Market rout continues

Emily Nicol
Chris Scicluna

Overview:
The rout continues. After yesterday’s shocker on Wall St, the fear factor has only magnified today in Asia and Europe. With the number of coronavirus sufferers in Korea topping 2000 and new cases found in several new countries including for the first time in sub-Saharan Africa, it’s hard to see what might possibly shift the mood ahead of a weekend that seems more likely than not to bring further bad news about the epidemic.

The markets are now pricing three rate cuts this year from the Fed – with the first coming as soon as next month – and at least one cut apiece this year from the BoJ, ECB, BoE, and RBA. While such action wouldn’t be able to address the supply-side damage from the spread of the epidemic, it might well, in due course, be required to ease funding costs for cash-constrained businesses and households, and seek to negate the tightening of financial conditions that has ensued. Coordinated monetary policy action might also give a helpful signal of determination of the major central banks to do ‘whatever it takes’ to try to restore confidence and support economic activity. But right now, it’s hard to believe that such action would make a sustained difference to the market mood.

Markets:
So, Asia’s stock markets opened sharply lower and failed to recover the lost ground thereafter, with the TOPIX closing down 3.65% to take the loss over the week to just shy of 10%. Most other major equity indices in the region chalked up losses in that ballpark (e.g. the KOSPI closed down 3.3%). Moving westwards, Turkey’s main stock market index opened 10% lower. And needless to say, European equities have taken a hiding when they opened this morning – the Stoxx Europe 600 is so far down 3%. US futures point to further losses later today.

Inevitably, major sovereign bonds continue to rally hard, with UST yields down 5-6bps across the curve. So, UST 2Y and 5Y yields have fallen to 1.00% for the first time since 2016 when the range for the Fed Funds Rate was still just 0.25-0.50%. And longer-dated UST yields are plunging new record lows (10Y yields now close to 1.20%).

Elsewhere, JGBs fell 4-6bps across the curve, with 2Y yields below -0.27% and 10Y yields below -0.15% (the BoJ confirmed that it will maintain its JGB purchases next month at the same pace as in February). ACGB yields are down similarly (10Y yields now down to a new record low close to 0.81%). And most core euro area govvies have made gains so far this morning (10Y Bund yields down 4bps to -0.59%), while BTPs continue to sell off (10Y yields up about 9bps to above 1.16% so far this morning). 

In FX markets, the yen has regained its status as a key beneficiary from the flight to quality, appreciating through ¥109/$ for the first time in more than three weeks. The trade-weighted dollar continues to trend steadily lower as the allure of Wall Street dims. Brent crude is below $51, down from $60 just over a week ago.

Given the major health risks from the coronavirus, and against the dire market backdrop, the economic data remains absolutely of secondary interest. Nevertheless, here’s the usual round-up, including a stocktake in Japan, on what was the busiest day of the month for new releases…

Japan:
At face value, today’s Japanese industrial production and retail sales figures came in a touch stronger than expected. But overall, even before the hit to global demand and supply from the outbreak of the COVID-19 coronavirus, they pointed to an economy struggling to gain momentum in the aftermath of October’s consumption tax hike. And as today’s labour market figures also flagged some weakness at the start of the year, the Tokyo CPI figures further illustrated the persisting very subdued inflationary outlook.

Indeed, while the 0.8%M/M rise in total industrial production in January marked the second successive increase and exceeded market expectations, it fell well short of manufacturers’ forecasts at the end of last year. And it still left output down around 2½% on a three-month basis and also compared with a year earlier. Moreover, the detail of the report was disappointing too.

For example, the improvement in output in January was more than fully accounted for by an acceleration in autos and aircraft part production (this left total transport equipment output up 6.6%M/M, the strongest monthly increase for almost two years). In contrast, general and electrical machinery production fell for the third month out of the past four, while output of ICT equipment posted the seventh monthly decline out of the past eight.   

Surprisingly, the METI’s survey suggested that manufacturers remained optimistic about the near-term production outlook, projecting growth of more than 5%M/M in February. But even adjusting for the usual upwards bias, the forecast of near-4%M/M growth in output this month looked highly unlikely. Indeed, January saw a further modest increase in manufacturers’ inventories (1½%M/M), driven by a near-16½%M/M rise in the autos sector. So, while there was a small reduction in the inventory-shipment ratio at the start of the year (from the 10½-year high reached in December) it still implied significant double-digit year-on-year declines in production through the first half of 2020.

A weak outlook seems highly likely now given the subsequent hit to Chinese economic activity over the past month, which will weigh on Japanese production through both demand and supply. And with the number of reported coronavirus cases rising in Japan – at a daily rate of around 14% over recent days – we wouldn’t be surprised to see factories reduce working hours and/or shut in the event of more widespread contagion of the virus. Certainly, a third consecutive quarterly contraction in manufacturing output seems on the cards for Q1.    

