Equities consolidate on Friday night but S&P500 manages to make a fresh record high. Global rates fall after soft US retail sales release. New COVID-19 cases fall for a 3rd day in a row – should be a boost to risk assets to start the week

There wasn’t much movement in either equity or currency markets on Friday night while global bond yields fell after a softer US retail sales release.  Yesterday, China reported a fall in the number of new COVID-19 cases for the third consecutive day, which should provide a bid to risk assets to start the week.  However, trading activity is likely to be lower than usual with the US out for Presidents Day. 

The COVID-19 outbreak remains the market’s main focus.  Yesterday, China reported 2,009 new cases, bringing the total on the mainland to 68,500.  Encouragingly, yesterday was the third consecutive day with a lower number of new cases (using the new methodology), which may boost market confidence that the outbreak is starting to come under control.  Risk assets, the NZD and AUD, may open higher to start the week.  The death toll in China stood at 1,665 on Sunday. 

While the rate of change of new COVID-19 cases appears to be declining, many protective measures to stop the spread of the virus remain in place, so the economic fall-out will be meaningful, at least on a short-term basis.  A Reuters’ poll on Friday showed that Q1 Chinese GDP was expected to slow to 4.5%, down from 5.9% in Q4, before recovering to 5.7% in Q2.  To cushion the impact on the economy, China is expected to add more fiscal stimulus, with Finance Minister Liu Kun writing over the weekend that the government would implement “targeted and phased” cuts to taxes and expenses for businesses.  Here in New Zealand, the government announced over the weekend that it was extending the travel ban for those foreign residents coming from China for another 8 days, as a precautionary measure.  

On Friday, risk asset markets consolidated gains from earlier in the week.   The S&P500 rose 0.2% on Friday, closing at a fresh record high.  There was support for US equities late in the session from a CNBC report that the US administration was considering a proposal to incentivise retail investment in the stock market by ring-fencing a certain amount from tax.  With the Democrats holding power in Congress, there is no chance of any such measure this side of the election in November.  Elsewhere, China’s CSI300 index had earlier gained 0.7%; it now stands around 5% off its recent highs. 

Commodity markets were mixed on Friday but up strongly on the week (Brent crude oil +5%, copper and nickel +2%), suggesting that market participants have become less pessimistic about the economic fall-out from COVID-19. 

Global rates declined on Friday, partly due to a soft US retail sales release.  The retail sales “control group”, which is an input into GDP, was unchanged in January, while prior months were also revised lower.  As a result, the Atlanta Fed’s estimate of Q1 GDP was shaved down from 2.7% to 2.4%.  Despite the miss on retail sales, the fundamentals for the US consumer remain supportive given robust income growth and elevated levels of consumer confidence (the University of Michigan consumer sentiment survey released on Friday rose to near its highest level in 16 years).  The 10 year Treasury yield was 3bps lower on the day, at 1.58%, and unchanged on the week.  Rates markets continue to suggest a more cautious economic outlook than equities. 

FX moves on Friday were minimal, with most currencies closing within 0.1% of their previous day’s levels against the USD.  The EUR continued to grind lower and is now trading near its lowest level since mid-2017, at 1.0830.  European economic data remains soft, with Euro-area wide GDP up just 0.1% in Q4 and German GDP unchanged.  The Bloomberg DXY index is trading near 2½ month highs and has gained more than 2% this year. 

Commodity currencies were broadly unchanged on Friday but higher on the week, reflecting less market pessimism around COVID-19.  On the week, the NZD, AUD and Norwegian krona were all up 0.6% while the CAD was 0.4% stronger.  The NZD closed the week just under 0.6440. 

In domestic data, the NZ PMI remained in contractionary territory in January, at 49.6, up marginally from the previous month.  It’s appears too early for the survey to capture the economic consequences of COVID-19 with only two respondents specifically mentioning the “coronavirus” as a negative influence on their business.  Next month’s survey will be closely watched.  Meanwhile, food prices increased a sizeable 2.1% in January and we nudged up our Q1 CPI forecast as a result, to 0.4% q/q and 2.1% y/y. 

NZ rates fell 3 to 4bps on Friday, reflecting both global forces and some reversal of the moves seen after the MPS.  The market continues to price around a 50% chance of an OCR cut this year.  We think that this rate cut pricing will be pretty sticky, at least until concerns around the coronavirus subside. 

In other news, the US administration announced it would increase tariffs on aircraft imports from the EU from 10% to 15%.  The decision relates to a prior WTO ruling that the EU provided state subsidies to Airbus.  Encouragingly, the US chose not to increase tariff rates on other imported goods in a sign that Trump doesn’t want trade conflict to jeopardise the economy and stock market ahead of the election. 

There isn’t much of note in NZ in the week ahead.  The PSI (the services equivalent of the PMI) is released this morning and we will be watching the Global Dairy Trade fortnightly auction on Wednesday (dairy prices fell around 5% at the last auction).   In Australia, employment and wage data is released.  Our NAB colleagues look for the unemployment rate to nudge up to 5.2%, in-line with consensus, and for wages to increase at a subdued 0.5% pace in Q4.  There is only second-tier economic data in the US but there are 12 speeches from Fed officials and the minutes to the last FOMC meeting are released.  The flash European PMIs will be a focus on Friday night.