Markets appeared to have woken up from their holiday slumber in an erratic mood last week as all manner of indiscriminate asset class moves were witnessed. USTs initially sold-off on the back of: concerns of increased sovereign supply, knee-jerk reactions following the BoJ’s “stealth taper”, rumours suggested that China is looking to either cut or halt their purchases of their USTs (these rumours were later quashed by SAFE) and the hawkish ECB minutes. Solid demand for the 30-year UST auction did, however, bring some relative calm to the curve on Thursday. All this before the much awaited December CPI readings, where the headline number was broadly in line at 2.1% yoy while the core reading beat estimates at 1.8% and firmed up from November print. This coupled with strong retail sales readings saw the yield on the 2-year UST spike to 2%, leading to further UST flattening; the 10-year moved 7bps higher over the week to 2.55% while the 30-yr was up just 4bps. Meanwhile, the dollar witnessed a further rollercoaster week; the DXY Index broke through the 91 level, plummeting over 1% over the week.
Staying with trade, having made a huge push to encourage international trade over recent years, the US could witness a major u-turn this year as Mr, Trump piped up about his “aggressive” trade ideals last week. It seems his attack against China’s (and other economic competitors’) “unfair trade practices” sparked the aforementioned response from an unknown source in China regarding its UST holdings. The latest data (end October 2017) shows that China holds ~USD 1.2tn of UST positions within its ~USD 3.14tn fx reserves; which have been increasing over the past consecutive 11 months. There is currently nothing substantial to be concerned about, however, we will continue to monitor what will be an interesting year in terms of global trade agreements. We do, however, feel that it would be highly counterintuitive for the world’s two largest economies to clash on trade, and instead look for ways to manage the huge trade deficit gap.
Earlier in the week, China tweaked the way in which it manages the renminbi fixing methodology by temporarily dropping the counter-cyclical-factor (CCF); in a bid to allow market forces a greater say in how the renminbi is fixed daily. This once again underscores policymakers’ increased flexibility in the way renminbi trades and reiterates that China is not as concerned about the appreciation of the redback against the dollar. The obvious knee-jerk reactions saw the renminbi tumble following the news, however, the offshore unit rallied to month highs and is this morning trading at strong levels last seen in December 2015; up 1.16% against the dollar (at time of writing). We also heard from the Bundesbank earlier this morning, on its decision to include the renminbi in its fx reserves; following the ECB’s inclusion in June last year. Although Germany’s central bank did not comment on the amount of inclusion, this will no doubt give the Chinese currency an added boost on its road to internationalisation.
Also last week, Premier Li Keqiang said the Chinese economy grew around 6.9% in 2017. He also said that the economy had fared better than expected adding that a survey on urban employment showed the lowest rate of unemployment in several years. We look to the official growth figures due on Thursday, if the GDP print does match the market consensus for 6.8% ytd yoy, this will be the first time the economy has witnessed an acceleration in growth since 2010. Aside from the better than expected fx reserves print and robust trade data releases for December, China’s CPI and PPI readings for December were broadly in-line with expectations, and at levels which will not create any unnecessary monetary policy pressure; so policymakers can focus on China’s number one priority, de-leveraging. Away from the GDP releases on Thursday, we will also get the December retail sales, fixed assets and IP data for December, all expected marginally unchanged from November.
Elsewhere, the two Koreas met, with little substantive outcome aside from the decision to allow the North counterpart to participate in the Winter Olympics, commencing next month in Pyeongchang. Further talks are expected to resume between the two nations. Last week also witnessed Theresa May’s cabinet reshuffle and a German coalition breakthrough. It’s worth highlighting Germany’s GDP reading at 2.2% last year; although below market expectations, it was the fastest expansion since 2011. The euro enjoyed a 1.44% rally last week, to its highest level against the dollar in three years. This will no doubt add fuel to Europe’s already optimistic outlook; the ECB meeting on the 25th January could be very interesting. Oil was another big story last week as Brent peaked above $70 intra-day on Thursday; and closed 3.33% higher over the week, at $69.87.
Bond and equity markets will be closed in the US today as the country celebrates Martin Luther King Day. Today will also see Greece’s parliament vote on the omnibus bill; in order to receive its next loan. UK inflation and the US Empire Manufacturing reading for January could grab some attention on Tuesday, as could the meeting between Canada’s Foreign Affairs Minister and the US’s Tillerson where security and stability on the Korean peninsula will be discussed. On Wednesday, US IP and the Fed’s Beige book could be of interest, as could Trump’s “Fake News Awards” presentation. A number of EM central banks will announce their rate decisions on Thursday, but China’s Q4’17 GDP and activity prints will be the focal point, ahead of the US’s housing starts and building permits releases. The deadline for the US government shutdown ends on Friday, when we will also get the UK’s retail sales print for December and various sentiment readings from the US.