Coronavirus Outbreak Tops Busy List of Developments for Markets to Process

January 30, 2020

Several central banks held their first policy reviews of 2020. Those in Chile and Great Britain left their interest rate structures unchanged at 1.75% and 0.75%, respectively. The National Bank of Ukraine implemented its sixth rate cut in nine months, a 150-basis point reduction to 11.0%. The Central Bank of Sri Lanka engineered its third 50-basis point rate cut since May 2019, resulting in a deposit rate of 6.5% and a lending rate of 7.5%.

The first estimate of U.S. real GDP growth in the final quarter of 2019 of 2.1% annualized compared to the third-quarter level matches quarterly growth last summer and marks the third straight quarter with growth at or very close to 2.0%. Fourth quarter-over-4Q growth was 2.3%. Calendar 2019 average growth equaled 2.3% as well, lowest since 1916 and the second weakest result since 2013. The late-2017 massive tax cut has proven to be a real bust from the standpoint of securing enduring business investment has had been promised at the time. Non-residential investment (-1.5% versus 3Q) was down for a third straight quarter and produced the first on-year drop (-0.1%) in that critical component of aggregate demand since the initial quarter of 2016. Net exports contributed 1.5 percentage points out of the 2.1% GDP growth rate last quarter. However, that support resulted not from stronger exports, which were just 0.2% higher than a year earlier, but from declining imports, which plunged at an 8.7% annualized rate versus 3Q and fell 2.2% below the level in the final quarter of 2018. Government spending (up 2.7% versus 3Q and by 3.0% on year) boosted last quarter’s growth rate by half a percentage point, continuing its rapidly accelerating acceleration under Republican control of both the executive and legislative branches of U.S. government. It’s notable, too, that the price deflator for personal consumption went up only 1.2% on year overall last quarter and by 1.6% among core items. Both figures were smaller than year-on-year comparisons of inflation in the third quarter as well as in the final quarters of 2018, 2017, or 2016.

New U.S. jobless insurance claims fell 7k last week, resulting in a 4-week average of just 214.5k versus 233.5k in the four weeks through December 28th.

Economic sentiment in the euro area during January beat expectations, rising 1.5 index points to a 5-month high. Subindices for construction and industry were at 7- and 5-month highs. That for services dipped to a 2-month low, and the index for construction matched December’s 40-month low.

Unemployment  in the euro area slid 0.1 percentage point to 7.4% in December. Such had been 7.8% at the end of 2018.

The number of unemployed German workers unexpectedly slipped marginally in January. And the preliminary estimate of German CPI inflation this month rose 0.2 percentage points to a 6-month high of 1.7%, which nonetheless matches the consensus forecast of street analysts.

Business sentiment in Spain fell to a 3-month  low in January. Italian unemployment stayed at 9.8% in December. Such has been pretty level for several months now but is down from 10.4% last January and February.

Belgian real GDP grew 0.4% last quarter, same as in 3Q, but on-year Belgian growth in the quarter of just 1.2% was at a 6-year low. The Swiss leading economic index printed 3.7 index points higher in January and at a 13-month high.

Mexican real GDP was flat for a third straight quarter in 4Q19. On-year growth last quarter was negative 0.3%. Real GDP had advanced 2.1% on average in 2018 but fell 0.1% in 2019.

South African producer price inflation of 3.4% in December was the highest year-on-year advance since September.

Manufacturing sector business sentiment in South Korea rose sharply in the latest month, thanks to the Phase I trade deal between the U.S. and China, but the data do not reflect the coronavirus outbreak’s inevitable impact.

Australian import prices unexpectedly rose 0.7% last quarter. New Zealand posted a NZD 4.31 billion trade deficit last year, down from a deficit of NZD 6.16 billion in 2018.

The Bank of England’s policy rate has been 0.75% since a pair of 25-basis point hikes in November 2017 and August 2018. There were no changes made in 2019 or at this week’s first meeting of the Monetary Policy Committee this week. There were dissenting votes, however, but Saunders and Haskel, who have favored a 25-bp cut in each of the last three meetings. The MPC released the a rate decision statement and also published a new quarterly Inflation Report. Projected growth this year was reduced. Inflation is expected to hold below the 2% target until late 2021. Yet the Bank of England stands apart from the crowd of central banks that moved to a more expansionary monetary stance in 2019.

The National Bank of Ukraine statement stresses a strengthening currency and inflation that has dropped sharply and is now expected to hover below the 4-6% target band until late this year. The rate was cut 150 basis points to 11.0% today and previously had been reduced by 50 bps each in April, July and September of 2019 and then by 100 bps in October and 200 bps in December.

A statement from the Central Bank of Sri Lanka explaining today’s 50-basis point policy rate cut  speaks of well-anchored inflation within the 4-6% target, accommodative monetary policy in other countries, and a need to support recovering domestic demand in the face of external uncertainties.

The statement following a decision by the Central Bank of Chile to retain a 1.75% policy interest rate acknowledges both Chilean street protests and continuing international trade uncertainties. Inflation is hovering around 3% (2.5% for core), and an expansionary monetary stance is well-advised.

In market action today through 15:30 GMT, a notable development was the decline of the offshore yuan through the 7.0 per dollar level. Another eye-catching move was a 5.8% plunge in Taiwan’s reopened stock market. Share prices had also fallen by 0.9% in Indonesia, 0.7% in India, 1.7% in Japan and South Korea, and 2.6% in Hong Kong. European markets were down by 1.4% in France, 1.3% in the U.K., and 1.1% in Germany. Equity declines in the U.S. and Canada were quite small, by comparison.

The dollar had fallen 0.6% against sterling and the Swiss franc but risen 0.7% and 0.5% relative to the Australian and New Zealand dollars. Dollar losses amounted to just 0.2% relative to the euro and 0.1% versus the yen.

10-year sovereign debt yields were down 2 basis points in the U.S., Japqan and Germany but up 3 bps in Great Britain.

Among commodities, WTI oil had dived 2.0%, while gold had firmed 0.3%.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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