Yesterday’s G7 statement implied that there will be no coordinated macro policy response to the coronavirus epidemic from the major economies. And the Fed’s subsequent emergency 50bps rate cut smacked of panic. So, on Wall Street, stocks tanked (the S&P500 closed down 2.8%) and USTs rallied. However, the relatively strong performance of Joe Biden in the Super Tuesday primaries, which placed him firmly back in contention to take the Democrat Presidential nomination, gave investor sentiment a little boost. But while markets in Asian time appeared to regain some of their poise, the mood in Europe this morning remains relatively downbeat.
So, European equities have opened weaker at today’s opening, contrasting with the rise in US stock futures and a more stable showing by Asian equities today. Indeed, as Korea’s government unveiled a fiscal stimulus to tackle the impact of the coronavirus, the KOSPI rose more than 2% to be the standout. Despite an extraordinary plunge of more than 25pts in the Caixin services PMI in February to a series low of just 26.5, and before the release just now of some dire Chinese car sales data (down a record 80%Y/Y in February) which hit stocks of Europe’s car manufacturers, China’s CSI300 closed up 0.6% to move back into positive territory for the year to-date. And as the yen eased back from yesterday’s five-month high through ¥107/$, while BoJ Governor Kuroda restated his commitment to take action if necessary and acknowledged that the virus was already taking its toll on the economy, the TOPIX clawed back most of its initial losses to close down just 0.2%.
But with no shortage of known unknowns about the coronavirus (How far will the epidemic spread, for how long and to what severity? And with what impact on economic conditions and earnings?), bond markets continue to err on the side of caution, and anticipate further easing to come. So, USTs have gained again, with 10Y yields currently back close to 0.95%, only a few bps above yesterday’s record low. And 2Y yields are down to 0.66%, while futures markets are pricing another cut of 25bps or more at the Fed’s next scheduled meeting on 18 March. Elsewhere, JGB yields are down about 3bps from between 2-10Y on the curve. With further easing by the RBA expected next month despite a stronger-than-expected Aussie GDP print (see below), yields on ACGBs are about 7bps lower up to 10Y maturities. And with the exception of BTPs, euro area govvies are firmer. And Gilts are stronger too ahead of a parliamentary testimony by Andrew Bailey, who will take over as Governor of the BoE in twelve days’ time.
While the final Japanese services PMI for February offered a modest upwards revision to the headline index from the flash release (+0.1pt), the underlying message from today’s survey remained very downbeat not least as the coronavirus outbreak took its toll on the hospitality and travel sectors. Indeed, the headline index was still down more than 4pts on the month to 46.8, the lowest level since April 2014 and signalling marked contraction in February. Moreover, there was a notable downwards revision to the new orders component, down a striking 1.1pts from the flash estimate, to leave it more than 6pts lower than January at 46.5, the weakest reading since mid-2011. So, while services firms were reportedly slightly more upbeat about jobs growth, we would expect this to deteriorate significantly over coming months as services activity will remain hindered by travel restrictions, cancelled events, closure of major attractions and the extended school break. Taken together with Monday’s final manufacturing PMI – which saw the output component revised down by 0.1pt from the flash release – today’s survey brought no change to the final composite index, which stood at 47.0, 3.1pts lower than January and consistent with the steepest pace of contraction in economic activity since the April-2014 tax hike.
Ahead of the release later this morning of the equivalent euro area figures, Germany’s January retail sales numbers published a little while ago aligned with expectations. In particular, in real terms, following a marked drop of 2.0%M/M at the end of 2019, Germany retail sales rose 0.9%M/M in January to be up a respectable 1.8%Y/Y and 0.4%3M/3M. The euro area sales figures also seem bound to have picked up at the start of the year following weakness at the end of 2019. The 1.6%M/M decline reported in December is also likely to be revised up. However, these data might offer little guide to the outlook for consumption growth in Q1, as the recent surge in coronavirus cases is likely delivering a significant hit to household spending on services.
Today will also bring final services and composite PMIs for February from the euro area and selected member states. These typically have a slightly longer collection period than the equivalent manufacturing survey and therefore might have seen a modest share of firms respond after the surge in Italian coronavirus cases. But overall, we expect to see only modest downward revisions to the services and composite indices, from the four-month high of 52.8 and six-month high of 51.6 reported in the respective flash estimates.
The main UK economic release today will be the final services PMIs. After the equivalent manufacturing survey brought a modest downwards revision on the back of heightened coronavirus concerns, the longer survey data collection period might trigger a more notable downwards revision to the services PMI (which already fell 0.6pt in the flash estimate to 53.3). As such, we might well see the composite output PMI revised down from the 53.3 level recorded in both January and the flash February release.
More importantly perhaps, Wednesday’s appointment hearing for incoming BoE Governor Andrew Bailey before the Treasury Select Committee will be watched closely for any hints into his preference for near-term policy action ahead of his first MPC meeting at the helm on 26 March. We would consider Bailey to be a conservative choice of Governor, but would not expect him to stand in the way of a rate cut later this month. Deputy Governor Ben Broadbent is also scheduled to speak in London this evening. And in the markets, the DMO will sell 5Y Gilts.
In the US, today will bring the non-manufacturing ISM and final Markit services PMIs for February. While the ISM is expected to point to ongoing steady expansion, risks to this forecast are skewed to the downside following yesterday’s weak manufacturing ISM. Certainly, the flash services PMI fell sharply to 49.4, the first contractionary reading for four years and the weakest since October 2013. Meanwhile, ahead of Friday’s BLS payrolls report, today will also bring the ADP employment survey, expected to report an increase of 170k following the surge of 291k in January. The Fed’s latest Beige Book is also due.
The Q4 national accounts figures came in a touch stronger than expected, with headline GDP growth rising to 0.5%Q/Q. But this still marked the softest quarterly growth for three quarters. Nevertheless, it also left output 2.2% higher than a year earlier, the firmest annual rate for a year and marginally stronger than the RBA’s forecast of 2.0%Y/Y, albeit still below trend.
Within the detail, while household consumption picked up slightly in Q4 (0.4%Q/Q) it remained disappointingly subdued given ongoing growth in employee compensation (1.0%Q/Q, 5.1%Y/Y). Indeed, it left annual household spending growth unchanged at just 1.2%Y/Y, the joint-weakest reading since Q109. Government consumption continued to slow (down 0.4ppt to 0.7%Q/Q), while public sector investment fell (-0.4%Q/Q) for the first quarter in Q4. And private investment remained a significant source of weakness (-1.1%Q/Q) having failed to grow in each of the previous six quarters. As a result, final domestic demand added just 0.1ppt to quarterly GDP. And with exports having failed to grow in Q4 for the first quarter in four, net trade was merely boosted by a drop in imports (-0.5%Q/Q). So, the most significant positive contribution came from private sector inventories (0.2ppt).
Of course, economic output was impacted around the turn of the year by the escalation of the bushfire crisis. And with activity in certain sectors – notably tourism and education – having been subsequently significantly hit by travel restrictions associated with the coronavirus outbreak, we would expect to see a notable weakening in growth in Q1, and possibly beyond.