Asset markets took on a more risk-on tone over the week with the S&P and Nasdaq reaching new highs on Thursday, although they conceded some ground into Friday’s close as some concerns about the coronavirus returned. Improved sentiment, combined with some stronger data on the US economy, saw UST yields back up; the yield on the 10 year UST rose 7bps to end the week at 1.58%. Global equity markets have had time to factor in some initial impact from coronavirus on the Chinese economy and responded positively in the week to China announcing some stimulus/support measures and rolling back tariffs on US$75bn of US imports from 14 February. Thus, when the Shanghai market reopened on Monday 3rd February for the first time and fell 7.7%, global markets took this in their stride. The Shanghai market ended the week down 3.4% and the renminbi ended the week -0.06% (CNH total return) versus the US dollar. Clearly, the risk remains that it takes longer to bring the virus under control and it spreads globally with the impact stretching beyond what has been factored in already. Christine Lagarde, the President of the ECB, noted in her testimony to the European Parliament’s committee on economic affairs that “the uncertainty surrounding the impact of the coronavirus – are a renewed source of concern”. The Fed also warned that coronavirus “could lead to disruptions in China that spill over to the rest of the global economy.”
Donald Trump was acquitted from his Senate impeachment trial on Wednesday but this was expected so had little impact on asset markets although it, and the fiasco with the Democrats’ Iowa caucuses, gave Trump plenty to tweet about. Data releases on the US economy erred on the strong side. Notably, the US manufacturing ISM index (for January) moved into expansionary territory for the first time since July 2019 and the ISM non-manufacturing index remained in expansionary territory. The employment data also erred on the stronger side over the course of the week: the ADP employment release showed 291,000 private sector jobs were added in January which was well ahead of market expectations of 157,000 jobs added. Friday's non-farm payroll data release was also strong, showing 225,000 jobs were created in January which was well ahead of market expectations of 165,000. The unemployment rate did edge up to 3.6% as the participation rate also edged higher to 63.4%. That said, the recent US Q4 GDP data showed the consumer has shown signs of easing and the FOMC even amended their January statement downgrading consumer spending to 'moderate' from 'strong'. Plus, Q1 will be impacted by Boeing production disruption with the risk of some fallout from the coronavirus. Hence we still expect US growth to be subdued and patchy with a risk that the Fed has to cut again later this year.
Key events and data releases for the week ahead include Fed Chair Jerome Powell’s testimony to Congress on Tuesday and Wednesday as he appears before the House financial services committee and the Senate banking committee. Plus, a number of Fed speakers are due to appear over the course of the week. The New Hampshire Primary is due to take place on Tuesday. The key data releases from the US include CPI and retail sales for January and the University of Michigan Sentiment reading for February. Elsewhere, Germany and the UK publish Q4 GDP data and the Riksbank meets on Wednesday.