BMA Market Insights: Prospects of China-U.S. Trade Resolution Prompts RISK-ON Sentiment

Optimism regarding the prospect of a Sino-U.S. trade resolution coupled with better-than-expected Chinese manufacturing data overshadowed lackluster domestic data towards the end of last week. The “RISK-ON” sentiment fueled Treasury yields, equity prices, and the USD higher.

Treasury yields moved up across the curve. The 10-year rallied nearly ten basis points throughout the week, closing around 2.759%. Similarly, all three major U.S. stock indices closed the week in the green, with the S&P 500 capping the week off at 2,803.69.  All three major U.S. equity indices have had strong starts to the year. For example, the S&P 500 is up more than 11%, the best start to a year in nearly three decades. Finally, the greenback also enjoyed the rally as the Dollar Currency Index increased to 96.51. The dollar hit a 10-week high against the yen (at 111.98), which is largely considered a safe haven currency.

This week, a slew of economic data and events are on the calendar both domestically and abroad. U.S. trade and housing data will trickle throughout the week. February’s unemployment data will be released on Friday. Further, a number of Fed officials are scheduled to speak (see more below).

Overseas, three central banks will preside over their respective monetary policies with the Reserve Bank of Australia kicking things off, with the Bank of Canada, and the European Central Bank to follow. It is widely expected that all three banks will keep their respective policy rates unchanged given weaker economic growth globally.

In particular, the Eurozone has seen continued weakness on the back of slowing exports, falling industrial production and continued trade uncertainty with the U.S. possibly imposing tariffs and Brexit. Many market practitioners expect the ECB will lower its economic forecasts and might provide some guidance regarding how the bank intends to support the economy. Outside of central bank meetings, key data releases include Australian and Chinese trade data, GDP data for Australia and the EU and Canadian unemployment data.

I.   U.S. Economic Data/Markets

• ISM Data
  • Prices paid marginally dropped m-o-m by 0.1 to 49.4 in February – indicating lower raw material prices for the second straight month after about three years of increases.
  • Manufacturing fell to a two-year low dropping to 54.2 in February from 56.6 in January.
    • A drop in new orders, production, employment, and prices contributed to the data.
• Personal income fell 0.1% in January after a 1.0% rise in December – January’s drop is the first monthly decline since 2015.
• Personal-consumption expenditures (PCE), the Fed’s preferred inflation gauge, rose 0.1% from November and was up 1.7%  y-o-y in December.
  • Fed’s target for annual inflation is 2%.
• Manufacturing Markit PMI dropped to an 18-month low coming in with an index reading of 53 compared to a reading of 54.9 last month. Slower expansion in output and new orders partly explained the reading.
• GDP came in at 2.6% for the fourth quarter of 2018 beating expectations of 2.2%.
  • A slowdown in consumer spending (rising 2.8% versus a 3.5% rise in the third quarter) and a weaker housing market contributed to the data.
  • 3Q and 2Q GDP were 3.4% and 4.2% respectively.
• The trade deficit widened to $79.5 billion in December, a 12.8% increase.
  • Exports fell 2.8% given a drop in food shipments, industrial supplies, and capital goods.
  • A strong USD coupled with waning global demand likely placed downward pressure on US exports.
  • Imports increased by 2.4% largely driven by food  and consumer goods.
• Housing Starts fell to a two-year low in December falling 11.2% m-o-m to a seasonally adjusted annual rate of 1.08 million.
• Pending Home Sales bounced back 4.6% m-o-m in January, although still nearly 2.3% lower  from a year ago.
• Housing Price Index reflected an increase of 1.1% in Q4 2018 and up by .03% m-o-m in December.
• FOMC Chairman Powell’s Congressional testimony takeaways:
  • Reaffirmed a patient approach to monetary policy, allowing time to assess the impact of previous rate hikes to the economy.
  • Noted a favorable domestic economic outlook but headwinds from abroad; likely include slowing global growth, Brexit uncertainty, and ongoing trade discussions between the U.S. and China.
  • Recent low oil prices have kept inflation relatively unchanged. Fed Chair Powell believes this is transitory and that inflation will run close to 2%.
  • Federal government debt is on an unsustainable path.
  • Fed is close to agreeing on a plan regarding the wind down of its $4 trillion portfolio.

