Chinese shutdown is hitting global activity

While the daily increase in people infected with coronavirus continues to decline, uncertainty remains high, not least with increasing fears that the virus may spread more seriously to Japan, South Korea and Singapore. In our view, the economic lockdown of China has clearly had a negative impact on the global economy, with the number of ships currently on route declining by more than 5% since December (see chart Twitter) and it is uncertain what monetary policy can actually do about this despite the easing from the People's Bank of China. As we show here (Twitter), it may take some time before the sharp fall in the number of ships underway feeds into lower global PMI manufacturing and there are downside risks to manufacturing PMIs in coming months. The Fed continues to monitor, not react to, the development. Look out for comments from government officials and central banks over the weekend in connection with the G20 finance ministers and central bank meeting.

There has been lot of focus on Japan this week. The combination of recession fears in Japan and coronavirus fears have weakened the JPY significantly this week and USD/JPY went briefly above 112. Japanese flash PMIs were very weak, with the composite index hitting the lowest level in six years, which means Japan is also likely to contract in Q1, after negative growth in Q4 19. We expect next week's Japanese retail sales and industrial production data for January to give important information on the current development (although some of the data is pre-coronavirus).

Euro area flash PMIs were better than feared. The PMI Service Index for the euro area rose marginally in February, supporting our view that we should not see a big impact on private consumption in Europe, as long as the coronavirus does not spread to Europe. The PMI manufacturing index surprised on the upside but this was driven partly by a sharp increase in suppliers' delivery times, which is driven by a fall in supply, not higher demand, i.e. a ‘false positive' growth signal. We have some interesting data releases out of both Europe and the US next week. In Europe, German Ifo expectations and the economic confidence indicators from the EU are due out on Monday and Thursday, respectively. In the US, look out for core capex orders and real private consumption data for January due out Thursday and Friday, respectively. On Friday, we get preliminary flash HICP inflation, which we do not believe will change anything from an ECB perspective.

On Tuesday next week, the EU is set to agree on the final negotiation objectives ahead of the EU-UK trade negotiations (set to start in the week beginning 2 March). This week, the tensions between the EU and the UK have been rising, as the UK continues to rule out following EU rules, while the EU says it cannot offer a deal similar to the EU-Canada trade deal, as the EU fears UK companies will get an unfair competitive advantage. Investors have largely ignored this development but we expect high Brexit uncertainty to hit the GBP eventually. Next week, UK business and consumer confidence indicators are due out the night between Thursday and Friday. It will be interesting over coming months to see whether or not the rebound in confidence is robust.

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