Overview: A string of disappointing economic is spurring risk-off sentiment today. Global shares prices are being punished and core bonds are being snapped up. The US dollar is trading higher against most major and emerging market currencies. The MSCI Asia Pacific Index was flat on the week coming into today's session. Many of the large markets were off 1.5-2.0% today, and the benchmark is off for the eighth week in the past ten. European shares are getting knocked back. The Dow Jones Stoxx 600 had been up about 1.2% this week but has given it all back and a little bit more. US shares trading lower in Europe, and the S&P 500 is off around 1%. Core bond yields are a two-three basis points lower, while the US 10-year yield is off four basis points near 2.88%. Near 97.55, the Dollar Index is up a little more than 1% on the week, which, if sustained, would be the largest gain in four months.
Asia Pacific
Business sentiment was little changed in Japan, but the Q1 19 outlook weakened slightly, according to the latest quarterly Tankan survey. Capex plans, though, were stronger, as large businesses anticipate a 14.3% increase up from 13.4%. Many had expected a decline. Although the large manufacturers revised higher their dollar forecasts for this fiscal year, they bearish. The exchange rate is expected to average about JPY109.40 this fiscal year, up from JPY107.40 forecast in September. Thus far in the fiscal year, the dollar has averaged nearly JPY111.15. The indicative forward for the end of Q1 19 is about JPY112.40. After the data, the BOJ announced it would reduce the 5-10 year JGBs that it will be next month, the first reduction of this maturity bucket since mid-year.
China reported disappointing retail sales and industrial output figures today. It suggests that the world's second-largest economy is weaker than economists appreciated. Retail sales slowed to 8.1% fro 8.6%, which appears to be the weakest pace since 2003. Industrial output slowed to 5.4% from 5.9%. This matches the slowest since 2002. It is possible that the stimulative measures are not working, which many are suggesting. Yet it seems more likely that it is too soon to make such a judgment.
Australia's preliminary December PMI warns of a poor momentum going into the New Year. Declines in both manufacturing and services drove the composite to 52.4 from 53.9. It has averaged 53.6 in Q4 and 53.6 for the entire year. Last year it averaged 55.6. The RBA is expected to remain on hold into 2020, but the risk of a cut seems higher than appreciated, especially if trade tensions escalate next year and China's slowdown deepens.
There is little enthusiasm for the yen despite the heavy equity tone and lower yields. The greenback is in about a quarter yen range today, straddling JPY113.50, where there is a $610 mln option struck that is expiring today. There are $1.4 bln in an option at JPY113.75 and $460 mln at JPY114.00 that also expire today. The risk is on the downside, and initial support is seen around JPY113.00. The Australian dollar is at its lowest level since the start of November as it approaches $0.7155. The intraday technical indicators warn against chasing it lower. Some corrective upticks can carry it back to the $0.7180-$0.7200 area.
Europe
True to form, the euro weakened in response to Draghi's comments. The market took his warning that risks were moving to the downside as a reason to sell the single currency back toward the lower end of its recent range after initially pushing it to almost $1.1400. Draghi acknowledged that inflation was also likely to work its way lower in the months. The forward guidance indicated that the reinvestment of maturing proceeds would continue until well past the end of QE was modified to well past the first rate hike. This seems mostly technical, and reinvestment phase was expected to last at least a couple of years. The revisions to growth and inflation forecast were minor. Given the magnitude of the misses, changing a forecast by 0.1 of a percent gives the illusion of greater precision than is justified. The introduction of the 2021 forecast for the first time at 1.5% GDP and 1.8% CPI should be understood as medium-term trend growth and stable prices....
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