Capital Markets: "Did Powell Toss in the Towel or was it a Tactical Retreat? "

From Marc to Market:

Overview: The Fed's dovish tone and earnings news are the main drivers of the capital markets today, helping lift stocks, bonds, and currencies. Large equity markets in Asia, including Japan, Hong Kong, China's CSI 300, India, and Indonesia, all rose more than 1%, putting the MSCI Asia Pacific Index in a good position to extend its rally for a fourth consecutive week. European shares are higher, but the gains are not as impressive, and the leading sectors are energy and healthcare. Financials, information technology, and communication sectors are laggards. Sovereign 10-year benchmarks are mostly 2-3 basis point lower, though Japan and Australia were flat. The dollar is seeing yesterday's Fed-inspired losses extended against the major and most emerging market currencies. The euro, sterling, and the Canadian dollar are the weakest, while the yen and the Antipodean currencies are the strongest.

Asia Pacific
Industrial output edged 0.1% lower in Japan in December, which was a smaller than expected decline. On a year-over-year basis, output in December was off 1.9%. In December 2017, it had risen by 3.2%. Japan's economy contracted by 0.6% in Q3, and although it has stabilized in Q4, it has not covered fully recovered. The Q4 18 GDP estimate is not released until toward the middle of the month. A 0.3%-0.4% increase is likely.

China's official PMIs did a little better than expected. The manufacturing PMI ticked up to 49.5 from 49.4, though many forecast another decline. It was helped by output and raw materials, while the decline in export orders slowed. The non-manufacturing PMI rose to 54.7 from 53.8 to stand at a four-month high. The rise in services offset the weaker construction reading. Tomorrow the Caixin PMIs will be reported. Caixin's survey covers smaller and more private sector enterprises than the official measure.

Australia reported favorable terms of trade developments in Q4, but slower private credit expansion in December. In Q4 18, import prices rose 0.5%, while export price rose 4.4%. It is a key factor behind Australia's improved trade balance, where the six-month average surplus is near record levels. On the other hand, private credit growth slowed to 0.2% in December, putting the year-over-year pace at 4.3%, the slowest in four years.

The dollar was turned back from JPY110 last week and posted an outside down day yesterday (trading on both sides of Tuesday's range and closing below its low). There has been follow-through selling today, which pushed the greenback near JPY108.50. There is a nearly $440 mln option struck there that will be cut today, but stronger support is not seen until closer to JPY108.00. The $760 mln at a JPY109 option that also expires seems safe. The Australian dollar is firm, in narrow ranges, around yesterday's highs, a little below $0.7300. It is up nearly a cent from last week's close. We have argued that the dollar's "approved" range against the Chinese yuan is CNY6.70 to CNY7.0. It slipped through the lower end briefly but snapped back to close onshore session above the floor.

Europe
Beginning on the aggregate level, EMU reported Q4 GDP rose 0.2% for a 1.2% year-over-year rate. In Q3, the regional economy also expanded by 0.2%, but then the year-over-year pace was 1.6%. Unemployment finished the year at 7.9%, matching the cyclical low set in November. At the end of 2017, EMU unemployment was at 8.6%. In a difficult year for growth, after posting 0.7% growth each quarter in 2018, but the continued decline in unemployment was an important bright spot. The labor market may be a chief consideration behind the ECB's patient response to steep economic moderation....

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