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Already released industrial production data for the four largest Eurozone economies showed that output in the factory sector fell sharply in December. That points to a big slide in production for the region as a whole and we look for a monthly decline of 2.1%. Euro looks to be vulnerable again as the larger-than-previously-expected fall points to downside risks for Q4 GDP growth and we think that Friday’s update will see a downside revision to no change from the initial estimate of 0.1% GDP growth.
Yesterday, the euro was little changed against the majors like dollar and yen soon after statements from ECB President Lagarde and Fed Chair Powell seemed to indicate that near-term interest rate moves in either the Eurozone or the US are unlikely.
In the Euro area, the economic data flow was mixed. Surveys remained positive and labor market data have shown resilience, but the 4Q’19 GDP print at 0.4% was well below our 1.0% forecast which economists believe is likely attributable to a continued inventory drag (4Q’19 GDP on the weak side).
JPM reinforces with a bearish bias with markets already pricing in a pessimistic scenario, and keep 2s/10s steepeners in Germany. Intra-EMU, they keep spread compression exposure via longs in 30Y Italy, 10Y Spain and 8Y Greece vs. Germany. In the UK, the BoE surprised with a more hawkish tone. While it has an easing bias, fiscal easing from 2Q20 and some expectations of a continued rebound in confidence post-election will likely keep it on hold.
Hence, it wise to capitalize on momentary rallies in underlying spot FX for fresh short hedges and below rates strategies ahead of flurry of data streaks in eurozone, such as, German ZEW Economic Sentiment, current a/c data, German, French & composite manufacturing/service PMIs.
The recommendation goes this way, shorts in May20 MPC OIS, hold a bearish duration bias and keep 10s/30s gilt curve steepeners. In Australia, the recent economic data flow provide the RBA with some breathing space, and we now expect a 25bp cut in May rather than next week.
JPM strategists stay long 3Mx3M AUD OIS and 3Y ACGBs, and long 10Y ACGBs vs. USTs. Courtesy: JPM
