Asset markets started the week with a risk-on bias, although this eased off on Thursday reflecting reports of a jump in the number of new coronavirus cases diagnosed using the new methodology (clinically diagnosed cases as well as those testing positive in a laboratory test). Nevertheless, the S&P 500 still ended the week at a new high. The yield on the 10 year UST ended the week at 1.59%, 1bps higher than the previous week’s close, after having reached 1.63% on Wednesday. However, risk off sentiment on Thursday helped the US Treasury Department sell USD19bn of 30 year bonds at a yield of 2.061%.
Fed Chair Jerome Powell appeared twice in front of the Senate and, while taking a dovish tone, echoed much of his recent commentary about the economy being ‘in a good place’. On coronavirus he said it was still too soon to know the extent of the impact. Data-wise, the January CPI figure was a focus but this came in close to expectations at 2.5% yoy and the CPI ex food and energy was even lower at 2.3% yoy. The market continues to see the inflation outlook as benign and the 5 year forward breakeven rate is trading at the bottom of the 1.7-1.85% range the rate has pretty much been in since August 2019. Data pointed to the consumer continuing to hold up; the University of Michigan sentiment indicator continued to strengthen supported by the expectations component and retail sales gained 0.3% in January which was in line with expectations.
It was a dismal weak for the euro which was down 1.06% versus the US dollar (total return). Economic data continued to show growth languishing; the Eurozone economy grew 0.1% qoq in Q4 which was the slowest rate of growth since 2013. German GDP growth was flat in Q4. The European Commission Winter 2020 Economic Forecasts released last week project “that euro area gross domestic product (GDP) growth will remain stable at 1.2% in 2020 and 2021. For the EU as a whole, growth is forecast to ease marginally to 1.4% in 2020 and 2021, down from 1.5% in 2019.” The downside risks from coronavirus were acknowledged with the press release stating “The baseline assumption is that the outbreak peaks in the first quarter, with relatively limited global spillovers. The longer it lasts, however, the higher the likelihood of knock-on effects on economic sentiment and global financing conditions.”
In the UK, Boris Johnson’s cabinet reshuffle caused a stir and a bounce in sterling (+1.22% total return wow versus the US dollar) with the surprise resignation of Sajid Javidas as Chancellor after he refused to sack his team of advisers. Rishi Sunak was appointed as his replacement in a move that was seen as consolidating Downing Street’s influence over policy; fiscal stimulus is expected to be the focus of the next budget.
In the week ahead, the US is shut on Monday for the Presidents’ Day holiday but the minutes of the January 28-29 FOMC meeting will be a key focus for Wednesday. A number of Fed speakers are due to speak including Neel Kashkari, Loretta Mester, Robert Kaplan from the Regional Fed Presidents and Lael Brainard and Richard Clarida from the Fed governors. Data-wise the Empire Manufacturing Survey is due on Monday and Philadelphia Fed survey is out on Thursday along with PPI data and a slew of housing data over the course of the week. In Europe the German ZEW Survey data and European PMI data and the ECB minutes will be the main focus. In the UK the inflation data and PMI data are likely to be closely watched.