Fed notes recent growth slowdown

Chris Scicluna

US equities sharply weaker as valuation worries grow & Fed notes recent growth slowdown
The doubts regarding valuations that had appeared in Asia on Tuesday emerged suddenly on Wall Street yesterday as investors awaited the Fed’s updated message later in the day. Stocks opened sharply weaker with the S&P500 quickly down more than 2% despite news of another decent lift in core capex orders in December. The frothiness of markets was demonstrated further by the continued phenomenal short squeeze in stocks such as GameStop, which at one point had seen its share rally by a factor of eight in less than a week. This squeeze, which has attracted the attention of the SEC and Washington DC’s lawmakers, probably also weighed on the broader market, with some investors likely liquidating their longs in order to unwind underwater short positions or meet margin calls.

The market remained down around 1½% going into the Fed’s announcement which, as expected, ultimately saw the FOMC leave all policy settings unchanged. However, amongst the small number of changes from the last meeting, the Fed’s post-meeting statement noted that the economic recovery had moderated in recent months, especially in sectors most exposed to the pandemic, and added that the path of recovery would now also depend on progress made in vaccinations. So, after a short delay, equities begin to grind lower to new session lows, with the S&P500 eventually closing down 2.6% and the VIX closing above 30 for the first time since early November, even as a very dovish Chair Powell repeated his earlier advice that it is much too early to discuss the tapering of asset purchases. In addition, when asked about recent surges in some stocks – and the buoyancy of asset prices in general – Powell argued that financial risks overall are ‘moderate’, and that vaccines and the outlook for fiscal policy were responsible for recent strength rather than monetary policy. In other words, at present developments in asset prices are clearly no constraint on the Fed’s willingness to provide accommodation. In the bond market, the UST yield closed down 3bps at 1.01%, with all of that decline occurring ahead of the Fed’s announcement. Meanwhile, the greenback was firmer on the day, driven by risk-aversion rather than macroeconomic factors.

Since the close US equity futures have weakened a little further, UST yields have nudged lower with the 10Y yield slightly below 1.00% again, and the greenback has continued to firm after Tesla’s Q4 EPS fell well short of market expectations and as Apple beat revenue expectations handily but sounded less certain about future trading conditions. Against that background, unsurprisingly, equity markets have fallen sharply across the Asia-Pacific region today. In Japan, the TOPIX closed down 1.1% with the only local economic news being an unsurprising further decline in retail spending in December (Japan will print a large number of key economic indicators tomorrow). In China, the CSI300 fell 2.8%, with the Hang Seng also currently down more than 2%, as repo rates hit new highs after the PBoC continued to drain liquidity via open market operations. Elsewhere, stocks were down around 2% in South Korea, Taiwan and Australia and around 1% in Singapore.

Japanese retail sales decline for a second month in December
The only economic report released in Japan today concerned retail spending during December. Total sales declined 0.8%M/M – close to expectations and following a slightly revised 2.1%M/M decline in in November – to be down 0.3%Y/Y. Spending on household machines fell 2.0%M/M following a 7.2%M/M jump in November. Together with a decline in spending on food and beverages, this more than offset a pick-up in spending on general merchandise, apparel and accessories, autos and fuel. Attention will now turn to the next release of the BoJ Consumption Activity Index on 5 February, which will provide a more comprehensive assessment of consumer spending during the month and one that aligns much more closely to the measure in the national accounts).

German inflation set to rebound by more than 1ppt but Commission survey to be downbeat
Today’s notable data from the euro area include the flash estimates of German inflation in January. While yesterday brought renewed chatter of a possible ECB rate cut this year – likely aimed at weakening the euro – German inflation is set to report a big step up due to the reversal of last summer’s temporary VAT tax cut and higher energy prices. The median forecast on the Bloomberg survey is for a jump of 1.2ppts in the EU-harmonised measure to 0.5%Y/Y, which would be the highest since June. But a little while ago, North Rhine Westphalia reported an even steeper rise on the national CPI measure – up 1.4ppts to 1.0%Y/Y, the highest since last March – and further results from the German states will come in over the course of the morning.

Also due today is the European Commission’s sentiment survey for January, which will provide more clues on how the euro area economy is faring in the face of continued containment measures. In particular, a further fall in confidence seems highly likely in the services sector, which remains hardest hit by the pandemic and associated restrictions. The respective index is predicted to fall about 1pt from -17.4 in December, which was the lowest level since July and consistent with a significant pace of contraction in the sector. In contrast, the manufacturing sentiment index is expected to remain unchanged in January at -7.2, close to the levels seen before the pandemic.

US GDP data to point to expansion in Q4 despite recent loss of momentum
The focus in the US today will be on the release of the advance GDP report for Q4. Despite the loss of momentum seen in a number of indicators of late, given a strong start to the quarter, Daiwa America Chief Economist Mike Moran expects the national accounts to reveal a further 3.0%AR lift in GDP, building on the 33.4%AR rebound in Q3. Robust business, housing and inventory investment, together with moderate growth in consumer spending, should readily more than offset downward contributions from net exports and public spending. Today will also bring the release of the advance merchandise trade report, new home sales and Conference Board leading indicator (all for December), as well as the weekly jobless claims report.

Australia’s export prices rise sharply in Q4, import prices slightly weaker
The ABS continued to release its suite of quarterly price indicators today, this time in the form of the International Trade Prices Indices for Q4. Export prices lifted a sharp 5.5%Q/Q during the quarter, erasing a similarly sharp decline in Q3, leaving prices up a modest 0.3%Y/Y. The improvement during the quarter, which was broadly in line with consensus expectations, was driven by significantly higher domestic prices for metal ores – even in the presence of a stronger Aussie dollar – due to the recovery in manufacturing activity, especially in China. By contrast, import prices fell 1.0%Q/Q in Q4 – also in line with market expectations – and so was down 7.3%Y/Y. The main downward contributors were lower prices for inorganic chemicals, medicinal products and non-monetary gold, together with the broad influence of the stronger Aussie dollar. Price declines petroleum and related products continue to explain much of the decline in import prices compared to a year earlier.

Kiwi trade surplus narrows unexpectedly in December as imports rebound
New Zealand recorded a seasonally-adjusted merchandise trade surplus of just NZ$17mn in December, far below the consensus estimate of NZ$0.8bn and narrower than in November. Exports decreased a seasonally adjusted 2.5%M/M and were down 2.7%Y/Y, falling somewhat short of market expectations, with dairy exports down a surprising 19.0%Y/Y and so more than account for the overall annual decline. By contrast, imports rebounded 7.9%M/M, accounting for the majority of the shortfall in the trade surplus, and so increased 4.2%Y/Y – the first time that annual growth has been positive since March. In the detail, imports of general consumer goods increased a strong 11.8%Y/Y as retailers responded to the unexpectedly strong resurgence of consumer demand, while imports of machinery and plant increased a very encouraging 8.8%Y/Y. However, reflecting lower prices, imports of crude oil remained down over 28%Y/Y.

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