The rally in US equities continued at the finish of the week, with the optimism spreading to Europe.
Overview: Broken record
- Incredibly weak UK retail sales puts GBP rally to the sword, boosting USD – as does 16.9% jump in US housing begins
- Onwards and upwards for US stocks, so also Fed’s balance sheet. Mere coincidence?
- China information gives much more proof of development stabilisation
- RBA Feb four expectations to turn on Thursday’s labour market place information
Yet another day yet another record higher for the US stock market place, the S&P500 and NASDAQ chalking up gains of .four% and .three% respectively and which means that much less than 3 weeks into 2020, the S&P is up just more than three% and the NADAQ just shy of five%. The ASX 200 meanwhile, which closed above the 7,000 barrier for the initial time final Thursday, added yet another .three% on Friday to finish at 7,064. We truly are sounding like a broken record (take you choose from the Plain White Ts, Katy B, Small Boots or Alex Ebert)
In the final week or so, there has been an escalating quantity of analytical and journalistic commentary linking the heady efficiency of US (and with that international) stocks due to the fact October final year to the re-inflation of the Fed’s balance sheet that started final September when funding pressures re-emerged in the US market place, to which the Fed responded initially by escalating its repo activity with U.S principal dealers and then starting a programme of further outright Treasury bill purchases. Dubbed ‘not QE’ on the basis that the Fed is not getting longer-dated securities outright with the intention of suppressing the so referred to as ‘term premium’ on longer term government bond yields, the connection in between the size of the Fed’s balance sheet, now some 11% larger than exactly where it was in late September 2019, and the efficiency of US danger assets throughout this period is nonetheless uncanny. Friday’s weekly Fed balance sheet information showed a much more than comprehensive reversal of the fall we had noticed the prior week, to a new post-September 2019 higher of $four.177tn.
Alan Kohler wrote a fantastic piece on this in the Weekend Australian subscriber hyperlink and which draws parallels with the Fed’s liquidity injections in late 1999, which was also connected with sturdy stock market place gains which then came to a crashing halt after the liquidity was withdrawn in 2000 when it became clear that the world’s personal computer systems have been not going to cease operating and planes weren’t falling out of the sky.
Irrespective of the above, financial information clearly had a hand in Friday’s markets, in certain on GBP exactly where a fleeting try to recover from the early week drubbing that followed the major downside surprise on UK inflation and some dovish Bank of England commentary, was place to the sword following an exceptionally weak set of UK December retail sales numbers. Some had although these may well show proof of a ‘Boris bounce’ following the December 12 common election outcome, but far from it – sales fell by .six% in headline terms and a larger .eight% excluding auto fuel.
GBP was Friday’s worse performing G10 currency, GBP/USD -.five% with some contagion impact onto EUR/USD, which fell by .four%. Considering the fact that these two currency pairs make up 70% of the DXY dollar index, the latter was up by .three% to 97.six, its ideal level of the year to date and highest due to the fact Christmas Eve. AUD and NZD have been each .three% reduce, to .6871 and .6607 respectively. GBP is potentially vulnerable to additional loses at the commence of the weak following an interview with UK chancellor Sajid David in which he poured cold water on the thought of the UK looking for regulatory alignment with the EU.
“There will not be alignment, we will not be a rule taker, we will not be in the single market place and we will not be in the customs union — and we will do this by the finish of the year,” Javid mentioned, urging businesses to “adjust” to the new reality. subscriber hyperlink
Friday’s US financial information was all round supportive for US stocks, Treasury bond yields (latter up 1.4bp to 1.82% at 10 years) and the USD. The most eye-popping was housing begins, up 16.9% on the month against expectations for a 1.1% rise, although unseasonably mild December climate doubtless had a hand right here (developing permits essentially fell by three.9% although are nevertheless on a increasing trend). It also impacted negatively on utilities output (i.e. heating) which supressed headline industrial production (-.three%) relative to manufacturing output (+.two%), greater than the -.1% anticipated]. JOLTS job openings a – a previous favourite of Janet Yellen – shows clear indicators of easing, down to six.8mn from 7.361mn in October, though the preliminary University of Michigan Customer Sentiment Index dipped by .two to a nevertheless incredibly sturdy 99.1 against 99.three anticipated.
A reminder that Friday’s China activity indicators beat expectations, though GDP was broadly in line. All round good and proof of development stabilisation at the finish of 2019. Industrial Production was six.9% y/y up from six.two% and against five.9% anticipated, Retail Sales development was steady at eight.% y/y against 7.9% anticipated and Fixed Asset investment five.four% up from five.two% and the five.two% consensus. GDP development beat on the quarter at 1.five% q/q against 1.four% anticipated, maintaining the y/y development price at six.% y/y. Multi-decade lows confident, but do not overlook than for an economy that has been doubling in size about each and every 10 year, six% development represents a substantially larger absolute improve in demand than the 7% development prices we final saw in 2017.
US stock and bond markets will be closed for the Martin Luther King Jr. vacation. Wellington is also on vacation.
Crucial to Australian markets this week ought to be Thursday’s Labour Force Survey, exactly where NAB is forecasting a weaker than consensus outcome each for employment (+10k vs. +5k consensus) and unemployment (five.three% from five.two% and five.two% consensus). Wednesday’s Westpac Customer Self-confidence will also be of keen interest, as the most complete study to date of the influence of the bushfires on sentiment. NZ has Q4 CPI on Friday, ahead of Australia’s subsequent week.
Internationally, US earnings season holds much more interest than the information calendar which is light. Netflix is the initial of the FAANGS to report, on Tuesday. The ECB, BoJ and BoC all meet. ‘Flash’ European PMIs on Friday will also be critical.
Market place rates
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