Overview: A weak economic assessment in the Beige Book and an ECB that slashed growth forecasts have been followed by news of a nearly 21% slump in China's exports have marked the end of the dramatic equity rally that was seen in the first part of 2019 after the sharp losses late last year. The Shanghai Composite dropped 4.4%, the largest fall in six months, ending the eight-week rally with a 0.8% decline. All the markets in Asia were lower. It is the second consecutive weekly loss for the MSCI Asia Pacific Index. European markets are falling and the Dow Jones Stoxx 600 is off for the third day. This week is the second of the year that this regional benchmark is lower. The S&P 500 has fallen for seven of the last eight sessions. It closed below the 20-day moving average for the first time since January 4 and below its 200-day moving average for the first time since February 11. Growth concerns and weak equities keep Asian and core European yields soft. US 10-year yields have moved lower every session this week and are a little lower now. At 2.63%, the yield is off 12 bp this week, the most since the first week last December. The US dollar is consolidating yesterday's gains, giving it a softer profile. The yen appears to have been lifted by the weaker stocks and lower yields. Its four-week drop is ending. US and Canadian jobs data are the highlight before the weekend. After the markets close, Powell will discuss monetary policy and note that the Fed Chair will be on "60-Minutes" this Sunday.
Asia Pacific
With China's National Party Congress endorsing a large stimulus program, including about a $300 bln of tax and fee cuts, officials may feel a bit bolder to resist US pressures. Recall, last year, the US fiscal stimulus was understood to give it a cushion to absorb the disruption spurred by the Trump Administration's more vigorous pursuit of economic nationalism. Now the shoe may be on the other foot. Reports yesterday claimed Chinese officials were wary of a quick trade deal and did not want to commit to US structural demands. Also, given the unpredictable element and last minute demands of the "art of the deal," there may be some reluctance for President Xi to come all the way to the US without knowing a deal is in hand. The risk of the loss of face (see US walk away from North Korea) may not be acceptable.
China reported a dramatic slump in February trade. The surplus shrank to $4.1 bln from $39.2 bln in January. The Bloomberg survey found a median forecast of $26.2 bln. Exports fell 20.7%, while imports were 5.2% lower. The Lunar New Year distorts the data, Some economists suggest looking at January and February data combined, though we are not sure that offers a "clean" read. Still, the trade figures would see to reflect domestic economic weakness, which makes sense given the other data and the aggressive action by officials.
Japan reported upbeat news. First, it revised up Q4 GDP from 1.4% at an annualized pace to 1.9% (0.5% rather than 0.3% on the quarter). Economists had forecast a revision to 1.7% on the back of improved capital expenditures. Second, it reported that overall household spending jumped 2% in January (year-over-year) from 0.1% in December. Economists were looking at a 0.5% decline. Third, Japan's January current account surplus was larger than expected, helped by a smaller than anticipated trade deficit. However, note that on a balance of payments basis, Japan's trade deficit was the largest in five years.
The dollar briefly slipped below JPY111.00 late in the Asian session but has stabilized in the European morning. It has not closed below its 20-day moving average (~111.00 today) since January 31. The initial retracement objective of the rally off that late January low is seen near JPY110.75. There are nearly $1.9 bln in expiring options struck between JPY111.50 and JPY111.65, which may now offer resistance to the greenback rather than support, which had looked likely previously. The Australian dollar has held psychological support at $0.7000 thus far today. An option for A$1.5 bln struck there expires after the US jobs report today. The $0.6950 area corresponds to a 61.8% retracement objective of the gains off the January 3 flash crash.
Europe
The ECB over-delivered a dovish message. The cut in the growth forecast was not only deeper than expected but next year's forecast was shaved as well. And to drive home the point, as well as a compromise with those who are even more pessimistic, warned that the risks remained to the downside. The ECB extended its forward guidance to indicate it will not raise rates before the end of the year. Some officials wanted to extend the pledge through Q1 20. It also committed to a new TLTRO, whose initial details are less favorable the previous rounds. The term will less (two years rather than four), and the rate is tied to the main refinancing rate (now zero) rather than the deposit rate (minus 40 bp). European banks were sold on the news. Yesterday's 3.3% drop in the Stoxx bank index had been followed by today's 1.1% decline. For the week, this is a 5% loss and ends a three-week advance. The 10-year German Bund yield that finished last week a little above 18 bp is not around five bp, the lowest since Q4 16. ...
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