Main Themes: The coronavirus was again at the top of investors’ minds, leading to a fall in equities and a rise in global bond yields, as investor appetite for risk fell. The VIX index, a measure of risk aversion, rose to its highest level since early October. China’s markets reopen today after an extended holiday due to the coronavirus. Many analysts expect sharp falls in the Chinese share market. China’s central bank is on standby to inject liquidity.
Share Markets: Share markets dropped sharply in Friday’s trade, as the spread of the new coronavirus caused the death toll to rise and the first death outside of China was registered. The Dow Jones fell 603 points (or -2.1%) and the S&P 500 index dropped 58 points (or -1.8%). We expect the Australian share market and Asian share market bourses to follow suit with large declines.
Interest Rates: US 2-year treasury yields fell 10 basis points to 1.31% - the lowest since September 2017. US 10-year yields fell 8 basis points to 1.50% - the lowest since early October.
Interest-rate markets are pricing a 30% chance of easing at the next Federal Reserve decision on March 18 and a terminal rate of 1.02% (versus the Fed’s current mid-rate of 1.63%).
Australian 3-year government bond yields fell from 0.62% to 0.57% and the Australian 10-year yield dropped from 0.99% to 0.92%. Interest-rate markets are pricing only a 15% chance of easing at tomorrow’s RBA meeting, but a terminal rate of 0.36%.
Foreign Exchange: The AUD/USD continued to trend lower, declining to 0.6682 – the lowest since October 2. In other currencies, the USD index was slightly weaker in Friday’s overnight trade and the GBP was the outperformer; GBP/USD rose from 1.3100 to an overnight high of 1.3228.
Commodities: OPEC and its allies are considering how to respond to a plunge in oil prices, with Russia suggesting it's open to Saudi Arabia's push for an emergency meeting.
Australia: Credit growth in the private sector expanded by a relatively sedate 0.2% in December, matching the increase from the month before. On an annual basis, growth was unchanged from the 2.4% pace recorded in November, which was the lowest rate since May 2010.
The slowdown in housing credit growth appears to be stabilising. Loans for housing grew 0.3% in December. A pick up in the housing market has encouraged new lending; however, the pace of growth in outstanding loans has been slowing. Households with mortgages have taken the opportunity to use lower interest rates to repair their balance sheets to pay down existing loans.
The recent upswing in housing has been led by owner-occupiers. Indeed, owner-occupier loans expanded 0.5% in December compared with no change to investors. Tighter regulations on investor lending, as well as concerns about building quality, have weighed on investor borrowing.
Credit to businesses rose 0.2% in December for the second month in a row, leaving the annual rate unchanged at 2.5%. An uncertain global economy and concerns over domestic demand has weighed on business confidence and investment decisions.
United Kingdom: Brexit officially occurred on Friday. Prime Minister Boris Johnson now faces 11 months of talks to agree on a trade deal before a transition period ends on December 31. The UK will follow EU laws during the transition period.
China: China's markets reopen today after the coronavirus-induced extended holiday. The People’s Bank of China (PBoC) pledged 150 billion yuan (US$21.7 billion) in liquidity.
The coronavirus pandemic continues to spread, with 14,000 cases confirmed (mostly in China) and the death toll passing 300. The Philippines reported the first death from the virus outside of China on the weekend. Also over the weekend, the Australian government announced a suspension of foreign arrivals from China and recommended no travel to China. Qantas has also suspended all flights to and from China.
The official manufacturing purchasing managers’ index (PMI) dropped 0.2 of a point to 50.0 in January, but the survey was conducted before the Wuhan coronavirus outbreak. Chinese officials warned that the survey would not encapsulate fully yet the impact of the new coronavirus.
The services PMI also fell in January, to 53.0, from 53.5 in December.
Europe: GDP grew by only 0.1% in the euro area in the December quarter, which led annual growth to slow from 1.2% in the September quarter to 1.0% in the December quarter. It was the weakest quarterly pace of growth in nearly 7 years. The result was weighed down by France and Italy. Both these countries recorded a contraction in GDP in the quarter.
Core inflation showed that price pressures also eased. In January, core inflation slowed to an annual pace of 1.1%, from 1.3% in December.
United States: The core personal consumption expenditure (PCE) deflator rose by 0.2% in December, lifting annual growth 0.1 percentage points to 1.6%. The PCE deflator is the US Federal Reserve’s preferred measure of underlying inflation and the result backs the Federal Reserve’s Chairman’s view that price gains are moving toward the central bank’s goal.
Personal income rose by 0.2% in December and spending lifted by 0.3% in the same period. Both outcomes represented a deceleration from the previous month.
The final measure of consumer sentiment for January, published by the University of Michigan, showed consumers overwhelmingly remain downbeat. January’s final outcome showed a lift from December of 0.7 points to 99.8, but this outcome remained below the key 100.0 mark.
In other data, the employment cost index grew 0.7% in Q4.
Finally, the Chicago PMI unexpectedly fell sharply to 42.9 in January, from 48.2 in December. Most sub components of the survey suggested a contraction ahead in activity.
Today's key data and events:
AU AiG Performance of Mfg Index Jan prev 48.3 (8:30am)
AU CoreLogic House Prices Jan exp 0.9% prev 1.2% (10am)
AU Building Approvals Dec exp -5.0% prev 11.8% (11:30am)
CH Industrial Profits Dec y/y prev 5.4% (12:30pm)
CH Caixin PMI Mfg Index Jan exp 51.0 prev 51.5 (12:45pm)
US Markit MfgPMI Jan final exp 51.7 prev 51.7 (1:45am)
US Construction Spending Dec exp 0.5% prev 0.6% (2am)
US ISM Mfg Index Jan exp 48.5 prev 47.8 (2am)
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.
Besa Deda, Chief Economist Ph: 02-8254-3251