II.  Other

• China/U.S. trade talks seemed to progress over the week, with a potential deal between the two sides in the coming weeks.
  • A meeting between both President Xi and President Trump may be scheduled as early as mid-March, on the back of an agreement.
• China’s Economic data
  • Caixin PMI slightly increased in February to 49.9 from 48.3 in January, beating expectations of 48.5.
    • Robust demand can partly be attributed to the data.
  • China’s manufacturing PMI also contracted for a third consecutive month falling to 49.2, the lowest reading since February 2016. Analysts largely predicted the level would be unchanged from January’s reading of 49.5.
    • Manufacturing output contracted for the first time since January 2009.
• Canada’s Economic data
  • GDP growth slowed in 2018 to 1.8% versus a 3% growth rate in 2017.
    • The economy expanded at an annualized pace of 0.4% in the last quarter of 2018, the weakest quarterly growth since the mid-2016.
  • Inflation levels dropped in January to 1.4% from 2% in December, largely due to a decline in gasoline prices.
    • It is the second time in the last 12 months were the level dropped below the central bank’s target of 2%.
• U.K.’s Economic data
  • Confidence surprised to the upside despite Brexit concerns, with the confidence index slightly improving to -13 from -14 in January and versus expectations of -15.
  • Manufacturing PMI fell to a four-month low of 52 in February, down from 52.6 in January and in line with expectations.
• Brexit
  • U.K. Parliament agreed that if they cannot agree to a Brexit deal that an extension beyond the March 29th divorce date would be needed.
    • Prime Minister May pledged to give Parliament a vote on March 14th regarding the extension if her Brexit proposal is voted down days prior.
    • Any extension would also require approval from the EU.
    • The Labour Party also agreed that if its proposal is rejected that it would support a second referendum.
• EU’s Economic data
  • Eurozone Markit manufacturing PMI fell for the seventh consecutive month to 49.3 versus January’s level of 50.5.
    • Anything below 50 signifies a contraction – it is the first time the level dropped below 50 since June 2013.
  • Economic sentiment indicator slightly dropped in February to 106.1 from 106.3 in January.
    • It is the tenth straight monthly drop and the lowest level since November 2016.
    • Manufacturing sector largely saw declines – likely due to global trade concerns.
• Japan’s Economic data
  • Core inflation increased marginally in January, rising 0.8% y-o-y relative to a 0.7% increase in December.
  • Retail sales rose 0.6% y-oy in January, versus expectations of 1.1%.
  • Industrial production surprised to the downside with a drop of 3.7% in January versus expectations of a 2.5% decline.

Key data/events this week:

• AUD Building Permits (Monday)
• U.K. Markit Construction PMI
• U.K. Retail Sales (Tuesday)
• Reserve Bank of Australia Meeting
• Swiss CPI
• Markit Services/Markit PMI: EU, UK, US
• E.U. Retail Sales
• U.S. Non-ISM Manufacturing
• Bank Of England Gov. Carney speaks
• AUD GDP (Wednesday)
• U.S. Trade Balance/Factory Orders/New Home Sales/Beige Book
• Bank of Canada Meeting
• CAD PMI
• U.S. Fed Official Williams speaks
• AUD Retail Sales/Trade Balance (Thursday)
• JPY Leading Economic Index/Household Spending
• European Central Bank Meeting
• E.U. GDP
• U.S. Fed Official Brainard speaks
• CNY Trade Data (Friday)
• German Factory Orders
• U.K. Industrial Production
• U.S. Housing Starts
• U.S. Unemployment Data
• CAD Unemployment Data