Main Themes: China could be planning further measures to support its economy in the wake of the coronavirus slowdown while the Fed signalled that it isn’t expecting to raise interest rates anytime soon. Stocks surged to fresh record highs while bond yields movements were muted.
Share Markets: Equity investors were treated to a sea of green overnight. US and European equity bourses followed their Asian counterparts higher, shrugging off last session’s earnings warning from Apple. The Dow Jones is up 0.4% while the S&P 500 is 0.6% higher. The tech-heavy NASDAQ is up 0.9%, and at above 9,800 is closing in on the 10,000 level.
The Euro Stoxx 50 rose 0.8% while the London FTSE 100 rose 1.0%.
Yesterday the ASX 200 rose 0.4%, boosted by news reports that China is considering cash injections and mergers to support business affected by the coronavirus, including the nation’s airlines.
Interest Rates: US treasury yields advanced cautiously. Expectations for further stimulus from China and solid US economic data supported yields, however, bonds oscillated in a relatively tight range throughout the session. The 10-year treasury yield is up 1 basis point to 1.57% while the 2-year yield rose 1 basis point to 1.42%.
The Australian yield curve was unchanged yesterday. The 10-year bond yield is 1.04% while the 3-year bond yield is 0.73%. Markets are still pricing in one more rate cut from the Reserve Bank (RBA) this year.
Foreign Exchange: The US dollar index touched its 3-year high overnight, boosted by fresh positive sentiment surrounding China’s response to the coronavirus and positive housing market data in the US. The US dollar index advanced 0.2% to 99.599.
The yen tumbled after core machine orders for December signalled that the Japanese economy was on very weak footing before the coronavirus outbreak. GDP fell at an annualised 6.3% in the December quarter, increasing the chance the economy will dip into a technical recession this year.
Currencies across the region fell, including the Australian dollar which was down 0.1% to US$0.6676 this morning.
Commodities: Oil prices rose as Chinese refineries cut back production in the face of weaker demand. Sanctions on Rosneft Trading and escalating tensions in Libya further threatened supply.
Precious metals continued their winning streak. Gold rose above US$1,600 while Palladium rose 3.6% to an all-time high.
Australia: The wage price index rose 0.5% for the third consecutive quarter in the December quarter of 2019. On an annual basis, wage price growth remained at 2.2%, reflecting continued spare capacity in the labour market amid sluggish economic growth.
Growth was muted in both the public and private sectors. Private sector wages rose 0.5% while the public sector saw a 0.4% increase. It was the first time quarterly growth in the private sector wage price index outpaced that for the public sector since 2012. However, each sector’s wages are growing at a similar annual pace of 2.2%.
Wage growth varied across industries, but most remain subdued. The largest annual gain in the December quarter was again registered in healthcare and social assistance at 3.1%. The weakest pace of growth was in information, media & telecommunications at 1.6%.
Japan: Core machine orders dropped 12.5% in the year to December. It follows a rise of 18.0%, led by one-off demand for railway equipment. On a year ago, machine orders shrunk 3.5%. This series is a leading indicator of investment and suggests the Japanese economy was looking fragile before the COVID-19 outbreak.
United States: The US housing market continues to beat expectations in January. Housing starts fell by less than expected and permits surged. Housing starts were down 3.6%, following three straight monthly increases. On an annual basis, dwellings commenced are 21.4% higher. Permits rose 9.2%. An unusually mild winter has contributed to increased building activity, but the sustained level of demand does hint at underlying strength which could continue to fuel the US economic expansion.
Separate data released showed upward pressure on producer prices emerging. The producer price index rose 0.5% in January and is 2.1% higher over the year.
The FOMC minutes from the latest policy meeting showed that the Fed remains cautiously optimistic about the outlook for the US economy. They confirmed that rate hikes were off the table, but the upbeat view on the US consumer and dissipating US-China trade tensions has tempered their inclination for cutting. Fed Chair Jerome Powell said last week that it was too early to tell if the coronavirus impact was a big enough shock to warrant rate cuts.
Today's key data and events:
NZ PPI Q4 (8:45am)
AU Labour Force Jan (11:30am)
Employment Jan exp 5k prev 28.9k
Unemployment Rate Jan exp 5.2% prev 5.1%
Participation Rate Jan exp 66.0% prev 66.0%
UK Retail Sales Ex Auto Fuel Jan exp 0.8% prev -0.8% (8:30pm)
UK CBI Survey Jan exp -20 prev -22 (10pm)
US Philly Fed Index Feb exp 11.0 prev 17.0 (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