BMA Market Insights: Signs Of Economic Slowdown Persist, Brexit Uncertainty Lingers

Disappointing global economic data coupled with key data releases unavailable domestically due to the partial U.S. government shutdown, now at day 32, hovered over the markets last week. Nonetheless, the stock market rallied on the back of better-than-expected corporate earnings, strong U.S. industrial data and signs of U.S./China trade tensions potentially easing. The S&P 500 remained in the green for a fourth consecutive week. Rates also edged higher with 10-year treasury yields around 2.78%.

Across the pond, continued uncertainty surrounding Brexit lingered as Prime Minister Theresa May’s proposal was voted down by the U.K. Parliament.

The potential of a no Brexit deal, China/U.S. trade tensions and global economic slowdown prompted the International Monetary Fund to lower its global growth forecast by 0.2% to 3.5% for 2019. The recent weaker economic story, in particular out of Europe, will likely prompt European Central Bank President Draghi to have a more dovish stance when the ECB meets later this week. Before the ECB’s discussion, the Bank of Japan is scheduled to meet and is also expected to keep rates unchanged amidst a weakening economic outlook.

While the U.S. markets were closed yesterday for the Martin Luther King Jr. holiday, mixed data out of China continued to rattle the markets. The Chinese economy grew 6.6% last year, the slowest pace since 1990. On the flip side, industrial output and retail sales data offered some reprieve. Looking ahead this week, outside of the aforementioned central bank meetings, other key events this week include the World Economic Forum and earnings season continuing with IBM, UBS and Ford among the names to announce results.

I. U.S. Economic Data/Markets

December’s Producer Price Index dropped 0.2% versus expectations of a 0.1% drop. The drop in prices was largely due to falling gasoline prices. Outside of food and energy, the core inflation rate was unchanged m-o-m and rose 2.8% y-o-y.
Housing Starts/Retail Sales were not reported due to the government shutdown as the Commerce Department, who provides the data remains closed.
Industrial production rose 0.3% in December, led by manufacturing and mining.
- Manufacturing production rose by 1.1%, the biggest gain in ten months.
Fed’s Beige Book indicated less optimism on the back of recent market volatility, higher interest rates, political and trade uncertainty. Other key takeaways included:
- Rising wages and tighter labor markets.
- Higher prices for materials and freight.
- Continued expansion within manufacturing, but at a slower pace.
Corporate Earnings have largely beaten analysts’ expectations. About 55 of the S&P 500 companies have reported earnings thus far, with over 75% beating earnings estimates.

II. Other

China
- Trade Data disappointed with December exports falling by 2.2% versus expectations of a 4.4% rise – a two year low.
  - Further, exports to the U.S. specifically fell 3.8% after rising 9.8% in November.
  - December imports also fell 7.6% versus estimates of a 4.5% rise.
  - Data reignited global economic slowdown concerns with stock indices globally dropping on the back of the data, including the three major U.S. stock markets.
  - Chinese Officials signaled greater stimulus measures on the back of the data, and that it will aim to achieve a “good start” to the first quarter, according to the National Development and Reform Commission.
    - The People’s Bank of China also noted that it will maintain a prudent monetary policy with the appropriate “tightness and looseness”.
- The PBOC injected about $83 billion of liquidity in the banking system mid-week, by way of reverse repurchase agreements. It was the largest inflow in a single day. The bank explained its actions by citing declining liquidity given the peak of the current tax season.
Brexit: As largely expected the U.K. Parliament voted on Tuesday against PM Theresa May’s Brexit proposal that then prompted a no-confidence vote against May, which she survived.
- The overwhelming defeat of May’s proposal by a vote of 432 to 202 fed the continued uncertainty regarding any resolve the U.K.’s divorce to the EU.
- The pound sold off against the dollar immediately after May’s proposal was rejected but pared its losses by the end of the day and edged slightly higher on the back of the no-confidence vote.
- May then presented a slightly revised Brexit proposal on January 21st, which had an underwhelming reception – leaving the U.K. with no resolution in sight as the March 29th Brexit date approaches.
  - May ruled out both a second referendum and delaying the March 29th exit date.
Germany’s economy grew by 1.5% last year, the slowest pace in five years.
- Global growth weakness and challenges facing the automotive industry in part contributed to the data.
European industrial production disappointed on the downside falling 1.7% (versus expectations of a 1.5% decline) in November, after gaining 0.1% in October – the steepest drop in nearly three years.
- The data fueled the pessimistic economic outlook for the region, casting doubt that ECB may hike at this week’s meeting.