Market news – 20 December 2019

Mixed hard and soft data this week; however, tone has unquestionably improved since the trough during the summer...

• Chinese economic activity surprised to the upside in November, led by industrial production (+6.2% YoY versus October 4.7% and consensus: 5.0%) and infrastructure investment. Retail sales were also stronger than expected, increasing by 8.0% YoY in November (October: 7.2%, consensus: 7.6%).
• The IFO business climate survey in Germany reported a 1.2 point increase in December to 96.3 (consensus: 93.8). The construction sector continued to decline, hitting the lowest level in over year,  but this was more than made up by the optimism in the services sector (+3.9 to 21.3).
• Flash PMIs from Europe show no change in the composite for December (50.6) but a continued divergence between the weakening manufacturing sector and stronger services sector. Manufacturing fell further into contraction territory, reading 45.9 (November: 46.9); however, the services sector increased to 52.4 (November 51.9).
• The UK composite flash PMI missed expectations, reading 47.4 (consensus: 49.2, November: 48.9). The manufacturing PMI showed a 1.5 point decline, whilst the figure for the dominant services sector dropped “only” 0.3 points to 49.0.
• UK retail sales fell -0.6% in November (consensus: +0.2%), whilst Canadian retail sales plunged 1.2% in October versus expectations for a 0.5% increase. Globally, household consumption has unquestionably slowed in H2; however, a modest recovery remains most economists’ forecasts for the start of 2020.
• The flash US Manufacturing PMI declined moderately in December to 52.5 (consensus: 52.6, November: 52.6). At current levels, the recovery from earlier this year is still intact (August: 50.3), as respondents gained confidence from more favourable financial conditions and progress in the US-China trade agreement.
• US industrial production rebounded in November +1.1% over the month (consensus: +0.9%, October: -0.9%). Manufacturing was the main driver of the increase as auto manufacturing jumped 12.4% after the conclusion of the General Motors strike.
• The US Empire Manufacturing Index increased 3.5 points in December (consensus: 4.0, November: 2.9). New orders declined but shipments rebounded and employment came in flat.

Monetary policy continuity remains the order of the day...

• In her first meeting as European Central Bank President, Christine Lagarde indicated no immediate need for a change in policy whilst noting that the construction sector has been a drag on growth for a number of months.
• Andrew Bailey has been appointed as the new Governor of the Bank of England. He joins from the Financial Conduct Authority where he has been acting CEO since 2016. He will serve an eight-year term, effective from 16th March 2020. Though not an economist by training, his vast experience of public service in the financial sector means he is generally considered a “safe pair of hands”, whose appointment signals a desire to maintain the present course.
• A number of G10 central banks met over the week: Japan, Sweden, Norway and the UK, revealing a similar theme of rates remaining “lower for longer”. The bar to policy tightening is clearly high and rates are likely to stay at present low levels for a period extending to years, with potential for further easing if the global economy fails to pick up.

Risk rallies into year-end

• With few catalysts left in the calendar for this year, risk assets rallied as investors sought to enter 2020 with a more constructive stance. Developed market indices such as the European Stoxx 600 and the US S&P 500 made fresh all-time highs. Bond markets remain cautious, however, with US treasury yields failing to break above the levels posted in mid-November (the 10-year note sits just below 2%).
• Concurrently the US dollar was generally weaker, not only against “risky” currencies but also against havens like precious metals.
• A notable outlier was GBP, which largely retraced its December surge as the ruling Conservative party sought to enshrine in domestic legislation a fixed date (end-2020) for concluding trade negotiations with the EU, despite widespread reservations regarding the feasibility of establishing long-term arrangements within such a constrained timeframe.
• Admittedly, such legislation is unlikely to prove binding in practice; if talks are progressing then further legislation extending the deadline is highly likely to be enacted.