Like IP, January’s retail sales figures showed modest signs of recovery, with spending up for the third consecutive month and by 0.6%M/M. The detail showed that sales of household appliances were improved, but sales of clothing and other general merchandise fell back again. And overall, this still left the level of sales down more than 3%3M/3M and a touch lower than a year earlier too. Retail sales seem bound to take a notable turn for the worse in February as the travel ban from China and Hong Kong came into effect from the end of January – together those countries  account for almost one third of spending by overseas visitors to Japan.

Certainly, Japan’s Department Stores Association in the past week noted that tax-free purchases by foreign shoppers in the first 17 days of February were down a whopping 70%Y/Y. While this might well be distorted by the timing of the Lunar New Year, it doesn’t bode well for Japanese exports of services. With no end to the travel ban insight, major tourist attractions (i.e. Hello Kitty Land and Tokyo Disney Land) having closed for business through to the middle of March at least, and the government recommending the cancelation of major cultural and sporting events, retail sales seem bound to remain subdued for several months to come too. 

Of course, this will likely have a knock on effect on the labour market. But January’s figures were also on the soft side, with the number of people employed falling (-250k) by the most in thirteen months. Admittedly, this followed a cumulative rise of 600k since June. Nevertheless, the unemployment rate rose 0.2ppt to 2.4%. And the notable drop in the number of new job offers, which fell 15%M/M to their lowest level for more than six years, was widespread across sectors and raised significant concerns about near-term jobs prospects. Indeed, this saw to ratio of total job offers to applicants fall from 1.57 to 1.49, the lowest since mid-2017 – not overly encouraging as we head into the annual Shuntō spring wage offensive. 

Against this backdrop, today’s Tokyo CPI figures further illustrated a clear lack of upwards inflationary impulses in February. In particular, headline inflation in Tokyo declined a steeper-than-expected 0.2ppt to 0.4%Y/Y. And when excluding the impact of the consumption tax hike and government policies, headline inflation fell to just 0.1%Y/Y, the lowest since October 2017. The BoJ’s forecast measure of core inflation (excluding fresh foods) similarly dropped 0.2ppt to 0.5%Y/Y (0.2%Y/Y on an adjusted basis, which was the lowest since June 2017). Perhaps unsurprisingly given the recent oil price adjustment, the weakness in part reflected lower energy inflation, with the annual rate of decline the steepest for three years. But there was also evidence of weaker demand from the outbreak of the coronavirus distorting price distortions too, with the largest annual decline in hotel charges since late-2011, related to a more than 9 ½%Y/Y drop in charges for package tours. A trend that seems likely to continue for some time to come too.      

Euro area:
While focus will undoubtedly remain on the magnitude of new coronavirus cases across the euro area, today will also bring flash CPI estimates for February from the largest three member states. These are expected to show that headline inflation in each country eased back this month or moved sideways as energy price inflation moderated. French figures, just released, showed that the EU-harmonised rate fell 0.1ppt to 1.6%Y/Y. A similar rate of decline is expected in the German data later today to 1.5%Y/Y, while the Italian rate is forecast to remain unchanged at a very weak 0.4%Y/Y. Today will also bring the latest German unemployment figures for January. 

UK:
In the UK, meanwhile, this morning brought the latest GfK consumer confidence for February, which showed a further modest improvement in household sentiment this month against the backdrop of low unemployment, reduced political uncertainty and rising housing prices. Indeed, the headline index increased 2pts to -7, its highest reading since August 2018. Households were reportedly more upbeat about the UK’s general economic conditions over recent months and looking ahead – indeed, the index for expectations over the coming twelve months rose 3pts in February to -21, 17pts above its level a year ago. And so, there was a notable pickup in households’ willingness to make major purchases – the relevant index rose 5pts on the month to +6, albeit only marginally stronger than a year earlier.

But today’s survey was conducted during the first half of the month, therefore before the escalation of the coronavirus outbreak across Europe. And as BoE Governor Carney noted in an interview with Sky TV this morning, there is already evidence that tourism is being impacted, while supply chains at firms are becoming tighter. And while he stated that it was still too soon to access the likely economic impact, he noted that the Bank would expect global demand to be lower than it otherwise would have been, which will have a knock-on effect on the UK economy.

US:
In the US, today will bring advance goods trade and wholesale inventories figures for January, as well as personal income and spending data, including the closely-watched deflators, for the same month. The updated University of Michigan consumer sentiment survey for February is also due. Elsewhere, the Fed’s Bullard will discuss the US economy and monetary policy. 

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