BMA Market Insights: Corporate Earnings, The Fed, And China In Play

While we do not expect the Fed to hike interest rates at their two-day meeting beginning Tuesday, close attention will be paid to the post-FOMC meeting statement on Wednesday. Mention of the partial government shutdown and its impact on the economy, as it temporarily ended into its 35th day last Friday, will be carefully monitored. We will look for any clues regarding changes to its quantitative tightening operations for its treasury and MBS portfolio. In addition to the Fed meeting, a slew of major economic data releases is scheduled throughout the week, including PCE inflation, the Fed’s preferred measure of inflation, Q4 U.S. GDP and January U.S. payrolls data.

Manufacturing data will be released for a number of key economies, including China, and will be heavily scrutinized given concerns regarding trade and a global economic slowdown. Inflation and GDP data for both the Eurozone and for some of the larger economies within the region are also on the docket. Other key events include:

Chinese officials are scheduled to come to the U.S. mid-week to continue ongoing trade negotiations.
The U.K. Parliament will consider Prime Minister Theresa May’s proposed next Brexit steps and alternative plans presented by lawmakers, some of which seek to delay Britain’s March 29th exit from the European Union.
Earnings season continues with tech juggernauts Apple and Microsoft to announce later this week.

Last week, as widely expected both the European Central Bank and Bank of Japan left their key rates unchanged. Dovish sentiments emanated from both banks given slowing global growth and trade tensions. Trade jitters were on the rise again on the back of Commerce Secretary Wilbur Ross’s comments that the U.S. and China were “miles and miles” away from a resolution. Data out of the U.S. were mixed, although some scheduled economic releases were sidelined again due to the government shutdown. Late in the week the Trump Administration and Congressional leaders reached an agreement, which would reopen the government for three weeks, giving time for negotiations regarding border security funding.

A temporary reopening of the government and encouraging earnings results propped up equity markets, which ended the week on a high. The Dow Jones Industrial Average enjoyed its fifth straight week of gains, closing at 24,737.2. The Risk-On sentiment towards the end of the week, fueled treasury yields higher, with the 10-year Treasury trading around 2.757% late Friday. Finally, oil prices edged higher on Friday on the back of the political turmoil in Venezuela, although data indicating that U.S. crude oil stockpiles had reached two-month highs last week slightly offset the run-up in prices. WTI crude hovered around $53.69 at the time of this writing.

I. U.S. Economic Data/Markets

December Durable Goods and New Home Sales data were not available due to the government shutdown.
January’s Richmond Federal Reserve manufacturing index rose to -2 from -8 last month.
- Data suggested U.S. industrial activity continued to wane with slowing global growth and continued trade tensions.
U.S. Housing Price Index gained, rising 0.4% in November versus some estimates of a 0.2% rise. Year-over-year housing prices have increased by 5.8%.
Markit PMI rose 54.5 in January, slightly beating analyst projections of 54.2. A reading above 50 indicates an expanding sector, while anything below that shows a contraction in activity.
- Manufacturing PMI rose to 54.9 (versus expectations of 53.5) in January, up from 53.8.
- PMI services dropped to 54.2, down from 54.4, but beat the expectation of 54.1.
Weekly jobless claims fell to a 49-year low dropping by 13k to 199k (versus expectations of a 220k rise) for the week ending on January 19th.
Existing Home Sales dropped to a three-year low in December declining by 6.4%, which reflected a seasonally adjusted annual rate of 4.99 million units last month – the lowest level since November 2015. Analysts expected a decline of about 1%.

II. Global Economic Data/Markets

Germany’s business confidence fell for a fifth straight month, with the IFO business climate index falling 99.1, the lowest level since February 2016. Uncertainty regarding Brexit, trade tensions and weaker demand for German goods contributed to the data.
The European Central Bank kept its key deposit rate unchanged at -0.4%. Other takeaways included:
- ECB President Draghi noted economic risks to the downside, a dovish change from his sentiments post the December meeting when he noted risks to be broadly balanced. Volatile financial markets, geopolitical concerns, trade tensions, and emerging market risks were among Draghi’s concerns.
- Draghi reaffirmed the bank’s stance to keep key interest rates unchanged through the summer of 2019 and “longer, if necessary.”
- ECB officials do not think a recession is likely. Draghi noted tightening labor markets and higher wages, which should push up inflation in the medium-term.
- Draghi’s comments pushed the USD to a five-week high against the Euro to about $1.1329.
- Next meeting will be held on March 7th where the ECB will provide economic forecasts.
U.K. jobs report surprised to the upside as unemployment fell to 4% in November ( the lowest since 1975) versus expectations of remaining unchanged at 4.1%.
- Average earnings rose by 3.3% annualized, the biggest increase since 2008.
- The GBP rose about .54% versus the USD on the back of the data.
- The positive data would likely prompt the Bank of England to tighten monetary policy, although the continued uncertainty regarding a Brexit resolution may keep the bank on hold at its next meeting on February 7th.
Japan
- The Bank of Japan left its key rate unchanged at -0.1% and reaffirmed its intention to buy 10-year Japanese government bonds to maintain their yield of around 0%.
  - The bank lowered its inflation outlook, to rise by 1-1.3% this year, compared to their forecast last October of a rise between 1.5-1.7% for 2019.
  - The bank’s inflation target is 2% and noted: “the rate of change in the consumer price index has been positive but continued to show relatively weak developments compared to the economic expansion and the labor market tightening.”
  - BoJ Gov. Kuroda noted risks to the economy due to trade tensions, particularly between the U.S. and China and waning global demand.
- Japanese exports fell to a two-year low in December, falling by 3.8% y-o-y, largely due to the slowdown in China.
  - Imports outpaced exports for the year, generating a trade deficit (of about $500 million) for the first time in three years.