Markets
Never catch the falling knife, qed. Risk-off trades simply continued across markets today. Financial markets are pricing a scenario where the coronavirus pushes a late cycle economy in a global recession. European stock markets lose another 4%, putting intraweek losses for example for the EuroStoxx 50 at nearly 15%! That index comes close to the key 3200 support area. Core bonds continue to profit with US Treasuries again outperforming German Bunds. The US yield curve bull steepened with yields dropping 13.6 bps (2-yr) to 6.5 bps (30-yr). The US 2- and 5-yr yields dived below 1% for the first time since 2016 with the 10- and 30-yr tenors reaching fresh all-time lows on a daily bases. Markets are at loggerheads with Fed governors who cling to their chorus that it’s too early to assess the impact of the coronavirus outbreak on the US economy and on monetary policy. For markets the question isn’t whether the Fed will cut in March, but whether it will be a 25 bps or a 50 bps rate cut. For 2020 as a whole, the market discount at least 100 bps rate cuts. The German yield curve bull flattens with yields declining by 4.8 bps (2-yr) to 9.3 bps (30-yr). Despite the ECB’s rhetoric since its September deposit rate cut (costs start outweighing the benefits; pass the torch to fiscal policy), short term rate markets are also discounting a 10 bps European rate cut. 10-yr yield spread changes vs Germany widened by up to 5 bps with Italy (+13 bps) and Greece (+17 bps) significantly underperforming. Brent crude fell tested $50/barrel, the 2018 low. Pressure is building on OPEC+ to act next week.
The dollar initially continued feeling the pain from losing its interest rate advantage against other majors. The trade-weighted dollar temporary fell to the low 98-area, before recovering ground towards 98.50. The intraday trading pattern in EUR/USD was similar with the pair bouncing from 1.10 to 1.1050 before diving back sub 1.10. USD/JPY fell prey to gravity laws, falling from 109.50 to 108.50. Smaller, illiquid currencies, being the scandies, the CEE-bunch or NZD/AUD all remained in the defensive. AUD/USD reached the 0.65-mark for the first tome since 2009. The swiss franc shows choppy action in the low 1.06-area with the (in)visible hand of the SNB probably playing a role. Sterling couldn’t recover, both because of risk-off and because of PM Johnson’s hawkish trade rhetoric.
News Headlines
The Canadian economy grew at a pace of 0.3% (Q/Qa) in Q4/2019. The economy slid to a near halt on the back of temporary factors (e.g. rail strikes, manufacturing plant disruptions …) that weighed on the economy. The details showed GDP slowed as a result of weaker business investments (-3%) and a major drag from a drop in exports  (-5.1%). Household spending held up (2%), reflecting the resilient Canadian labour market.
The Swedish economy grew by 0.2% (Q/Q) in the final quarter of 2019, matching market expectations. The details showed a drop in imports (-1.2%), a pick-up in private spending (0.7% ) and increased exports (62.7%) while public spending remained flat.
German inflation recovered sharply in February, accelerating to 0.6% (M/M) from -0.8% in January. On an annual basis, inflation rose to 1.7% from 1.6%, the fastest pace in 10 months. Details of the regional series show the pick-up in prices was mainly due to a rise in food and beverage prices, alcohol and tobacco and leisure costs while energy prices reflected the tumble in oil markets. In France, price pressure remained muted on a monthly basis. The annualized gauge dropped to 1.6% from 1.7% due to lower energy prices and food prices.
US personal spending decelerated to 0.2% in January after an upwardly revised 0.4% gain in December. Personal income jumped 0.6%, the fastest pace in almost a year on increases in wages and salaries. The PCE core deflator, the Fed’s preferred inflation gauge, remained unchanged at 1.6% but missed the anticipated 1.7%.
