China’s markets reopened from the Lunar New Year holiday and were inevitably in catch up mode as the number of reported cases of coronavirus continued to rise at a double-digit percentage daily rate. So, having been shut since 23 January, China’s stocks predictably plunged at the open, with the CSI 300 index closing almost 8% lower on the day to mark the largest one-day drop since 2015. This move came even as the Chinese authorities unveiled several support measures in an attempt to ensure ample market liquidity and continued supply of credit, with the People’s Bank of China injecting 1.2trn yuan, the largest single-day cash injection going back to 2004 (admittedly in net terms the addition was relatively modest, with more than 1trn yuan of short-term funds maturing today) and cutting rates on its 7- and 14-day reverse repos by 10bps to hint at cuts on its main policy rates ahead. Other Asian equity markets started the week on the back foot too, with Japan’s TOPIX down 0.7% as the final manufacturing PMI was revised lower and domestic vehicle sales disappointed again. Bucking the trend, however, Hong Kong’s Hang Seng closed marginally higher (0.2%) on the day, underpinned by a jump in shares of healthcare firms.
With US stock futures higher in the wake of the PBoC’s action, however, UST yields also rose 2-2½bps across the curve. But at around 1.52%, 10Y yields are still about 4bps lower than this time Friday. JGBs are weaker at the long end of the curve, after the announcement late at the end of last week that the BoJ had reduced the number of purchase operations for 10-25Y bonds this month. But euro govvies have opened with a mix of modest gains and losses, seemingly impervious so far to events abroad. Finally, ACGBs followed Friday’s moves in USTs, making gains despite a further decrease in Australian prices which tallied with widely held expectations that the RBA will leave its cash rate unchanged tomorrow. Beyond the RBA announcement, the main economic news this week will come from the US, where a busy week of data includes the ISM indices and payrolls while the Fed will also publish its latest semi-annual monetary policy report to Congress.
A relatively quiet start to the week for Japanese releases brought the final manufacturing PMIs for January, which brought a downwards revision from the initial release. In particular, the headline index came in ½pt lower than the flash estimate at 48.8, nevertheless 0.4pt higher than December. The output PMI was similarly revised lower (by 1.1pts) to 48.2, still more than 1pt higher than in December, while the new orders index was 0.4pt higher on the month at 47.0 with a marked increase in the new export orders component (up 2.3pts) to 49.3, a fourteen-month high. The survey also reported a notable improvement in business sentiment at the start of the year, with output expectations for the coming twelve months the highest for seventeen months.
While the PMI survey therefore pointed to improvement in Japan’s manufacturing sector at the start of the year, it was conducted before the coronavirus gained prominence. And not least given expectations of a hit to demand for Japanese goods from China (which account for almost one fifth of total goods exports), we would expect sentiment among Japanese manufacturers to take a notable turn for the worse this month. This is also likely to be the case in the services sector. Indeed, while January’s final services PMI release (due Wednesday) might bring a downwards revision to the flash estimate, which was 3.7pts higher than December at a four-month high of 52.1, it is unlikely to reflect intensified concerns surrounding the virus and the associated impact on Japan’s hospitality sector in particular. As we highlighted in last week’s Yen 4Sight, risks to Japanese economic activity in the first quarter of the year have become more skewed to the downside.
Today’s vehicle sales figures also suggested a disappointing start to the year, with sales down more than 11%Y/Y in January, the fourth consecutive year-on-year decline and a steeper pace of contraction than in December. The back end of the week, meanwhile, will bring an update on overall household expenditure at the end of last year, with the BoJ’s consumption activity index and household spending figures for December due on Friday. That day will also see the release of the latest labour earning figures, as well as the Cabinet Office’s composite business indicators for December.
For what it’s worth, the Caixin manufacturing PMI fell 0.4pt in January to a six-month low of 51.1, still nevertheless consistent with expansion. With a cut-off date of 22 January for the survey, however, it certainly could not sufficiently report the full impact of the coronavirus on activity and we should expect a significant weakening in the February PMIs. Indeed, a strong improvement in the business expectation index looks incongruous, and likely responded to initial relief at the first-phase US-China trade deal. Despite that deal, the new export orders PMI fell back into contraction territory while the overall new orders index suggested a softer pace of growth. Looking ahead, the Caixin services PMIs are due on Wednesday while the January trade report will be released on Friday.
The euro area’s data calendar this week will bring a mixed bag of economic data, many of which are likely to be soft. Among the more notable releases will be those offering insights into industrial sector activity at the end of 2019. In particular, Germany’s factory orders figures for December will come on Thursday, with German and French IP and goods trade data for the same month coming the following day. And, overall, these are likely to point merely to stabilisation in the sector as opposed to significant expansion. Indeed, while German factory orders are expected to have increased about ½%M/M, that would leave them little changed on the quarter in Q4. And not least given ongoing weakness in car production, the expected small drop in German IP would leave it down in Q4 for a sixth successive quarter.
Meanwhile, euro area retail sales figures for December, due on Wednesday, seem bound to post a substantive decline due to the steep drop reported in Germany. And that could leave sales down in Q4 for the first quarter since Q415. Other data due include the final January PMIs (this morning and Wednesday). The flash estimates suggested improvement in the manufacturing sector but weakening in services and so the euro area composite PMI was unchanged at 50.9 to imply no overall improvement in overall growth at the start of the year.
