Macroeconomic update: recovery buried by the virus impact?

• China to feel impact from the coronavirus
• Promising signs in Europe
• US Fed to stay put in January

Asia – just how big the hit will be?

When the Chinese authorities decided to close the city of Wuhan it became obvious that there would be some noticeable impact on business activity. China celebrates the Lunar New Year so at present many plants stand idle anyway but the holidays are actually compounding economic risks. First of all, travel restrictions and fear among the society will reduce spending, especially in tourism. However, unless the virus is contained soon, the impact could be much more severe. Workers traveling home and then back to work can help spread the virus greatly and we’ve already heard from the Shanghai authorities that factories are being told to extend the holiday break. While the situation is very fluid, the impact will be visible only in March when the data for February will be released (as January data will show only some of the impact). Right now it’s crucial to contain the virus as soon as possible.

Speculation stage: oil feels a burden of concerns related to travel and business activity. Source: xStation5

Key economic event this week: PMIs in China (Friday, 1:00 am GMT)

Europe – promising sign from European manufacturing

Manufacturing in Europe took a big hit in 2019 as producers hit a wall of lower demand with excessive capacity. While the downturn was deeper than initially expected, there are signs of stabilization. How to interpret the data? First, consumer spending remained solid all along the way, additionally supported by panic (even if marginally inefficient) monetary easing. As companies chew through their stockpiles, they were able to increase their activity somewhat and we see that in the data. While this is positive, without a boost to demand (which we think is unlikely) a shallow recovery is probably the best Europe can hope for.  

Out of the hole? Recovery in German manufacturing is a good sign for Europe. Source: Macrobond, XTB Research

Key economic event this week: Flash CPI data from Germany (Thursday, 7:00 am GMT), EMU Q4 GDP (Friday, 10:00am GMT)

US – Dollar gains not supported by the data

The US dollar gained last week versus the majority of currencies and that extended the USDIDX rally to 1.6 figures. These gains are hardly supported by the data. The PMIs were mixed with the manufacturing survey pointing at struggles for the US industry and at the same we had solid data in Europe and Japan. Right now it’s hard to tell how much of the economic damage US will take versus Europe (probably less) but USD gains already look stretched. The FOMC this week should be market neutral – the Fed is in the wait and see mood and new uncertainties will only discourage it from hinting at any direction.

Recent USD strengthening doesn’t seem to be supported by the data. Source: xStation5

Key economic event this week: FOMC decision (Wednesday, 7:00 pm GMT), US GDP (Thursday, 1:30pm GMT)