SWITCHING TO DATA-WATCHING MODE
As the global economy has been going through a phase of slowdown, markets have become increasingly jittery. Is a rebound in economic growth on the horizon that could improve global investor sentiment for a sustained period of time? A cyclical upswing in economic growth (including Europe and China) is likely to prevail soon in the next few quarters, as policymakers (especially central banks) have been doing their best to stimulate their economies. Whether the pick-up in growth will be sustained in the longer-term is difficult to tell at this point in time. To have greater clarity on growth prospects, Chinese GDP growth, monthly macro data in the US and the Fed’s Beige Book will be the ones to watch this week.
S&P 2,907 +0.51%, 10yr Treasury 2.56% +6.97bps, HY Credit Index 325 -13bps, Vix 12.46 -.81Vol
Stock markets rose in the US during the week, albeit slowly: the S&P 500 gained 0.5%, while the Nasdaq Composite rose 0.6%. From a sectoral viewpoint, financials increased to the greatest extent, while health care lagged. The broad dollar index (DXY) edged down 0.4%, which reflected a broad-based weakness against several developed and emerging currencies. Treasury yields rose on the back of increasing inflation expectations, as the 2-year yield increased by 5bp to 2.39%, while the 10-year yield increased by 8bp to 2.57%, bringing the 2s10s spread to 17bp.
According to the minutes from the FOMC’s last monetary policy meeting, policymakers stand ready to adjust the Fed funds rate depending on the developments in the domestic US economy, with inflation being one of the indicators in the policymakers’ focus. Although the decision to keep the Fed funds rate stable was supported by the broad majority, some members argued in favour of tightening monetary conditions ‘modestly later this year.’
Looking forward: The economic diary in the US is packed with relevant high-frequency macroeconomic indicators, such as industrial production, retail sales and Market PMI figures for manufacturing and services. The Fed will release its Beige Book during the week, which will grant granularity on the state of the US’ domestic economy.
Eurostoxx 3,450 +0.76%, German Bund 0.07% +4.80bps, Xover Credit Index 245 -9bps, USDEUR .884 -0.74%
During the week, stock indices of the Eurozone’s four largest economies increased: the French index up by 1.4%, the Italian index up by 1.2%, the German index up by 0.7% and the Spanish index up by 0.3% (all in USD). Within the fixed income space, the German Bund curve shifted up and slightly steepened, as the 10-year German yield rose by 5bp to 0.06%. Following ECB President Draghi’s press conference, the market does not price any policy rate changes by the ECB for 2019 and expects a 10bp hike at the very end of 2020.
The European Central Bank left the policy rates unchanged, i.e. the lending facility at 0% and the deposit facility at -0.4%. During the post-decision press conference, the President emphasised that the ECB is highly unlikely to raise the policy rates throughout 2019 and stands ready to provide an appropriate amount of monetary stimulus to the Eurozone as long as necessary, e.g. through the sustenance of a negative ECB deposit rate, the initiation of the Targeted Longer-Term Refinancing Operations and the re-investment of coupon payments and maturing bonds in the ECB’s balance sheet.
Looking forward: The economic diary in Europe is lightly packed for the week. In the Eurozone, the final March inflation figures will be revealed, and later both manufacturing and services PMI figures will be released for April. In the UK, investors will mainly focus on the monthly jobs report, various inflation metrics and retail sales statistics.
HSCEI 11,641 -0.20%, Nikkei 22,169.11 +0.02%, 10yr JGB- 0.03% 0bps, USDJPY 111.940 +0.27%
Most of the Asian stock markets had a challenging week. The Bangladeshi market (-2.4% in USD), Chinese “A” shares (-1.6% in USD) and the Malaysian stock index (-1.3% in USD) lagged their regional peers. In contrast, the Thai (+1.3% in USD), South Korean (+0.9% in USD) and Philippine (+0.9% in USD) markets delivered the strongest performance in the Asian space.
Chinese macroeconomic data showed that domestic growth in the world’s second largest economy has stabilised and is on the brink of an upward cyclical bounce. According to the March money supply statistics, M2 growth rose by 0.6ppt to 8.6% YoY, as corporate demand for credit increased. Furthermore, export growth hit 14.2% YoY in March, while imports contracted 7.6% YoY – bringing the 12-month rolling trade surplus to USD 382.6bn. Meanwhile, CPI inflation accelerated to 2.3% YoY in March on the back of rising pork prices, as the supply of swine meat is constrained by the African Swine Flu. PPI inflation remained depressed, at 0.4% YoY in March.
Further macroeconomic data will be released this week, which could further strengthen the case that a cyclical rebound is on the short-term horizon.
Headline CPI inflation in India rose to 2.9% YoY in March, as food deflation returned to inflation of 0.7% YoY. Food inflation was mainly pushed up by the rising inflation of meat and fish prices and the softening deflation of fruit prices. Excluding the impact of food price inflation, underlying inflationary pressures eased, according to our in-house estimate.