This week will also bring appearances by several ECB policymakers including Christine Lagarde, who will speak publicly today, Wednesday and Thursday.
After last week’s excitement from the BoE MPC meeting, which saw policymakers eschew a further rate cut despite greater pessimism about the economic outlook, this week should be quieter for UK economic news. The final January PMIs in the first half of the week will nevertheless attract some attention. The flash manufacturing and services surveys certainly exceeded expectations, with the respective headline indices up 2.3pts to a nine-month high of 49.8, and 2.9pts to a sixteen-month high of 52.9. The construction PMI (due tomorrow) will also tally with increasing signs of stabilisation in the housing market. And we would expect the final composite PMI (Wednesday) to confirm a return back to expansionary territory for the first month in five – indeed, the flash estimate was up 3.1pts in January to 52.4, its highest since September 2018. Wednesday will also bring new car registrations figures for January, which might also report another month of positive growth as near-term uncertainties have receded somewhat.
Following Brexit Day at the end of last week, today will see the focus shift to the negotiations over the future relationship between the UK and EU, which will formally kick off early next month. Among other things, Boris Johnson will today set out the opening UK position for the negotiations in a speech that is likely to feature his usual mix of bluster and obfuscation. He will likely restate his desire for a quick and simple Free Trade Agreement – based on the EU-Canada relationship – to provide for tariff-free goods trade while allowing the UK significant freedom to diverge from EU rules. Ad hoc deals on fishing rights and financial services will also be sought.
The EU is also set to publish its own mandate, which – in marked contrast to Johnson’s contribution – is likely to be transparent, specific and technical. This will also likely call for a more substantive arrangement involving shared institutions and detailed procedures, and would also incorporate substantial Level Playing Field rules to constrain the ability of the UK to diverge from EU rules without significant consequences. While this would be fully consistent with the detail Political Declaration agreed by Johnson at the end of last year, the UK PM will insist that he is willing to walk away without a deal – and thus impose WTO rules, representing significant tariff hikes and other new barriers to trade – if this is the best the EU can offer.
It will be a busy week for US top-tier economic releases. This afternoon kicks off with January’s manufacturing ISM, which, despite some reversal of the sharp drop seen in December, is expected to remain in contractionary territory. In contrast, the final Markit manufacturing PMI is expected to confirm a further decline in January, albeit to a level still consistent with expansion. Today will also bring construction spending figures for December, followed by revised durable goods and trade data for the same month tomorrow and Wednesday respectively. The non-manufacturing ISM and final services PMI for January are also due on Wednesday, both of which are expected to remain comfortably in expansionary territory.
That day will also see the release of the latest ADP employment report, while Challenger job cuts and weekly jobless claims figures are due Thursday. Of course, of greater significance will be Friday’s non-farm payrolls report, which is expected to show a slightly stronger increase in January (160k) than December, albeit a touch below the average for the past year as whole. The unemployment rate will likely move sideways at 3.5%, while average weekly earnings growth is expected to be little changed at 2.9%Y/Y.
Friday will also see the Fed publish its semi-annual Monetary Policy Report, which will be followed by Chair Powell’s testimony to the Senate and House committees on 11/12 February. Meanwhile, the Fed’s Quarles will speak on monetary policy and the economic outlook on Thursday.
The main event in Australia this week will be the RBA policy announcement tomorrow. Despite concerns about the impact of the bushfire crisis not least on confidence and tourism, the impact of the coronavirus on Chinese demand, and still subdued inflation, the stronger employment report a couple of weeks ago saw expectations of an imminent rate cut fall considerably. And, while there would be justification for a further cut – the RBA is likely to continue to forecast sub-target inflation across the projection horizon when it publishes its quarterly Monetary Policy Statement on Friday – on balance, the RBA will likely want to wait a little longer for further more information about the various impacts on activity and inflation from recent shocks before easing policy further. As such, while we expect the cash rate to be left unchanged at 0.75% this week, the policy statement will no doubt continue to leave the door open for further easing in due course. And Governor Lowe’s post-meeting speech and semi-annual testimony to the Parliament Committee (on Friday) might also have a dovish tone.
In terms of data, the latest corelogic home price figures released earlier today supported the case for no change to policy, with a seventh consecutive monthly increase in prices in the major cities. In particular, median city home prices rose in January by 0.9%M/M. While that was the softest monthly increase since July, it still left prices up 4.1%Y/Y, the biggest annual rise since December 2017. Prices rose in every capital city, with further strong rises in Sydney (1.1%M/M) and Melbourne (1.2%M/M) but still very modest increases in Perth and Darwin (both just 0.1%M/M). While the more favourable price environment should support future construction sector activity, currently that sector remains weak. Indeed, today’s building approvals data reported a drop of 0.2%M/M in December, although that still left the annual rate in positive territory (2.7%Y/Y) for the first time since June 2018.
At face value, today’s other notable data appeared more favourable, with a 3.8%M/M rise in the ANZ measure of job advertisements in January. That was the first monthly increase since September, but was insufficient to reverse the 5.7% drop in December. As such, it left the level of vacancies at the second-lowest level since September 2016. Looking ahead, Thursday’s release of the trade report and retail sales figures for December will also be worth watching.