China Beats its 2023 Growth Target

In focus today

This morning at 8:00 CET we get inflation data for December from the UK, where consensus expects both headline and core inflation to ease further on a yearly basis. Key will be how service inflation develops as this remains an important input for the Bank of England to determine underlying inflation pressures.

We will also look out for the final euro area inflation figures for December. The final HICP figures includes details on inflation components that will provide important information about the underlying inflationary pressure.

In the US we get retail sales data for December this afternoon. Consensus expects 0.4% m/m compared to 0.3% m/m in November.

In Sweden at 09:10 CET, The Riksbank’s first deputy governor Anna Breman gives her view on the economic situation and current monetary policy at a conference on the Swedish housing market.

There are several speeches on the schedule for today with Fed’s Bowman and Barr and ECB President Lagarde all speaking in the afternoon and Fed’s Williams speaking tonight.

Economic and market news

What happened overnight

Chinese data out this morning disappointed badly. The GDP data looked okay with a 1.0% q/q increase (consensus of 1.1%). This compares with a growth rate of 1.5% q/q for Q3 (revised up from 1.3% q/q). With the Q4 release, Chinese GDP growth for the year 2023 stood at 5.2%, thus beating the government’s 5% growth target and in line with consensus. However, data for consumption and housing was weak. Chinese retail sales for December stood at 7.4% y/y missing expectations of 8% y/y, and down from 10.1% y/y in November. Home sales dropped to a new low in December 50% below the pre-pandemic level (link to chart), and house prices fell 0.5% m/m marking the biggest drop since 2015. The numbers raise warnings that the housing crisis continues to deepen, and that the consumer engine is slowing down. The data highlights the need for further stimulus. Chinese population fell for the second year in a row, shrinking by 2m in 2023. Chinese offshore stocks have taken a new hit after the data and is down 3% overnight to the lowest level since November 2022.

What happened yesterday

In Norway, mainland GDP figures for November stood at -0.2% m/m in line with expectations and marginally stronger than what Norges Bank expected (-0.3% m/m) in its December Monetary Policy Report. The slight contraction in November after the 0.4% m/m growth in October is in line with the sideways trend seen in mainland GDP figures since March 2023.

In the UK, the labour market report for November/December was fairly in line with expectations. The 3m/3m annualised wage growth for the private sector stood at 2.6% down from 3.8%, which is sustainable with a 2% inflation target (assuming 1% productivity growth).

In China, Bloomberg reported that Chinese leadership were considering issuing CNY1tn (USD139bn) of bonds in a ‘special sovereign bond plan’, corresponding to around 0.8% of Chinese GDP. The funds raised would be used to finance projects related to food, energy, supply chains and urbanization. At the end of 2023 China also lifted the budget deficit for the year, providing support to growth in H1 this year. The potential new stimulus would likely add support to growth in H2.

In the ECB, moderate Governing Council member Villeroy commented the next move from the ECB should be a rate cut this year, but he would not comment on any specific time this may happen. This is in contrast to the recent comments from other GC members (Nagel, Holzmann, Lane, etc.) that in the past days have generally pushed back on market expectations of a rate cut this spring and guided for summer at the earliest. The ECB survey for November on consumer expectations for eurozone inflation showed expectations for inflation three years ahead had dropped to 2.2% y/y from 2.5% y/y.

In Germany, ZEW economic sentiment for January rose to 15.2 from 12.8 marking the sixth consecutive monthly rise. The current conditions index is however still weak and has been only slightly improving over the last couple of months, as also reflected in the more comprehensive Ifo survey.

In the Red Sea, another dry bulk carrier ship was hit by a missile. The ship, a Greek-owned vessel sailing under Maltese flag, is the second commercial vessel hit by a missile off the coast of Yemen in two days. Energy company Shell and Japanese shipping operator NYK Line were the latest major companies to halt transport through the Red Sea. US military carried out another strike against Houthi missile capabilities.

Equities: Global equities were lower yesterday after weak macro data and yields ticking higher. Just like Monday, this was not a full-blown risk-off session with strong defensive rotation, but rather a profit-taking session after the strong year-end rally. That being said, one could easily have feared a much more negative reaction to the macro data but weak manufacturing data was more or less ignored since the service-driven economic pick-up post Covid. In US yesterday, Dow -0.6%, S&P 500 -0.4%, Nasdaq -0.2% and Russell 2000 -1.2%. Asian markets are lower this morning led by China after a broad set of weak data was released. Especially the housing market continues to struggle and calling for more public support. European and US futures all lower this morning as well.

FI: US bond yields rose significantly on the back of hawkish comments from Fed Governor Waller regarding the timing of the rate cut from the Federal Reserve as well as the number of rate cuts in 2024. Hence, 10Y US Treasury yields rose some 11bp yesterday and are back above 4%.

FX: EUR/USD declined below 1.09 due to rising yields and poor risk appetite. The increasing yields propelled USD/JPY above 147. Meanwhile, EUR/GBP initially jumped higher on the release of the November/December UK Job report but reversed the move during the afternoon, settling around the 0.86 mark. The Scandies remain weak this week, with both EUR/NOK and EUR/SEK consolidating above 11.30.