The Sri Lankan central bank kept the policy deposit and lending rates unchanged at 8% and 9%, respectively. The MPC argued that should the external backdrop remain supportive, the current trend in credit growth and the trade balance remain intact, ‘policy rates could be reduced in the period ahead.’
Looking forward: China is set to release its usual broad set of monthly macroeconomic indicators, including fixed asset investments, industrial production and retail sales. But, most importantly, we are going to see how the Chinese economy performed in 1Q19, as GDP metrics will be published as well. Furthermore, Indonesia, India and Sri Lanka will reveal their respective foreign trade data. Later, the South Korean central bank announces its decision on the policy rate.
MSCI Lat Am 2,761 -2.58%
Latin American stock markets delivered a mixed performance during the week. The Mexican (+1% in USD), Colombian (+0.5% in USD) and Chilean (+0.3% in USD) benchmarks rose, while the Peruvian (-1.2% in USD) and Brazilian (-4.5% in USD) markets underdelivered.
Brazilian President Bolsonaro sent a new central bank autonomy bill to Congress. The proposal establishes a fixed tenure for the governor and deputy governors, not coincident with the presidential term.
The Peruvian central bank kept the policy interest rate at 2.75%, as the MPC cited that economic growth remained below its potential.
As economic slack is yet to fully subside and inflation remains at bay, the MPC is likely to keep the policy rate stable for a prolonged period.
Industrial production in Mexico fell 0.8% YoY in February, as output by the mining sector continued to sharply contract. Although manufacturing activity increased in an annual comparison, the rate of expansion markedly slowed.
The central bank of Mexico published the minutes of March’s meeting, the policy rate was unchanged at 8.25%. As opposed to the majority of the MPC members, the deputy governor considered that the recent evolution of several inflation indicators and the looser Fed’s stance opened up space for a more neutral tone. However, most MPC members expressed their concern about the persistence in core inflation.
The key takeaway from the minutes is that the MPC has probably shifted to a more data dependent approach, i.e. should inflation persistently surprise to the downside, the MPC might consider easing monetary conditions in the backend of 2019 given the external backdrop remains supportive.
Economic activity indicators in Colombia were solid in February, as retail sales growth hit 5.7% YoY and manufacturing output grew 2.8% YoY.
Looking forward: The Latin American economic diary is relatively empty this week. Peru and Brazil are going to publish their respective monthly economic activity index. In addition, the Chilean central bank is set to release the minutes from its last rate-setting meeting. Furthermore, the Brazilian government will send the budgetary guidelines law (LDO) for 2020 on Monday, while the Lower House’s Constitutional Committee (CCJ) may conclude the voting on the pension reform draft during the week.
MSCI Africa 848 +2.59%
The majority of African stock markets performed well during the week. The benchmark index of the continent’s largest economy outperformed its regional peers, as the index rose 2.2% in USD. The South African index was followed by the Kenyan (+2% in USD). In contrast, the Egyptian (-0.7% in USD) and the Ghanaian (-1.8% in USD) performed poorly.
Business confidence in South Africa decreased to 91.8 in March, to a 7-month low. The ease of business conduct in the country has become increasingly difficult due to the blackouts, as the state-owned power company, Eskom cannot meet the demand with its unreliable and outdated infrastructure.
The South African central bank governor argued that the MPC had a very limited room to reduce the policy rate anytime soon unless inflation expectations got anchored appropriately. In addition, the governor implied that inflation might not be low enough on a forward-looking basis.
The governor’s remarks should serve as confirmation for the market that no rate cuts are in the pipeline in the months ahead.
Inflation in Egypt slowed by 0.2ppt to 14.2% YoY in March, as inflationary pressures stemming from fruits and vegetables eased. However, the fact that the government carries on with the reduction of fuel subsidies provided to consumers keeps headline inflation in the mid-teen’s range (temporarily). Meanwhile, core inflation – a measure that filters out the impact of fuel prices – decelerated by 0.3ppt to 7.9% YoY.
Gradually slowing underlying inflationary pressures (captured by the core measure) suggest that the structural reforms have improved the inherent deficiencies of the Egyptian economy. Further steady structural improvement would allow the central bank to decrease the policy rate in the coming quarters.
Ghana’s inflation rate accelerated by 0.2ppt to 9.3% YoY in March, remaining inside the central bank’s target band of 6-10%.
After cutting in January, the central bank of Ghana warned at its March interest-rate announcement that it could tighten policy if inflation risks from a weaker currency materialize. The moderate uptick in inflation is unlikely to make the central bank change course and start increasing rates again.
Looking forward: Egypt is scheduled to release 4Q18 GDP data this week. Later, Nigeria, Morocco and South Africa will reveal their respective inflation metrics for March.
This week’s global market outlook is powered by Alquity www.alquity.com