Safe haven demand dominated the price action on Friday, with the US$ and the Jpy both broadly firmer, while stocks saw another heavy selloff on Friday, down around 1.5%-2.0%, led lower by Johnson & Johnson (-10%) after Reuters reported that J+J knew for decades that asbestos was present in its Baby Powder. US stocks are now generally 10% below the September all-time highs and look as though the correction has further to go on the downside.
Slowing of economic growth was the dominant theme, following on from weak data coming from both China and the EU, causing a flight towards the dollar which was also underpinned by the solid November Retail Sales ahead of Wednesday’s FOMC Interest Rate Decision. Treasury yields were slightly lower, while the Jpy also saw increased demand as US stocks headed lower. The Euro was heavy following the soft PMIs, coming on the back of China’s equally soft Retail Sales/Industrial Production. The commodity currencies also took a hit as risk-aversion set in, but did recover from their lows, while Cable was heavy again because of the never-ending Brexit issues.
Elsewhere, WTI gave up the previous day’s gains in falling by around 2.5%, as fears of China’s slowing growth saw a rush to the exits. The metals followed the dollar around, ending slightly lower on the day, as the dollar strengthened.
In terms of data, the EU PMI manufacturing dropped to 51.4 in December, down from 51.8 and missed expectation of 51.9, a 34-month low. PMI services dropped to 51.4, down from 53.4, also missing expectations of 53.4, a 49-month low. The PMI composite dropped to 51.3, down from 52.7, a 49-month low. The individual PMIs were no better, with France falling into contraction. The German PMI manufacturing dropped to 51.5, down from 51.8, missing expectation of 51.7, a 33-month low, while the PMI composite dropped to 52.2, down from 52.3, a 48-month low. In France, the PMI manufacturing dropped to 49.7 in December, down from 50.8, and missed expectation of 50.7, the worst reading in 27 months. The PMI composite dropped to 49.3, down from 54.2, a 30-month low and the first contraction reading in 2 1/2 years.
From the US came the slightly better than expected retail sales data, showing 0.2% growth versus 0.1%, underpinning the dollar ahead of this week’s Fed meeting. The DXY briefly reached levels last seen in June 2017 (97.71). US 10Y treasury yield fell from 2.92% to 2.87%, while the 2Y yield fell from 2.75% to 2.71%. Fed funds rate futures continued to price the chance of a rate hike on 19 December at 75%. Beyond that, a March rate hike is given a 30% chance.
Looking ahead, the coming week will be busy, as conditions begin to thin out ahead of the holiday, with the focus being on Interest Rate Decisions to come from the BOJ, BOE (both Thur) and most importantly the FOMC (Wed). The Fed are still expected to raise rates this month, despite the deteriorating economic growth outlook, and much will hang on the words of Jerome Powell who will be speaking after the meeting/decision. In reality, traders will only be looking for a single piece of information from Powell; How many hikes does the Fed think will be appropriate in 2019?
Other major events will include the EU CPI (Mon), RBA Minutes, Australian Mid-Year Economic & Fiscal Outlook, German IFO Business Climate/Expectations (Tue), UK CPI, PPI, RPI (Wed), NZ Q3 GDP, Australian Unemployment (Thur), UK Q3 GDP, US Durable Goods Orders, Personal Consumption/Expenditure (Fri). Have a good week.
Economic data highlights will include:
Mon: EU Trade Balance, CPI, BuBa Monthly Report, UK CBI Distributive Trends Survey – Orders, NAHB Housing Market Index.
Tue: NZ ANZ Activity Outlook, Business Confidence, Australian MYEFO, New Home Sales, RBA Minutes, German IFO Business Climate/Expectations, US Housing Starts, Building Permits, Global Dairy Trade Index, API Weekly Crude Oil Stock Inventory
Wed: NZ Current Account, WBC Consumer Survey, Australian WBC Leading Economic Index, Japan Merchandise Trade Balance Imports/Exports, German PPI, UK CPI, PPI, RPI, EU Construction Orders, UK CBI Distributive Trends Survey – Realised, US Existing Home Sales, EIA Crude Oil Stocks Weekly Change, FOMC Meeting/IR Decision, Press Conference, Fed’s Powell Speech
Thur: NZ Trade Balance, Q3 GDP, Credit Card Spending, Australian Unemployment, BOJ Meeting/Interest Rate Decision/Press Conference, EU Current Account, BOE Meeting/Statement/Minutes/Vote Count/APP Facility, US Philadelphia Fed Mfg Survey, Jobless Claims
Fri: Japan National CPI, UK Consumer Confidence, Total Business Investment, Q3 GDP, Public Sector Net Borrowing Requirements, Quarterly Bulletin, US Durable Goods Orders, US Personal Consumption/Expenditure, Kansas Fed Mfg Activity, Michigan Consumer Sentiment Index
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