13-Feb-2020

1) US Markets Close At Record Highs As Coronavirus Fear Ebb
2) Gold Ekes Out Gains As Markets Turn Risk-Off
3) US Retail Sales January Preview: Jobs And Consumption

 

 

1) US Markets Close At Record Highs As Coronavirus Fear Ebb

China Hubei Coronavirus update Feb 12th: 14,840 additional cases (under revised standards) v 1,638 prior; Daily death toll 242 v 94 prior

Revised standards have started to include cases diagnosed under new method – Notes it started involving cases diagnosed with the new process among confirmed cases from Thursday (Feb 13th) –

This certainly doesn’t sound good, and if I’m reading this headline correctly as on the first glean, there could be a severe case under-reporting going on.

Stay calm and buy the dip?

The Hubei Coronavirus update headline has initially hit like a ton of bricks given this is one of the market’s biggest fears.

So, traders have jumped into sell first, ask questions later mode. But is it time to stay calm and buy the dip?

The headline on the sharp jump in Covvid-19 cases looks gnarly on the surface. Still, it is essential to note that in Hubei, the epicenter of the outbreak, there has been a severe shortage of testing kits reported over the past few weeks. Many people who had symptoms (and even positive affirmation of things like pneumonia) were unable to be confirmed as virus carriers due to the testing kit shortage, and some were sent home to self-quarantine. The government made a push this weekend to clear the backlog of tests, and this big jump in confirmed cases could be a result of this.

And while there could be a knock-on effect where the Rest of China has been under-reporting. Still, I don’t think its a threat to the virus cluster beyond Hubei at this stage as other countries are certainly adhering to strict reporting protocol, and the cluster effect outside of China is receding.

On a more market-friendly note, the PBoC will continue to intervene perhaps now even more aggressively either with RRR or deeper interest rate cuts.

But Asia market rather than a global market and of course, demand sensitive to China commodities like Oil will be more re prone to the sell-off. Still, for ASEAN currency risk, its unlikely to weaken off to significantly as Yuan is doubtful to weaken through 7.0 USDCNH given the PBoC policy backstop.

Ho-hum, another day, another stock market high water mark…US markets close at record highs as coronavirus fear ebb.

 US equities posted another day of gains Wednesday; S&P500 up 0.5% heading into the close, US 10-year treasury yields rising 3bps to 1.63% and the 2s5s curve – which inverted earlier in the week – has turned positive again. Asia equity futures are trading in the green pre cash market open with the China proxies looking to open up well, while oil lifted 2.6%.

 Investors’ sentiment was boosted by the fact that China reported the lowest number of new virus cases since the end of January, while a senior medical adviser suggested the outbreak could be over by April.

 Central bankers continue to remind us that it’s too early to gauge the economic impact from the virus fully; the RBNZ and Riksbank are the latest to acknowledge downside risks. Still, the market looks increasingly willing to look through virus headlines. And with the market flush with cash to provide the juice, and given the negative data impact is so well flagged, in no small degree the growth downgrades have become somewhat irrelevant.

 With risk positive momentum building and stocks and commodities both singing from the same song sheet, it appears the markets are finally letting go of the coronavirus fears.

 Although “The Street” is downgrading growth forecasts, for now the market has decided enough is enough. The source of funds for the latest asset price move is the PBoC’s policy bazooka bolstering Asia sentiment and the Fed’s repo remedies which have left banks awash with cash.

 The coronavirus impact is probably just a near term demand shock that has been mitigated by central bank liquidity. Still, given that stocks are purely a momentum story at the moment, investors have little choice but to get on board or risk getting left at the station.

 

2) Gold Ekes Out Gains As Markets Turn Risk-Off

Gold is finding love in Asia amid signs of risk aversion in the equity and currency markets. At press time, the yellow metal is trading at $1,570 per Oz, representing a 0.30% gain on the day.

Gold demand was tempered by the strong US dollar and rising risk appetite and, while the underlying support remains there, the upside looks limited over the near term.

