SHOULD CONCERNS ABOUT GLOBAL GROWTH BE TAKEN SERIOUSLY?
Bond yields slipped to very depressed levels once again marking that financial markets remain concerned about the state of the global economy. The question arises whether the worries of the fixed income universe is justified and what one should expect in terms of economic activity going forward.
In the US, GDP growth is likely to slow throughout 2019, which some interpret to mean normalisation from a previously overheated pace.
As the Chinese structural growth story seems to be unhurt thus far, the current slowdown in China is of cyclical nature, which has been already addressed by the local authorities.
In the rest of the EM space, apart from some idiosyncratic developments (such as Argentina, Turkey, etc.), most of the economies are likely to deliver good enough performances. The Eurozone appears to be one of the outliers, since economic activity in the Zone has been stuttering in 2H18, while monetary stimulus is being withdrawn and no meaningful fiscal support has been deployed, thus deepening the worries of an impending recession.
S&P 2,708 +0.05%, 10yr Treasury 2.64% -5.03bps, HY Credit Index 362 +15bps, Vix 16.12 -.42Vol
Stock markets in the US were flat on the week, while the USD strengthened (DXY up 1.1%). From a sectoral point of view, utilities (+2%), IT (+1.8%) and industrials (+1.5%) outperformed, while energy (-3.3%), material (-1.6%) and financial (-1.5%) underdelivered. The Treasury curve shifted down during the week. Consequently, the 10-year yield dropped by 5bp to 2.63%, bringing the 2s10s spread to 17bp.
ISM non-manufacturing index fell to 56.7 in January, below 58 registered in December. Details showed that sub-index for new orders moderated to 57.7, while business activity eased to 59.7. Meanwhile, the component for employment strengthened to 57.8.
The indicator suggests that the domestic economy of the US remained in very good shape despite the partial and temporary government shutdown. Although the headline index decreased, it still remains very high, signalling that the strengthening of the domestic economy will continue.
Looking forward: Although the economic diary is relatively light in terms of relevant macroeconomic data (CPI inflation and retail sales to be released), their impact will probably be meaningful on asset prices, as the market wants to gain reassurance that growth outlook in the US remains solid. The talks between the US and China may continue on Thursday and Friday.
Eurostoxx 3,159 -2.32%, German Bund 0.10% -7.90bps, Xover Credit Index 315 -9bps, USDEUR .884 +1.23%
As concerns increasingly mount about Europe’s economic growth prospects, stock markets become more and more jittery. The benchmark stock indices of the Euro Area’s four largest economist declined: Germany by 3.6%, Spain by 3%, Italy by 2.4% and France by 2.3% (all in USD). In contrast, the UK’s broad stock index held its own, as it lost only 0.5% in USD during the week, outperforming its peers in the Euro Area. Meanwhile within the fixed income space, core yields in the Eurozone plummeted, again. As a result, the 10-year German Bund yield slipped to 0.09%. In contrast, the risk premium on Italian sovereign debt assets widened, as the 10-year yield rose 21bp to 2.96%.
The industrial sector in Germany experienced a sharp contraction in 2H18, as the sum of construction, manufacturing and utilities activities decreased by 1.7% QoQ in 3Q18 and 1.5% QoQ in 4Q18; comparable to the decline at the time of the financial crisis in 2007/08.
The Bank of England (BoE) left the policy rate at 0.75% in line with the median market estimate. The BoE Governor claimed that the degree of disruption by Brexit had been greater than the BoE had previously expected. As a result, the GDP forecast was reduced by 0.5ppt to 1.2% for 2019 reflecting the potential impact of Brexit and a weaker external backdrop.
Although the BoE has become more pessimistic on the prospects of the UK economy, the Governor’s speech did not appear to reflect explicitly a dovish turn. The lack of clarity is most likely due to the uncertainties stemming from Brexit. As long as the policy horizon remains foggy, the BoE may retain as much flexibility as it can.
