Duncan Donald

Mon, Jan 28

KYLIN TALK | Weekly Markets Update 28.01.2019

As we finally close in on an end to the US shutdown the question remains, what will the impacts be to the US economy. The effects of the shutdown really started to bite last week with severe disruption to the economy, with many flights at US airports grounded.  Donald Trump finally had to concede defeat, with the shutdown now paused until February 15th. In his long fight to build a border wall with Mexico funded by the Government, the Democrats spearheaded by Nancy Pelosi managed to exercise their veto. With the shutdown and non-payment of Government staff reaching 32 days, the impacts this would bring to the economy and household were drawing serious concern. The detrimental impact this could cause GDP would have been a strong contributor to the President’s concession, with it estimated that a -0.13 decrease in GDP could be seen for every week of the shutdown. Naturally, this has had a dragging effect on the US Dollar.

However, the shutdown was not the only negative factor for the US Dollar last week, as it was reported we could see the US Federal Reserve (FED) return to an even more dovish stance. Having previously received presidential scorn and seeing the stock markets plunge in the last quarter of 2018, the FED albeit reluctantly, relaxed the pace of interest rate appreciation, opting to sit back as the market dealt with external pressures before resuming the cycle.  However, it is somewhat surprisingly reported, that this may be taken a step further when Jerome Powell’s committee meet on Wednesday, with them possibly signaling that they are closer than expected to ending their balance sheet unwind. During last Friday’s session this brought further depreciation in the US Dollar, giving equity markets the boost needed to advance. In some cases, the major averages have surpassed the losses brought by the impacts of shutdown, as the S&P closed the week near 2,675 and the Dow Jones made a weekly high above 24,750.

A rather quiet meeting at Davos concluded without any significant market impact, mainly due to key members being absent, with the US opting not to attend due to internal shutdown and external trade negotiations. The UK also abstained from attendance, as UK PM Theresa May closed in on the House of Commons vote on her revised Brexit Deal. With little tangible progress noted ahead of this vote, the market relies on rumors and sources reports, but if we look at the pound in isolation, it has soared not only against the ailing US Dollar, touching the 1.3200 level not seen since October, but also versus all major currencies. This comes as the market perception is that the PM is gaining support from internal party factions that had previously voted against her deal and are now giving serious consideration to voting for her deal, if the possibility of “No Deal” is taken off the table and Article 50 is extended to renegotiate the Irish border backstop. We will see the Parliamentary vote on Tuesday this week, and with the appreciation seen from the current optimism, the volatility risk surely lies with a downside correction, if that optimism proves to be misplaced.

Last week brought Central bank meetings of the monetary policy committees of Japan and the Eurozone. Both chose to keep interest rates at current levels. Whilst Japan’s event passed with limited market impact, as is typical, Mario Draghi’s statement brought volatility. Having taken the step of warning the market that the committee had concerns over growth that would hamper their path to interest rate normalization (a return to higher interest rates), he again took the chance to underline that notable uncertainty still weighs on the Eurozone and that significant monetary stimulus in the form of quantitative easing is still required. This brought the Euro down to 1.1300 against the US Dollar, only for it to retrace on Friday following US Dollar weakness.


The week Ahead

Monday – There will be speeches from two prominent central bankers as the European Central Bank’s Mario Draghi and The Bank of England’s Mark Carney speak early in the session.  Later in the day we receive Australian business confidence data and Trade balance data from New Zealand.

Tuesday - With the shutdown ended we expect the resumption of US data and the test of this will be Tuesdays US Consumer Confidence numbers. It is forecast to decline to 124 from 128.1. In the UK afternoon session, we will have the House of Commons vote on UK PM May’s current Brexit plan.  Late in the day we see Australian CPI data expected in line with last quarter’s 0.4%, but a slight drop to 1.7% from 1.9% in the year-on-year number.

Wednesday – A busy day which starts with UK Mortgage Approval and Money Supply Data, Eurozone key sentiment data and German, Italian and Spanish 10 year bond auctions. In the afternoon we receive the US GDP data, which is forecast to show a decline for Q4 from 3.4% to 2.5% and ADP Nonfarm Employment data estimated at 170k versus 271K last month.

In the evening we have the Federal Reserve Interest Rate decision, unanimously expected to remain unchanged, but naturally all eyes will be on Chairman Jerome Powell’s statement that follows it.

Thursday – We start the day with Chinese Manufacturing and Non- Manufacturing PMI’s. There is a raft of Eurozone data out in the morning, including Spanish CPI and GDP, French CPI and most significantly German Employment data and Eurozone GDP. In the afternoon we receive US Employment cost data, PCE Deflator and Personal Income and Spending data, as well as Canadian GDP.

Friday – The day starts with PMI data from Germany, the UK and the Eurozone. The afternoon session brings one of the biggest monthly data events from the US as we receive the Non-Farm Payrolls, which after such a strong November reading at 312K is expected to normalize to 160k. At the same time we get the US Unemployment data which is forecasted to remain at 3.9% and Average Earnings, which is also forecast unchanged at 3.2%.