 Gold has been range-bound of late but supported, given the headwinds it faces. Two factors continue to offer support. One is that global monetary policy remains soft and interest rates are low. The other is that geopolitical risks beyond the coronavirus are bullish. But, with ETFs, and Comex net long positions high and, if anything, a little bit stretched, when flagged against a firm USD, stock market gains and the bounce higher in US bond yields, it suggests fast money traders who have been driving the bulk of action these days would probably be more inclined to trade gold from the short side limiting gains.

Chair Powell’s comments to Congress were bullish for gold longer-term but neutral in the immediate to short term. Without an immediate dovish Fed impulse, there’s limited upside for gold currently, but the US election cycle risk should support it. The race now moves to Nevada with a caucus on 22 February with an essential debate before that on 19 February. But it’s still unclear if Michael Bloomberg, who would pose a real threat to Trump, will meet the polling criteria to make it to the debate stage.

 

3) US Retail Sales January Preview: Jobs And Consumption

The US Census Bureau will release the advance report on Monthly Sales for Retail and Food Services for January on Friday, February 14th at 13:30 GMT, 8:30 EST.

Retail sales are predicted to rise 0.3% in January as in December. The retail sales control group, the Bureau of Economic Analysis’ (BEA) GDP component, is expected to slip to 0.3% from 0.5% in December.  Sales ex-autos are projected to increase 0.3% following Decembers 0.7% gain.

It’s a truism that if the US consumers have income they will spend it. The US economy has provide plentiful proof over the last three years that this remains accurate.

Annual average wage increase have been at 3% or higher for 18 months through January.

Non-farm payrolls averaged 175,000 new jobs each month in the year to December. If this was a decline from 235,000 in at the start of 2019 it is more than enough to supply the natural labor force expansion of 125,000-150,000 new workers each month with positions.

This surplus of employment is the main reason that wage gains are stable near their best levels of the decade despite the unexploited labor pool represented by the improved but historically low 63.4% participation rate.

This measure of income from the Bureau of Economic Analysis counts almost all sources of incoming funds including wages, salaries, interest payments, dividends, workmen’s compensation, pensions , social security and other transfer payments.  It rose 0.2% in December.

The 12-month moving average has tailed off this year to 0.317% in December from 0.375% in January and from 2018’s four year high of 0.508% in July and August, but it remains a constant addition to family and individual income.

Michigan consumer sentiment has made a complete recovery from its August 2019 plunge. At 99.8 in the overall index, 90.5 in the expectations index and 114.4 in the current conditions score in January, the outlook of the US consumer is near the top of the past three years which places among the highest reading of the past two decades.

The preliminary figures for February due on the 14th are expected to remain buoyant at 99.5 overall, 115 for current conditions and 90.3 in expectations.

Whatever is going on in Washington, China and the rest of the world, close to home America is remarkably sanguine.

Consumption over the past year, aside from the anomalous reading of -2% in December 2019 and 1.4% in January 2019 that were due to reporting problems around the government shutdown in January, has been stable.

The 11-month moving average for retail sales in December (excluding the above mentioned months) was 0.4%, a bit higher than where it was in November 2018. The same average in the ex-autos category was 0.364% in December, almost equal to the November 2018 score of 0.373%. Finally the retail control group that informs the BEA’s GDP calculation for consumption was 0.327% in December and 0.368% in December 2018.

Despite all the political wrangling and bitterness in DC, the US-China trade dispute, the recession in manufacturing and assorted international and now health crises, US consumers has stayed close to their happy employment roots.

The main factors enabling retail sales, employment, wages and consumer sentiment have remained strong through the second half of the year and into January.

The pickup in hiring in the New Year may owe something to the China trade deal and the next few months may show lower numbers due to the mainland health crisis, but the trend is stable and is the biggest consideration in expanding consumption.

Wages continue to outpace inflation and provide higher amounts of disposable income. Consumer sentiment reflects these conditions and suggests a willingness to spend the profits of employment. There is no reason for this to change in January.

The dollar has gained 3% against the euro since the beginning of the year. Initially a product of the positive ramifications for the US economy of the China trade deal, the move since early February is a safety reaction to the corona virus crisis in China. The much weaker improvement versus the yen, less than 1%, is likely due to the Japanese currency’s safe-haven status in Asian markets.

A good retail sales result for January will reinforce the notion that the US economy is still the most successful of the major industrial nations. The dollar can only benefit.