Looking forward: The UK and the Euro Area release 4Q18 GDP growth statistics this week. GDP growth likely decelerated in both countries. Details may reveal whether the deceleration will be persistent.
HSCEI 11,017 -0.98%, Nikkei 20,333.17 -2.33%, 10yr JGB- 0.03% 0bps, USDJPY 110.020 +0.15%
The majority of Asian stock markets (in USD) went sideways during the week. The Bangladeshi, Malaysian and Indian indices gained 0.8-0.9% in USD outperforming their regional peers, while the South Korean stock index underdelivered, as it declined 1.9% in USD.
The Indian central bank (RBI) surprised markets by slashing the policy rate by 25bp to 6.25%. In addition, the MPC abandoned its hawkish bias and shifted to a neutral stance. According to the RBI’s survey, households’ inflation expectations have visibly moderated. Members argued that the output gap has become modestly negative.
The timing of the RBI’s move was broadly unexpected, as Bloomberg consensus projected no policy change just yet. The decision is fundamentally justified by the fact that inflation has slowed below target. Further loosening measures may be delivered, if the outlook for inflation and GDP growth warrants them.
Headline CPI inflation in the Philippines slowed to 4.4% YoY in January, while core inflation eased to 4.4% YoY in January. Inflation decelerated, as food and non-alcoholic beverage inflation slowed by 1.1ppt to 5.6% YoY. The direct and indirect impact of lower fuel and energy prices also contributed to the moderation in inflation as well.
The central bank of the Philippines kept the policy rate stable at 4.75% for the second consecutive time, as inflationary pressures have been easing. The MPC’s tone remained cautious, as members claimed that their decisions will be data-dependent. There was no hint of easing monetary conditions anytime soon.
Inflation might remain above the 4% upper band in 1Q-2Q19, as excess duty hikes on fuel probably have not been fully (or at all) incorporated in the January figure, as retailers might not have raised prices during the time of data gathering. Despite the significant deceleration, inflation remains above the central bank’s 2-4% target range. Therefore, the prevailing downward trend justifies the pause in the rate hike cycle, but not enough yet to consider rate cuts. As the MPC claims to be data dependent, the policy rate is likely to remain flat in 1H19.
Real GDP growth in Indonesia was 5.2% YoY in 4Q18, and full-year growth hit 5.2% in 2018. The above-5% growth rate was partly due to fiscal stimulus measures (e.g. fuel subsidies to households, infrastructure construction, etc.) and partly to external stimulus (through the recovery of mining exports).
Indonesia’s current account deficit widened to 3.6% of GDP in annualised terms in 4Q18, 0.3ppt higher than in the previous quarter. The deterioration of the current account deficit was primarily due to the increased foreign trade gap, while increased tourism revenues and remittances helped to mitigate the widening.
The central bank of Thailand kept the policy rate stable at 1.75%, as expected. The decision was not unanimous, as two members voted for a 25bp hike. The MPC sees downside risks to headline inflation, however, has identified gradually intensifying demand-pull pressures.
Looking forward: This week is going to revolve around inflation, as China, India and Taiwan, will reveal their respective consumer price statistics from January. Furthermore, GDP growth figures from Taiwan and Malaysia will also grab markets’ attention, and Chinese monthly FX reserves will also be released.
MSCI Lat Am 2,851 -3.36%
Latin American markets faced a challenging week, as the majority of the benchmark indices decreased in USD terms. Brazil underperformed relative to its regional peers, as the country’s benchmark stock index declined 4.6% in USD, followed by Chile (-2.2% in USD) and Argentina (-1.6% in USD).
The central bank of Brazil left the policy rate at 6.5%, as expected. The MPC reviewed its inflation forecast and despite the stronger exchange rate, members decided to keep CPI inflation estimates for this year at 3.9%, while raising the forecast for 2020 to 3.8%.
