Markets:
The Chinese coronavirus reclaimed its role as main market driver following a brief Fed-related interruption yesterday evening. The Fed kept its policy target band unchanged, but Fed Chair Powell added some dovish twists to his message. Whatever the driver, the outcome remained the same for bond investors. The German Bund and US Note future extended gains in a risk averse context which spooked Asian and European equity. The WHO gathers today probably to lift the emergency status of the coronavirus. The positive surprise in EC confidence indicators didn’t impress EMU interest rate markets, stock markets or the euro. The latter bounced off the 1.0989/81 support area in the aftermath of the Fed meeting. German headline inflation increased from 1.5% Y/Y to 1.6% Y/Y (vs 1.7% Y/Y expected). The release lacks details at this stage and also failed to impact trading. US Q4 GDP was supposed to have the final say, but printed too close to consensus (2.1% Q/Qa) to have any noticeable impact. The strike at GM represented a noticeable drag with motor vehicle output down 0.81 ppt. Full-year GDP grew by 2.3% in 2019, the slowest in three years. US yields decline by up to 1.5 bps today. The German yield curve bull flattens with yields down 0.9 bps (2-yr) to 2.1 bps (30-yr). 10-yr yield spread changes vs Germany are narrowly mixed with Italy (+4 bps) underperforming.
Much ado about nothing at today’s first Bank of England meeting. The UK central bank kept its policy rate unchanged at 0.75% at Carney’s final meeting as governor. In the run-up to the meeting, several BoE-members seemed to gear up to vote along the lines of Saunders and Haskel, who have been calling for a 25 bps rate cut since November. Eventually, they didn’t walk their talk. The voting record showed a familiar 7-2 in favour of unchanged rates. In a nutshell, the BoE indicates that growth has slowed in the UK while inflation is below the 2% inflation target. There are however early signs that growth is picking up (eg January PMI’s) after avoiding a no deal brexit and following UK general elections (uncertainty gone & fiscal stimulus bets). If the growth recovery doesn’t occur, the BoE will nevertheless contemplate lowering the policy rate. Sterling was slightly wrongfooted by this month’s dovish BoE comments as well. As a result, the UK currency gained ground after the decision with EUR/GBP falling from 0.8460 toward 0.8410. The UK Gilt curve bear steepens with the front end up to 9 bps higher. The market implied probability of a UK rate cut before the end of the year fell to 50%.
News Headlines:
EC economic confidence data confirmed recent evidence that activity in the region is gradually improving (102.8 from 101.3 vs 101.8 expected), with especially manufacturing rebounding after last year’s slump. Consumer confidence and retail confidence currently are the laggards in this process. The EMU unemployment rate declined further, from 7.5% to 7.4% in December, approaching the 2007-2008 cycle/all-time low.
US growth in the fourth quarter was reported at 2.1% Q/Qa, close to market expectations (2.0% QoQa). Personal consumption growth slowed slightly more than expected to 1.8% (from 3.2% in Q3). Gross private investment again made a negative contribution to growth despite as solid performance of residential investment. Inventories also were drag on growth (-1.09 % contribution) but this was (more than) counterbalanced by net exports (+1.48 contribution). Price pressures remained very modest as the core PCE deflator eased from 2.1% to 1.3%. For the whole of 2019, the US economy expanded 2.3%.
