Market movers today
With a relatively light data calendar, a key focus point today will be the start of US and Chinese officials’ mid-level trade talks in Beijing. These talks will probably pave the way for more high-level negotiations later in January, where President Trump could meet with Chinese Vice President Wang Qishan at the World Economic Forum in Davos. This week, we should also look out for an announcement on tax cuts for consumers and companies, which have been well signalled by Chinese leaders.
In the US, given the recession fears in financial markets, focus will be on today’s ISM non-manufacturing index. The index remains at a very high level, indicating the economy is doing fine, but any substantial decline will be taken as a further indication of a slowing US economy.
In the UK, this week will see the start of the Brexit debate ahead of the vote in the House of Commons – the vote is scheduled for the following week beginning on Monday 14 January (the vote will probably take place on Tuesday or Wednesday).
Selected market news
US equity markets surged on Friday and Asian markets are trading higher this morning, supported by a very strong US jobs report, monetary policy easing in China and Fed Chairman Jerome Powell indicating that the FOMC would be prepared to change the monetary policy course if the outlook shifts.
The US jobs report released on Friday was very strong, with non-farm payrolls gaining 312,000 in December compared to consensus of an increase of 184,000. Wages also gained substantially with an increase of 0.4% m/m and 3.2% y/y in December, suggesting solid momentum in the labour market towards the end of the year.
On Friday, Federal Chairman Powell said that the FOMC’s policy is flexible and that officials are ‘listening carefully’ to financial markets. Powell also said that the Fed will be patient as it observes how the economy evolves and referred to 2016 as an example where the FOMC indicated four hikes but only raised the target range once in December. Powell’s comments came after FOMC members Kaplan (on Thursday) and Mester (earlier on Friday) said something similar and overall, the Fed is clearly indicating flexibility in its policy both in terms of the interest rate and quantitative tightening. The market expects the Fed to stay on hold in March.
In China, the People’s Bank of China (PBOC) responded to the slowdown and announced a reduction in the RRR for banks of one percentage point, freeing up another USD116bn. See China Weekly Letter: China hits the gas as the economy slows further, 4 January.
The big question for now is whether easing from China and the Fed on hold will be enough to stabilise markets. According to Thomas Harr, Global Head of FI&C Research, it is probably premature to call the bottom, as we may need to see a stabilisation in growth expectations before equities stabilise and head higher. See Harr’s View: Market turmoil to continue until growth stabilises , 6 January 2019.
