Main Themes: Investors digested a mixed bag of news overnight. Company earnings on Wall Street beat expectations, the coronavirus death toll rose sharply and the Fed opted to stand pat. Equities rose while bond yields fell.
Share Markets: US stocks rose overnight, boosted by earnings reports that beat market expectations from Apple, Boeing and General Electric. The Dow Jones and S&P500 are up 0.2% each.
Concerns over the coronavirus ensured optimism remained restrained in US and European equity markets, and had a localised effect on Asian markets. Both the Hang Seng Index and Shanghai Composite Index fell 2.8% as concerns about an economic fallout from the virus mount.
Interest Rates: Bond yields have been much more sensitive to news about the new coronavirus. US yields fell as the death toll rose sharply, and edged lower again after the Fed kept rates on hold, but announced it would continue to expand its balance sheet. The yield curve flattened further, even briefly turning negative during the session. The 10-year treasury yield fell 5 basis points to 1.60% while at the short-end, the 3-month treasury bill fell 2 basis points to 1.56%.
Australian bond yields recovered yesterday, being whipsawed by uncertainty over the economic impact from the spreading coronavirus. The 10-year bond yield is back up to 1.02% while the 90 day bank bill swap was unchanged at 0.88%.
Foreign Exchange: The US dollar index etched its fifth straight gain overnight, as a risk-off mood returned to currency markets. The DXY ended the session at 98.075, its highest close of 2020.
The pound slipped a little ahead of tonight’s meeting of the Bank of England (BOE), where markets are divided about the prospect of a rate cut. The pound is hovering just above US$1.30.
On the back of concerns about the coronavirus and the economic impact on China, the Australian dollar weakened to 67.54 US cents.
Commodities: Oil prices were mixed as markets anticipated lower demand due to transport restrictions amid the spread of the coronavirus and OPEC signalled that it would cut supply. A report from the Energy Information Administration (EIA) said that US crude stockpiles rose more than expected.
Gold prices rose as investors sought safe-haven assets.
Australia: Consumer prices showed the faintest of heartbeats in the December quarter. However, headline and core inflation remained below the RBA’s target band. Headline inflation was up 0.7% on the quarter while the trimmed mean measure rose 0.4%.
The impact of the drought and the pass-through effect of a weaker Australian dollar have resulted in price pressures in selected areas. Fruit prices rose 6.8% over the quarter and beef & veal rose 2.9%. Higher oil prices lead to a 4.4% rise in automotive fuel and tobacco tax increases were responsible for an 8.4% increase in tobacco prices.
Non-tradables inflation jumped 1.0% in the December quarter, the biggest quarterly gain in nearly 5 years. The lift reflects some pass-through to retail prices from a weaker currency. In contrast, tradables inflation (i.e. the prices of imported goods and services) rose by only 0.2%.
At just 1.6% on an annual basis, underlying inflation is well below the RBA’s target band of 2-3%. This leaves ample room for more rate cuts. However, in the context of last week’s strong labour market report, the data buys the RBA time to wait before cutting the cash rate again.
United Kingdom: House prices in January rose 1.9% over the year, their fastest pace since November 2018. The housing market appears to be benefiting from reduced uncertainty following the general election in December. The BOE will meet tonight to decide whether it will cut interest rates. Rising house prices and a strengthening labour market has bolstered the case for no cut, however the economic outlook remains highly uncertain.
China: A government economist from the China Academy of Social Sciences said that the coronavirus outbreak could cut growth in Q1 by 1 percentage point. The virus has killed at least 130 people and infected more than 6,500, prompting the lockdown of several cities, right before the Lunar New Year holiday.
United States: The Federal Open Market Committee (FOMC) kept the Federal funds target rate unchanged at 1.50-1.75%, as expected. Chair Jerome Powell characterised economic growth as “moderate” and the labour market as “strong”. He reiterated that the Fed sees inflation returning to its 2% objective. There was no new guidance about the US$60 billion treasury bill purchase plan implemented last year aimed at calming repo markets. At a press conference, Powell added that uncertainties around the outlook remain, including the coronavirus, which he said the Fed was monitoring closely. Treasury yields moved lower as he spoke.
Elsewhere, President Trump signed a trade agreement with Mexico (USMCA) while economic data showed the goods trade deficit widening in Q4. The increase in the trade deficit was mainly due to a bounce-back in imports. Other data showed that pending home sales fell 4.9% in December.
Today's key data and events:
NZ Trade Balance Dec exp $100m prev -$753m (8:45am)
AU Trade Prices Index Q4 (11:30am)
Imports exp -5.2% prev 1.3%
Exports exp 0.5% prev 0.4%
EZ Economic Confidence Jan exp 101.8 prev 101.5 (9pm)
EZ Consumer Confdience Jan F prev -8.1 (9pm)
EZ Unemployment Rate Dec exp 7.5% prev 7.5% (9pm)
UK BOE Rate Decision exp 0.75% prev 0.75% (11pm)
JN Consumer Confidence Jan exp 39.5 prev 39.1 (4pm)
US GDP Q4 annualised exp 2.1% prev 2.1% (12:30am)
US Core PCE Q4 exp 1.6% prev 2.1% (12:30am)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.
Nelson Aston, Economist Ph: 02-8254-1316