Main Themes: Financial market sentiment deteriorated on Friday on the back of fresh worries about the coronavirus outbreak. A strong US payrolls report only offered a brief break from these concerns. The death toll from the coronavirus has now exceeded that of SARS. There are also more reports of global supply-chain disruptions.
Share Markets: Renewed coronavirus concerns overshadowed robust US labour market data, halting the share market’s 4-day rally. The S&P 500 closed
Interest Rates: US 2-year treasury yields fell from 1.44% to close at 1.40%, briefly spiking to 1.46% after the strong jobs data. The US 10-year yield fell by a greater 6 basis points to close at 1.58%.
Interest-rate markets are pricing a 10% chance of easing at the next Federal Reserve decision on March 18 and a terminal rate of 1.15% (versus the Fed’s current mid-rate of 1.63%).
Australian 3-year government bond yields fell from 0.74% to 0.69% and the Australian 10-year yield declined from 1.08% to 1.00%. Interest-rate markets are pricing only a 10% chance of easing at the next Reserve Bank (RBA) meeting on March 3 and a terminal rate of 0.45% (versus the RBA’s current cash rate of 0.75%).
Foreign Exchange: The Australian dollar pushed lower in Friday night’s trading session, breaking below key support around 0.6680. AUD/USD touched a low of 0.6662, which is the lowest since 18 March 2009, before recovering to the 0.6680 handle. Amid fragile risk sentiment, AUD/USD appears set to trade lower over the week ahead.
In other FX moves, weak industrial production data in Germany saw EUR/USD shed ground and fall to a 4-month low of 1.0942.
Commodities: Oil closed lower and gold higher amid worries about the spread of the coronavirus.
Australia: The quarterly Statement on Monetary Policy (SoMP) was released on Friday by the RBA. Earlier on Friday, Governor Philip Lowe also gave his semi-annual testimony to parliament.
The key message of the SoMP was that “the medium-term outlook for the Australian economy is broadly unchanged from three months ago.”
The point forecasts for GDP growth were modestly downgraded to 2.0% for 2019, 2.7% for 2020 and 3.0% 2020. But the medium-term ‘central case’ view remains for growth to return gradually to ‘around trend’ this year and rising slightly above trend in 2021.
Similarly, the unemployment rate is expected to hold in the 5-5¼% range near term, before gradually declining heading into 2021.
Meanwhile, underlying inflation is forecast to remain below the RBA’s target of 2-3% until the December quarter of 2021.
The RBA remains prepared to cut rates further, particularly if there is a deterioration in the jobs market. We continue to expect two more rate cuts this year.
China: The novel coronavirus has killed 813 people, exceeding the global death toll from the SARS outbreak almost two decades ago. Reported cases in China exceed 37,000, less than two months after surfacing in late December in Wuhan.
The People’s Bank of China will offer its first batch of special re-lending funds today, as it seeks to combat the outbreak. The central bank will offer the facility weekly to banks later this month. Nine major national banks and some local banks are qualified for the special funding. Chinese officials have said financial institutions should expedite the review process for loan applications and release loans within two days.
Europe: Germany’s industrial production slumped 3.5% in December. It was the biggest fall in industrial production since the GFC. It comes after news a day earlier of a large contraction in factory orders. The data suggests a soft finish to 2019 for Germany with a possible contraction in GDP for the Q4.
United States: Non-farm payrolls surged 225,000 in January, well above market estimates for a 165,000 gain. January had unseasonably mild weather and the weather-sensitive construction industry helped lead the way in job creation, adding 44,000 positions.
The unemployment rate ticked higher to 3.6% due to the participation rate rising 0.2 percentage points to 63.4%, matching its highest level since June 2013.
Average hourly earnings rose by 3.1% in the year to January, ahead of estimates for 3.0% growth. This result marked 18 consecutive months of annual wage gains above 3.0%, as the initially reported 2.9% outcome for December was revised up to 3.0%.
Today's key data and events:
JN Current Acct Dec ¥464.7bn prev ¥1436.8bn (10:50am)
CH Consumer Prices Jan y/y exp prev (12:30pm)
CH Producer Prices Jan y/y exp prev (12:30pm)
JN Eco Watchers Survey exp 39.1 prev 39.8 (4pm)
EZ Sentix Investor Confidence Feb exp 5.9 prev 7.6 (8:30pm)
US Federal Reserve’s Bowman Speech (12:15am)
US Federal Reserve’s Daly Speech (5:45am)
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