Bit sniffly

I don't want you to infer from my summary that I don't think older, or less healthy members of the population are more expendable. But they are at higher risk during a regular flu season anyway, and the fatality numbers so far are small compared with a regular flu year. What I am really getting at is this, this is not the Spanish flu (the 1918 one).

The importance of this is that the Spanish flu has been estimated to have killed, worldwide, more people in the immediate aftermath of World War 1, than actually died in that horrible conflict. And when you think of the butchery that occurred at the Somme, Ypres, Vimy Ridge etc, then that is a particularly horrifying statistic.

Moreover, those that died of the disease were not the elderly, very young or infirm, but the young fit and healthy - the very cohorts of the population that would be needed to rebuild populations decimated by war. How Spanish flu differed from other cases of flu, was that it was the patient's own immune response that usually led to their demise. An aggressive immune reaction from younger healthier people to infection flooded their infected tissues with histamine, drawing in attacking white blood cells to fight and digest infections, leading to what is called a cytokine storm - greater inflammation leading to a spiralling immune response and further inflammation. It was a nasty way to die.

This does not appear to be happening here. So far, reports of the fatalities show them to be largely amongst the elderly, and those with pre-existing chronic conditions.

That doesn't mean there won't be an economic or market response to this. But it does suggest that the response will be manageable, and hopefully fairly short-lived, weeks and months, not quarters or years.

I sneezed twice on the way into work today, but agewise, I'm the right side of 60, so hopefully, all will be well. I'm now off to buy some hand sanitizer if there is any left. Though the best defence against this remains regular handwashing with hot water and soap. Avoid touching your nose and eyes, and stay safe.

What will cause it all to come crashing down?

It's a question I get asked a lot these days, especially by clients, but also by one of my senior risk colleagues in the elevator this morning as I arrived at work. The answer I have been giving, which I stand by, is that what ultimately brings markets crashing down, is when the world economy begins to look quite good again.

Let me explain, but before doing so, on a similar theme, Bloomberg's Cameron Crise is as usual, on the money with his own similar discourse this morning in "Daybreak".

In 2018, markets were fretting because the Fed was hiking and promised to do more. EM economies were struggling to attract the capital needed to finance their current account deficits and were having to match Fed hikes to protect ailing currencies and keep inflation at bay. There was even some talk of a synchronised global upturn, as for once, the Eurozone had started the year in decent shape. Fortunately, that didn't last.

2019 was characterised by deteriorating growth. The Eurozone slid into stagnation. Markets worried about global recession and talked endlessly about yield curve inversion. The Trade War hit Asia along with a global tech slump. US data softened. But markets roared as the Fed cut rates and QE returned to both the Eurozone and arguably, to the US. It gave me plenty to write about.

In the intervening period, more money has been channelled into more equity and fixed income products, valuations have become more stretched, spreads more compressed. What I genuinely fear, is that one day we will return to a semblance of synchronised global growth, and possibly a return of some pricing pressure. Just the whiff that the Fed might change policy direction, that the ECB might stop printing, or the BoJ, could see the excesses of recent years unwinding aggressively, exacerbated by the rush for the exit.

But there's more "good" news - I just don't see it...The Eurozone seems fairly bogged down right now. And though it might show a slight improvement this year, I can't see growth reaching 2%, or inflation turning noticeably higher. The US seems to be on a saddle point - it will probably avoid joining the Eurozone in stagnation, but a lift-off from here seems highly improbable without a complete reversal of trade tariffs. And even then, I suspect inflation wouldn't follow the economy noticeably higher, which should keep any central bank response muted.

After this year - I can't say. Such a crash could happen in 2021 or 2022 or maybe not for much longer. But it would be ironic if the thing that central banks were trying above all to achieve, was to be the catalyst that delivered the next crash. This is something that perhaps Mme Lagarde could consider as she directs the ECB strategic review. The targets that made sense before, no longer do, and mainly because in the intervening period, central banks like the one she now runs have stuffed asset markets full of printed money, making any eventual correction far worse.

I shall be cross if this happens just before I try to cash in my retirement savings.

This discussion segues nicely into data already released today in what will be a shortened day before the Lunar New Year holidays across the Asia region. 4Q19 CPI data for New Zealand, and headline CPI data for Japan for December both beat expectations. NZ data came in at 0.5% QoQ, and lifted the inflation rate to 1.9%, practically the inflation target. In contrast to some commentators I read this morning, I don't think the RBNZ will deliver any further easing this year. These figures show they don't need to.

Japan's December CPI inflation of 0.8%YoY is less impressive, though still rose from 0.5% in November. The core rate was also up, but only to 0.7%YoY, and the core rate ex-food and energy up only 0.1pp to 0.9%. Today's inflation figures do ease the pressure on the Bank of Japan to increase its efforts to achieve their 2% inflation target. We hear that they aren't too serious about 2%, but don't see how they can walk away from the target without appearing to be softening their stance. Personally, I don't think this credibility is there to lose, so they might as well ditch it, but that is a personal opinion.

Prakash Sakpal also writes this morning on some of the SE Asian data due out today:

Singapore: December industrial production data is due today. The consensus of -0.6% YoY IP growth is derived from the -2.1% YoY 4Q19 manufacturing GDP growth in the advance estimate released earlier this month. So the significance of today’s release is limited to the direction of any revision in manufacturing and total GDP growth (+0.8% YoY) that it points us to. We see little market impact given the early shut down of business for the Lunar New Year eve.

Thailand: In its bid to revive investment demand the government is considering tax incentives and more lending support for companies. This comes as 2020 budget spending faces a further holdup amid reports of irregularity in the passage of the budget bill earlier this month. Increasing delay in fiscal support will weigh on GDP growth, boosting talk of more BoT policy easing this year.

Happy New Year everyone - I shall be travelling for much of next week, but will hopefully resume my daily rant on Friday next week.