THE MACRO MENU: 2 - 6 MARCH 2020

THE MACRO MENU: 2 - 6 MARCH 2020

Updated: Mar 8

MARKET BRIEFING: Monday 2nd March 2020
CALENDAR HIGHLIGHTS:

Monday: AU Business Inventories, JN Manufacturing PMI, CN Caixin Manufacturing PMI, SP/IT/FR/GE/EU Manufacturing PMI, UK Manufacturing PMI, M4 Money Supply, Mortgage Approvals/Lending, US Manufacturing PMI, ISM Manufacturing PMI, Construction Spending, CA RBC Manufacturing PMI, ECB's De Guindos Speaks, UK/EU Brexit Talks Formally Begin


Tuesday: AU RBA Interest Rate Decision, Current Account, Building Approvals, Services PMI, JN 10-yr Auction, FR Government Budget Balance, SP/IT Unemployment Change, UK Construction PMI, EZ CPI/PPI, Unemployment Rate, US ISM NY Index, IBD/TIPP Economic Optimism, Weekly API Inventories, Total Vehicle Sales, NZ GDT Price Index, ECB's De Guindos, Fed's Mester, Evans Speak, US Super Tuesday (14 Primaries)


Wednesday: AU GDP, MI Inflation Gauge, JN Services PMI, CN Caixin Services PMI, GE Retail Sales SP/FR/GE/EU Services PMI, IT GDP, EU Retail Sales, UK Services PMI, 5-yr Auction, BoE MPC Treasury Committee Meeting, US ADP Employment Change, Services PMI, ISM Non-Manufacturing PMI, Weekly DoE Inventories, Beige Book, CA BoC Interest Rate Decision, Labour Productivity, ECB's Weidmann, Fed's Bullard Speaks


Thursday: AU Trade Balance, JN 30-yr Auction, SP 3/5/10-yr Auctions, FR 10-yr Auction, UK BRC Retail Sales Monitor, WR OPEC Meeting Day 1, US Challenger Job Cuts, Weekly Jobless Claims, Factory Orders, Non-Farm Productivity, Unit Labour Costs, BoE's Haldane, Carney, BoC's Poloz, Fed's Kaplan, Kashkari, Williams Speak


Friday: AU Retail Sales, JN Leading Index, GE Factory Orders, FR Trade Balance, Current Account, SP Industrial Production, IT Retail Sales, UK Inflation Expectations, Halifax House Prices, RICS House Price Balance, WR OPEC Meeting Day 2, US Non-Farm Payrolls, Unemployment Rate, Average Hourly Earnings, Consumer Credit, CA Unemployment Rate, Employment Change, Trade Balance, Ivey PMI, Fed's Evan's, Mester, Bullard, Williams, Rosengren, George Speak



MACRO OVERVIEW: Sunday 1st March 2020

The important thing to remember about financial markets is that they are forward looking. This time last week, I wrote about the three signs that could trigger a loss of investor confidence. The spread of the virus outside of China, further disruptions to supply chains and the final but most influential, fear.



The latter gripped markets last week and resulted in the S&P 500 falling 11%, US 10 and 30-yr yields touched record lows and oil saw its largest weekly drop in 12 years. In short, we've not seen a week like that since the depths of the Global Financial Crisis (GFC).



THE MARKET EXPECTS


On Friday, the Fed released a statement to counteract the onslaught stating the virus poses "evolving risks to economic activity", and that policy makers will use their tools "and act as appropriate to support the economy".


In a dramatic move, FFR futures are now pricing in a 94.9% implied probability of a 50bps cut from the Fed (to 100-125) on March 18th, an astonishing shift in expectations and one I personally see as being an overreaction to last week's sell-off.



Looking ahead there are 12 Fed speeches this week as officials will look to steady the ship, so be vigilant for hints of future policy action and any references to the notion of a global coordinated move, not seen from central banks since March of 2011, when they cut in unison in reaction to the catastrophic earthquake that hit Japan.


THE CURRENT STATUS OF COVID-19


Italy has reported a 50% rise in cases in one day (total cases 1,128, deaths 29) and a dozen new cases have emerged in the UK, bringing the total to 35. The first death has also been reported in the United States of a man in his 50s, with underlying health conditions in the state of Washington.



In order to ward off the impending impact to the Italian economy, the national government has also issued plans to spend EUR 3.6bln to help support the region, according to the finance minister.


Fiscal stimulus may well be key over the coming months in order to support the relatively exhausted monetary tool box, but with political agendas to manage, it is far from a guarantee that state assistance will be forthcoming in such a direct fashion.


PMI DATA KEY TO GAUGE VIRUS IMPACT


On Saturday, the Chinese Manufacturing PMI figure came in at a shocking 35.7 vs Exp. 46.0 in February, the lowest on record and below the GFC low range of 38.8-45.3, with the Service PMI number even worse at 29.6.


A number of big banks are now forecasting a contraction for the Chinese economy in Q1 2020, with Nomura expecting a decline of some 2.5%. We might not need to wait long to see how the rest of the world is faring under such strained conditions with the European PMI data out first thing Monday morning.



RUSSIA START TO PLAY BALL


Oil prices crashed last week as the market repriced the impact the virus will have on global consumption, prompting Russian President Vladimir Putin to say this weekend that his country is ready to cooperate with its OPEC+ partners in order to support the world oil market.


This fits with our view that now we have technically broken through $50/bbl, OPEC+ verbal intervention will quickly turn into actual physical action. As for timing, the OPEC meeting in Vienna starts this Thursday.



RBA DECISION ON A KNIFE EDGE


Keep an eye on the AUD Monday night. Market pricing would suggest the RBA will hold fire this week with a 60% implied probability of a cut next month, but with one third of the country's exports going to China, and in the aftermath of the devastating bush fires, a cut of 25bps would not be surprising.


GETTING 'IN THE ZONE'


Be careful this week. Trading is far more than one opportunity. After last week's large ranges and volatile price action it will be a test of patience and discipline.


The calendar for the week is jam packed and coronavirus updates will continue to drive sentiment intraday. I would suggest particular focus in tracking virus updates on the US, UK, Italy, France and Germany. Any sudden and sharp pick up in confirmed cases, alongside preemptive actions to quarantine large populous areas in these countries could cause further economic disruption and thus the need to further price in a negative outlook this week.




Anthony Cheung

Head of Market Analysis

(@AWMCheung)



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