The implied message by the MPC via the inflation forecast could be interpreted as a way to curb speculations on a rate cut in the short-term.
The central bank of Peru left the policy rate stable at 2.75%, in line with expectations. The MPC claimed that the output gap remained negative, while inflation remains in check, within the target range.
As long as the MPC sees inflation within the target range and output below its potential, it is unlikely that members will opt for a hike, however, economic activity may gradually converge to its potential levels over the coming quarters, and as a result, the policy rate might be hiked as early as 2H19.
Inflation in Mexico slowed to 4.4% YoY in January, from 4.8% YoY in December. The largest chunk of the disinflation from December to January was driven by energy prices. The slowdown of the core gauge was marginal, by 0.1ppt to 3.6% YoY.
The monthly GDP proxy (Imacec) in Chile rose 2.6% YoY in December, mainly driven by non-mining sector activity, while the non-mining sector virtually stagnated in an annual comparison.
Despite external headwinds, such as a slowing global economy and international trade tensions, Chile’s growth prospects this year remain robust.
Inflation in Colombia was stable in January, as the headline gauge remained 3.2% YoY, matching the figure seen in December. The inflation measure filtering out the impact of food prices rose 3.6% YoY.
The Colombian Statistics Office is yet to release the detailed breakdown of inflation in January and as such, whether the reading has any implication to monetary policy is yet to be determined.
The budget deficit of the central government in Colombia was 3.1% of GDP in 2018. The Ministry of Finance reaffirmed the deficit target at 2.4% of GDP for 2019, which means that the budget will run a primary surplus (excluding interest expenditures). The Ministry plans to reduce the deficit by higher tax revenues (generated by the tax reform), dividends and the sale of non-strategic assets.
Looking forward: Latin American markets will mostly focus on high-frequency macroeconomic data this week, which will help to assess the robustness and sustainability of economic growth momentum. Furthermore, the Brazilian central bank publishes the minutes of the last rate setting meeting.
MSCI Africa 799 -3.64%
African markets were a mixed bag during the week, as the spread of return across regional markets was wide. South Africa’s TOP40 index declined by 3.7%, while Egypt, Nigeria and Kenya gained 4.3%, 3% and 2.6%, respectively (all in USD).
South African President Ramaphosa announced parliamentary elections are to take place on the 8th May. Furthermore, the President presented plans to split Eskom, a struggling state-owned power company, into three entities, i.e. generation, transmission and distribution, would become separate entities. The company supplies more than 90% of South Africa’s power and employs ca. 48,000 people. However, Eskom has around USD 31bn of debt and is expected to remain loss-making.
Turning around Eskom is inevitable, as credit rating agencies and the market have to be convinced that the company will become financially sustainable and in turn the burden on the budget is mitigated.
PMIs in Africa were a mixed bag in January. The indicator remained in contractionary territory in Egypt (48.5) and in South Africa (49.4), while signalled expansion of future manufacturing output in Kenya (53.2) and Nigeria (54).
The International Monetary Fund (IMF) officially agreed to disburse a USD 2bn tranche to Egypt of the USD 12bn package. This is the last tranche out of the existing facility, which was granted to the country in 2016 conditional on the devaluation of the pound, the reduction of energy subsidies, and the introduction of a value-added tax.
The fact that the IMF disbursed the final portion of the three-year programme implies that the Egyptian authorities achieved a meaningful progress in terms of improving the structure of the domestic economy. From a structural standpoint, it appears Egypt is in better shape and may enjoy a cyclical upswing in the next few years. However, further measures are needed to improve the economy’s growth potential.
Looking forward: The Egyptian central bank holds its rate setting meeting on Wednesday where the MPC is not expected to embark on a loosening cycle just yet. However, members have the option to signal whether they intend to initiate cutting rates in the coming quarters. In Nigeria, 4Q18 GDP statistics will be published.
This week’s global market outlook is powered by Alquity www.alquity.com