Markets have adopted a more cautious tone after the spike up in the COVID-19 coronavirus cases reported in China. US equities are flat, while global rates have ticked lower – apart from the UK where rates and GBP are much higher following some political fallout that might see an easier fiscal stance adopted. EUR continues to probe fresh lows, while the NZD and AUD are also on the soft side of the ledger.
The number of COVID-19 cases leapt in Hubei by nearly 15,000 for the day, taking the number of total confirmed global cases to over 60,000, based on a new methodology that counts people with apparent symptoms of the virus without necessarily having been tested positive via a laboratory result. A top WHO official said that many of the new cases date back days and weeks and don’t represent a sudden surge in new infections. On a like-for-like basis the number of new cases for the day dropped slightly to just over 1,500. Still, there remains some doubt about the true number of cases in China, which throws some caution into the wind about how broadly the disease will spread.
The economic fallout from the virus continues, with cancelled conferences and sporting events around the world, an increasing number of companies issuing profit warnings, additional quarantine measures and extended work suspensions. An early read on how China economic data is being affected was provided by the release of auto data that showed sales dropping by a record 22% y/y in January and the China Passenger Car Association forecasting a decline of 30% for February.
It was risk-off during the Asian trading session yesterday after the higher number of COVID-19 cases were reported, seeing the NZD spike down to 0.6429 and the AUD spike down to 0.6707. After recovering a little, these currencies have tracked sideways, with the NZD trading this morning at 0.6445 and the AUD at 0.6725. EUR has tracked lower overnight, falling to a fresh multi-year low of 1.0834. Its steady decline through February reflects the recent run of soft data, particularly against a backdrop of robust US economic data. The latest forecasts from the EU suggest more of the same, with euro area GDP growth expected at 1.2% for 2020 and 2021.
GBP has been the biggest mover over the day, after Sajid Javid quit as Chancellor after clashing with PM Johnson and his top advisor Cummings. He was immediately replaced by Rishi Sunak, a rising star in the party, previously employed by Goldman Sachs and hedge funds. UK bond yields and GBP rose overnight, with the market speculating that the new Chancellor will be friendlier towards fiscal expansion. Sunak’s voting history in Parliament suggests that his views are more aligned to Johnson’s than Javid’s were, and he is a supporter of corporate tax cuts, lower capital gains taxes and increased infrastructure investment. Against a backdrop of slightly lower global rates, UK’s 10-year rate is up 4bps to 0.65% while GBP is up 0.7% to 1.3060.
In economic news, US core CPI inflation in January was 0.2% m/m, as expected, but rounding pushed the annual figure to a stronger 2.3% y/y. This figure is running much stronger than the Fed’s preferred core PCE measure and won’t have any impact on its policy outlook. Initial jobless claims data remained near a historically low level, a healthy sign for the jobs market. The US 10-year rate Treasury yield fell to as low as 1.57% overnight, but has since recovered to 1.61% – up slightly since the NZ close but still down 2bps for the day.
NZ rates didn’t show much movement yesterday, with little follow-through from Wednesday’s chunky post-MPS moves. RBNZ messaging in post MPS interviews was in line with the Statement. In a Bloomberg interview, Assistant Governor Hawkesby confirmed that the Bank had a neutral policy bias. He expressed comfort if inflation spent some time above the mid-point of the 1-3% inflation target range, noting that policy would be slow to respond to higher inflation outcomes – the Bank wants to see inflation persistently around 2% or even higher before contemplating raising rates, adding that “we can stay on hold, keep rates low for a long time”.
In the day ahead, NZ’s manufacturing PMI is released this morning and after its dip back below 50 in December, we’ll be interested in whether it lurched down further, ahead of the beginning of the coronavirus impact. Tonight, Germany and euro-area GDP data for Q4 will look very soggy, while retail sales is the key data print for the US.