between the US and China. Finally, more constructive headlines were released citing that the two countries have finally found some common ground, which ultimately could lead to a consensus in the coming few months. President Trump talked up prospects for a ‘monumental’ agreement, while refraining from providing granularity or evidence. Drafts of the agreement being crafted would give Beijing until 2025 to meet commitments on commodity purchases and allow American companies to wholly own enterprises in the Asian nation, according to people familiar with the talks. Global investor sentiment could surely benefit from some good news.
stock-nasdaq-4-nasdaqUNITED STATES
S&P 2,893 +2.06%, 10yr Treasury 2.50% +9.04bps, HY Credit Index 338 -11bps, Vix 13.55 -.89Vol
Most of the major stock indices in the US gained: the S&P 500 gained 2.1%, while the Nasdaq Composite rose 2.7%. Meanwhile, the broad USD index (DXY) was broadly flat on the week, bringing the dollar’s year-to-date increase to 1.3%. As the jobs report in the US among other global macroeconomic data were convincingly strong. The Treasury curve shifted upwards, and as a result the 2-year yield rose by 8bp to 2.33% and the 10-year to 2.49%. Although the pricing of the Fed futures still implies a rate cut, the degree of such move has softened.
A wide range of relevant macroeconomic data was released during the week, which confirmed our view that the US is not on the brink of a recession. Both the manufacturing (55.3 in March) and non-manufacturing (56.1 in March) components of the ISM index continue to signal a very strong expansion. But most importantly, the jobs report in March delivered a convincingly solid set of figures again:

  • Non-farm payrolls rose by 196,000, bouncing from 33,000 in February
  • Unemployment rate remained 3.8%, while labour force participation eased to 63%
  • Nominal wage growth hit 3.2% YoY, down from 3.4% YoY in February

Both forward-looking (ISM indices) and backward-looking (jobs report) indicators imply that the domestic US economy remained strong in March.
Looking forward: The economic diary in the US is not too busy for the week, as it contains only a limited number of relevant releases, such as the CPI and PPI inflation figures from March. On Wednesday, the Fed releases the minutes from the last monetary policy meeting, which could provide markets further guidance on the outlook for interest rates.
Europe 9 April 2019EUROPE
Eurostoxx 3,438 +2.80%, German Bund 0.01% +7.70bps, Xover Credit Index 257 -17bps, EURUSD 1.123 +0.06%
European stock markets enjoyed a more constructive investor sentiment, as most of the stock indices considerably gained during the week: Germany by 4.1%, Spain by 2.9%, France by 2.3% and Italy by 2.2% (all in USD). Meanwhile, the euro was flat vs. the USD and the German Bund curve shifted upwards and steepened: the 2-year yield rose by 3bp to 0.57% and the 10-year increase by 8bp to 0.01% by the end of the week.
The European Central Bank’s minutes highlighted that the Governing Council saw widespread uncertainty about the persistence of the current weakness in economic activity within the Eurozone. The Council’s assessment on inflation was quite downbeat, as members remain puzzled about the sluggish nature of inflation. The minutes reaffirmed that the forward guidance on the ‘no rate change’ scenario was extended until the end of 2019. Most interestingly, however, the minutes included that ‘A number of members voiced an initial preference for extending the forward guidance through the end of the first quarter of 2020.’
Looking forward: European investors will have a busy week with an Emergency Summit on Brexit on Wednesday and an ECB decision on Thursday. Furthermore, the UK will release various high-frequency macroeconomic data, including the monthly GDP figure for February.
HSCEI 1,179 +2.76%, Nikkei 2,176.00 +1.95%, 10yr JGB- 0.05% +0bps, USDJPY 111.490 +0.86%
Investor sentiment in the Asian space was supportive, as the majority of the broad stock indices rose. Chinese “A” shares (+5% in USD) and the South Korean stock market (+3.7% in USD) outperformed their Asian peers. In contrast, the Pakistani (-3.4% in USD) and the Bangladeshi (-1% in USD) delivered an underwhelming performance.
The Reserve Bank of India (RBI) cut the policy rate by 25bp to 6% in line with expectations. This was the second consecutive time, when the RBI slashed the headline policy interest rate. MPC members agreed that economic growth needed to be stimulated in the context of a benign inflationary environment. The central bank revised down its real GDP growth forecast by 0.2ppt to 7.2% for FY2019-20. Furthermore, the central bank’s inflation forecast was reduced too, as the projection for headline CPI inflation was brought down to 2.9-3% in FY1H19-20 and to 3.5-3.8% in FY2H19-20.
Consumer price inflation in the Philippines slowed to 3.3% YoY in March, bringing the average for 1Q19 to 3.8% YoY – below the upper bound of the central bank’s inflation target of 2-4%. The deceleration was mainly due to a high base for comparison and easing food price pressures.
Inflation in South Korea unexpectedly slowed to 0.4% YoY in March (vs.0.5% YoY in February). Meanwhile, the core gauge was stable at 0.9% YoY. The headline inflation measure was dragged down by vegetable and transport prices. Services inflation (which captures inflationary pressures generated by domestic demand) remained muted at 1.1% YoY.
According to the central bank governor’s latest statement, the MPC acknowledged that softening inflationary dynamics. The governor argued that there is no room for any rate cut, as the MPC has to safeguard financial stability by preventing a build-up of imbalances.
