- US and global yields moved lower in recent trading sessions amid ongoing uncertainty about the effect of the Covid-19 virus and dovish comments from key central banks. The US yield move was focused at the long end, with 30y yields declining close to 10bp. The past week was also notable for US dollar strength. The greenback strengthened against the currencies of all major US trading partners with the US Dollar Index (DXY) at levels last reached in early 2017. US risk assets continued to receive a bid however, with the S&P500 making new highs over the week. On the economic data front, releases were mixed. While headline retail sales figures rose slightly, underlying measures of discretionary spending stuttered and growth in previous months was revised lower. US housing data surprised to the upside, with homebuilding falling less than expected in January. Building permits have surged to a near 13-year high, pointing to a robust housing market.
- European government bond (EGB) spreads continue to trade in a resilient manner with strong demand for duration and yield continuing to drive longer-end EGBs and the EUR swap curve. Similar to the US Treasury market, the relative strength of German Bunds has been influenced in part by dovish commentary from the Fed and ECB, with a number of ECB Governing Council speakers raising concerns about downside risks to the Eurozone economy stemming from the Covid-19 outbreak. On a positive note, the slump in Eurozone manufacturing activity diminished in February, easing concerns of deterioration caused by Covid-19. The manufacturing purchasing managers’ index for the euro area rose to 49.1 in February up from 47.9 in the previous month, and above market expectations.
- In China, January’s Total Social Financing (TSF) and loan flow printed higher-than-expected. The annual growth rate in the TSF stock remains at 10.7% (as it was in December), while bank loan growth eased but remains robust at 12.1%. The strong TSF print is largely attributable to stronger local government bond issuance, which should ultimately prove supportive of infrastructure investment. China’s home price momentum has slowed however. The National Bureau of Statistics released a 70-city home price index for January 2020. Compared to the previous month, new home prices declined in 15 cities in January (versus 16 in December) while increasing in 47 cities (50 in December).
- US corporate spreads widened 1bp to 96bp as markets paused following a big rally. Fund inflows have remained particularly strong, amid the global search for yield, which has kept the market solid. That being said, Kraft Heinz was downgraded to high yield and went 80bp wider. There was US$15bn of new issuance including Otis, BP, Lear and Republic Services. European credit markets are behaving as if the COVID-19 outbreak will only have a transitory impact on growth, and continue to receive a strong bid.
Chart of the Week: US 10-year Treasury yields continued to fall on coronavirus fears and a dovish Fed
Source: Bloomberg. Data as at February 21, 2020.
Source: Bloomberg, February 21, 2020
February 24: Eurozone business climate
February 25: US house price index; S&P/Case-Shiller home price indices
February 26: New Zealand trade balance data
February 27: US GDP Q4
February 28: Eurozone consumer prices
US data was a bright spot globally, while Europe was weaker. Strong US economic data buoyed confidence in the growth trajectory and supported risk appetite. US initial jobless claims came in at 205,000 (vs. 210,000 expected). Meanwhile, US CPI rose to +2.5% (vs. +2.4% expected), its highest level since October 2018. However, in Europe, eurozone GDP growth fell to its lowest level since 2013, with Q4 growth at +0.1% (Q3: +0.3%). France and Italy posted negative Q4 GDP, while German GDP was flat quarter-on-quarter. Over the week as a whole, US Treasuries and core European government bond yields did not move materially.
US and European credit markets were mixed: US corporate spreads continued to tighten after the recent coronavirus outbreak, with sentiment buoyed by the economic data. The US primary market was active, with $25bn of new issuance, including a financial, a multinational, and an energy name. European credit bifurcated as issuers exposed to the outbreak (e.g. cruise operators) suffered, while less-exposed credits (e.g. subordinated financials and domestic utilities) rallied.
The coronavirus continued to make headlines, with a mid-week change in how Chinese cases are diagnosed leading to a sharp spike in the number of cases. There are more than 64,000 cases worldwide, but most remain in China.
Senator Bernie Sanders won the Democrats' New Hampshire primary with 26% of the vote, making him currently the most likely candidate to win a majority of pledged delegates and become the Democrats' nominee for the US presidential election. Senator Elizabeth Warren and former Vice President Joe Biden finished fourth and fifth, respectively. Notably, Michael Bloomberg is spending substantial amounts on advertising ahead of the so-called 'Super Tuesday' votes on March 3.
The UK Chancellor of the Exchequer’s unexpected resignation on Thursday, during a cabinet reshuffle, surprised markets. Sajid Javid’s replacement is Brexiteer Rishi Sunak. A spokesperson for the prime minister subsequently declined to confirm whether the government would stick to its fiscal rules or the previously announced budget date of 11 March. Sterling strengthened as the chances of a larger fiscal stimulus were deemed to have risen. Yields on 10-year gilts rose by c.6bp on the week.
Chart of the Week: Euro area Q4 GDP print shows growth fall to lowest level since 2013
Source: Bloomberg. Data as at February 14, 2020.
Source: Bloomberg, February 14, 2020
February 17: Japan final December industrial production, euro area December construction output
February 18: UK December employment, unemployment; Japan January trade balance
February 19: Euro area December current account; UK January CPI, RPI, PPI; US weekly MBA mortgage applications, January building
permits, housing starts, PPI
20 February 20: Germany March GfK consumer confidence, January PPI; France final January CPI; UK January retail sales; Euro area
advance February consumer confidence; Japan January nationwide CPI
February 21: February preliminary manufacturing, services and composite PMIs from Japan, France, Germany, euro area, UK and US;
Japan December all industry activity index; Italy December industrial sales, industrial orders; UK January public sector net borrowing;
euro area January CPI, final January core CPI; Italy final January CPI; US January existing home sales
- US Treasury yields ended the week 8bp higher on the back of improved US economic data and optimism that China’s coronavirus epidemic might be contained. There were a number of data releases that came in stronger than expected: January ADP private payrolls, the services PMI, ISM non-manufacturing and non-farm payrolls all beat estimates and bolstered risk appetite. Yields were further supported on news that China’s Ministry of Finance announced it will halve tariffs on $75bn worth of US imports. With regard to the virus, reports of progress towards a vaccine supported sentiment, though reports of new cases caused yields to move lower again later in the week.
- US corporate spreads tightened 6bp to 96bp as credit markets stabilized after the coronavirus worries weighed on investor sentiment last week. Strong economic data in the US also contributed to improved sentiment in credit despite continued selling in Asia. New issuance was relatively muted following last week’s volatility.
- European government bond yields were also moderately higher in the wake of more positive news around the virus outbreak. Market participants now await a review of Italy’s 'negative' outlook by Fitch Ratings after the market close on Friday. Notably, 10-year Greek bond yields reached a record low of 1.04% after European Central Bank President Christine Lagarde said she is “relatively convinced that Greek bonds will be eligible” for the central bank’s asset purchasing program. This was interpreted as a signal that Greek bonds could reach investment grade status, one of the main criteria for the program.
- In European credit, non-financial corporate bond issuance set a weekly record as €26.5bn of sales surpassed the previous weekly record of €23.6bn set in March 2016. LVMH’s €9.3bn offering to finance its purchase of Tiffany and Company was the largest deal. Comcast and IBM also issued notes as investors looked past coronavirus concerns.
Chart of the Week: Greek 10-year yield (%) falls to record low on ECB optimism
Source: Bloomberg. Data as at February 7, 2020.
Source: Bloomberg, February 7, 2020
February 11: UK GDP, UK industrial production
February 13: US inflation, US jobless claims, German inflation
February 14: EU GDP, US retail sales, US industrial production