Markets
Markets welcomed back Chinese investors this morning following an extended Lunar NY holiday. Chinese stock markets lost around 8% despite soothing measures by the PBOC and the Chinese Securities regulator. USD/CNY traded north of 7 for the first time this year. Bloomberg reports that Chinese officials are contemplating lowering this year’s growth target to “around 6%”, down from 6%-6.5% last year. In what could be an important tell, it was striking that the Chinese return didn’t cause additional risk-off moves on other markets. European stock markets gain up to 0.5% with US markets even opening 1% higher. Core bonds are upwardly oriented with German Bunds this time outperforming US Treasuries (reverse of last Friday). US yields add 2.2 bps (30-yr) to 4.2 bps (5-yr). The 5-yr yield bounced off last year’s low around 1.31%. German yield gains are limited to 1 bp across the curve. The rising US/German yield differential this time benefited the dollar. EUR/USD fell back from the high 1.10 resistance area and currently changes hands around 1.1060. USD/JPY is marginally higher around 108.50. The trade-weighted dollar bounces from 97.5 to 97.8. Eco data in the EMU and UK remained limited to final revisions of January manufacturing PMI’s. On a bright note, most of them faced upward revisions with the UK gauge even at the neutral 50-mark following 8 months in contraction territory. The second tier revision failed to impact traders, who eyed the January US manufacturing ISM. The indicator rebounded to 50.9, leaving behind contraction territory for the first time in six months. A lesser increase to 48.5 was expected. The US dollar and yields increase previous gains.
Sterling was in the ropes today. EUR/GBP rose from 0.84 to first resistance at 0.8477 (last week’s high). EU Barnier and UK PM Johnson at different locations set out clashing starting positions for this year’s trade discussions. Especially Johnson took an audacious tone, suggesting little willingness to play by the EU’s rules. Unfortunately, to be continued…
News Headlines
In its Economic Survey of Belgium the OECD notes that robust job creation, albeit mostly in low-wage industries, has brought the unemployment rate to a historic low level. Economic growth has been steady, but remains below average euro area levels, and productivity growth has stagnated. The OECD recommends to lower employment barriers to disadvantaged groups, help innovative businesses and further ease pressures on public finance.
The top policy makers of the EU and the UK already ‘illustrated’ the ‘big divide’ they will have to overcome to reach a trade deal by the end of the year. EU’s Barnier stressed the need of a level playing field as a condition for free trade. At the same time, UK PM Johnson indicated the UK could live with a deal similar to Australia which has far less tight arrangements with the EU.
Turkish inflation rose for the third straight month. Headline inflation accelerated to 12.2% in January, up from 11.8%. Core inflation (9.88%) and producer price inflation also rose more than expected in January. Higher inflation is pushing the real policy rate of the central bank further below zero and can make it more difficult for the CB to extend a growth-supportive policy.
The US January manufacturing ISM rebounded more forcefully than expected from 47.8 to 50.9. The 50+ level suggests a pick-up in activity in this cyclical part of the US economy as uncertainty eased after the US and China reached a phase one trade deal. Looking at the details, new orders (52.0), production (54.3) and prices paid 53.7 all showed a substantial improvement. The improvement in employment was modest (45.7 from 43.3) and still suggests a loss of jobs, albeit at a slower pace.