CPI inflation in Thailand rose to 1.2% YoY in March, while core inflation hovered at 0.6% YoY. The headline gauge was mainly driven higher by non-core items, such as fruit and vegetable prices as well as by energy prices.
According to the governor of the Indonesian central bank, the policy rate will most likely be kept stable, as the MPC will opt for macroprudential tools to support economic growth.
Vietnam’s sovereign credit rating was raised by S&P from ‘BB-’ to ‘BB‘ citing continued improvements in the government’s institutional settings, which help to support consistently strong economic growth.
Looking forward: All eyes are on China, who is set to release a wide set of macroeconomic indicators including CPI and PPI inflation as well as foreign trade data. India is also scheduled to publish inflation metrics, which could serve as guidance for future monetary policy measures. Furthermore, the Sri Lankan central bank is expected to keep the policy rate stable.
Latin America 9 April 2019LATIN AMERICA
MSCI Lat Am 2,834 +3.19%
The majority of stock indices headed north during the week in Latin America. Mexico led the pack, as the country’s stock index gained 6% in USD, followed by Brazil (+2.5% in USD) and Colombia (+2.4% in USD).
The debate on the pension reform bill in Brazil has proved to be noisy so far, but the process itself has remained on track. According to various local sources, opposition parties have been preparing amendments to the bill that could somewhat water down the cumulative savings in the future. During the week, President Bolsonaro met with six parties to discuss the pension reform and will meet other parties as well to secure their support.
It is important to note that the President has been making efforts to find a consensus among the government coalition and opposition parties to smooth the process as much as possible.
Economic activity in Chile underdelivered relative to previous months, as the official GDP proxy grew only by 1.4% YoY in February. The unexpectedly weak performance was due to mining activity, which decreased by 7.8% YoY. Non-mining economic activity delivered a solid performance again, as it expanded by 2.4% YoY.
Credit rating agency Fitch commented on Colombia’s new, higher fiscal targets for 2019 and 2020, 2.7% of GDP and 2.3% of GDP, respectively. According to Fitch, the changes to the fiscal rule could hurt the credibility of Colombia’s non-governmental Fiscal Committee. The agency cited that the country may need further fiscal reforms in the future.
Mexico’s fiscal targets in the Preliminary Economic Policy Guidelines (PEPG) fiscal targets for 2019 and 2020 were unchanged at 1% and 2% of GDP, respectively, compared with the approved budget for 2019, while GDP growth forecast and oil production projection were revised down.
The official Argentine GDP proxy index expanded by 0.6% MoM in seasonally adjusted terms in January. In spite of the fact that economic output stagnated in a monthly comparison, economic activity contracted in an annual comparison, by 5.7%. With the exception of agriculture, most of the industries performed weakly.
Looking forward: This week kicks off with the release of the Peruvian inflation gauge and carries on with manufacturing PMI indices from Brazil, Colombia and Mexico. Mexico is also set to release plenty of macroeconomic data, such as inflation, industrial production and the minutes from the last monetary policy meeting. Later, the Colombian central bank will release the minutes of the last rate-setting meeting. In the second half of the week, a wide range of monthly economic activity indicators are revealed.
South Africa's New Finance Minister Pravin GordhanAFRICA
MSCI Africa 827 +5.41%
Most of the African stock indices gained during the week with the exception being Nigeria, whose market lost 4.8% of its value in USD. South Africa delivered one of the largest gains during the week, as the country’s benchmark index rose 4.9% in USD, followed by Egypt (+2.9% in USD).
Current account deficit in Egypt was USD 2.1bn in 4Q18. As a result, the deficit widened by 0.3bn YoY to USD 3.9bn in 2H18 (or first half FY2018-19 ending in June 2019). The wider current account deficit was a result of the decline in remittances (-6.8% YoY) and the increase in the value of non-oil imports (+11.5% YoY), despite the rising transportation revenues (+3% YoY) and surging tourism revenues (+36.4% YoY). Meanwhile, net FDI inflows slowed USD 2.8bn in 2H18.
The fact that the current account deficit widened only by USD 0.3bn compared to the same period in the previous year shows the country is now on a more stable and more sustainable footing than before it joined the IMF’s programme.
Real GDP growth in Kenya could growth 6.3% in 2019, according to the President of the country. The President’s statement imply that the government expects faster growth than in the previous year, when real GDP expanded 6.1%. The government’s projection is not meaningfully higher than the market consensus for real GDP growth in 2019, which has been hovering around 5.8%.
The Moody’s released a statement on Tuesday, in which the credit rating agency cited that South Africa remains investment grade, rated Baa3 (the lowest investment grade rating) with ‘stable’ outlook.
The PMI in South Africa fell for the third consecutive month in March, to 45, significantly below the 50-point threshold, which separates contraction from expansion. Business sentiment has been deteriorating in South Africa, due to the increasing number and length of power outages, due to the capacity constraints and financial struggles of Eskom, a state-run utility company. According to the minister for Public Enterprises, the government had been discussing a bailout package for the company.
Looking forward: The African economic diary for the week is quite empty, as only South Africa (business confidence and industrial production) and Egypt (CPI inflation) have scheduled releases for the week.
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