Mon, Jan 18, 2021 @ 00:51 GMT
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China Macroeconomic Update

Recent releases in China's November macroeconomic indicators suggest that growth continue to stabilize. Yet, weakness in renminbi means that capital outflow should remain a headache. China's growth in industrial production (IP) improved to +6.2% y/y in November, from +6.1% a month ago. This came in better than consensus of +6.1%. Retail sales expanded +10.8% y/y in November, compared with expectations of +10.2% and +10% in October. Indeed, this is the fastest pace of consumer spending growth so far this year. A key contributor to the upside surprise was auto sales, thanks to government tax incentives. Meanwhile, 'single's day earlier in November also helped boost sales of electronics and telecom products. Urban fixed assets investment gained +8.3% in the first 11 months of the year, unchanged from the year through October. This came in line with expectations.

ECB Extends QE but Tapers Size

ECB surprised the market by announcing tapering plan for its bond purchases program. The Governing Council decided to extend the program until December 2017. However, the pace would slow down to 60B euro per month from April 2017, compared with the current 80B euro. The market generally anticipated ECB to extend the program for 6 months without changing the pace of purchases. The market was disappointed. German yields spiked to a one-year high. The single currency soared to a one-month high of 1.0872 immediately after the announcement. However, gains were erased with EURUSD dropping more than -1%, as ECB left the door open to extend QE further beyond December 2017 and/or pick up the pace of bond buying again if the economic conditions deteriorate. Despite disappointing in first sight, the ECB has indeed delivered more than the market had anticipated: 9 months*60B euro = 540B euro vs consensus of 6 months*80B euro = 480b euro. Has the ECB has again disappointed the market by doing more?

BOC Left Rates Unchanged, Differentiating Itself from Fed

BOC, as widely anticipated, left the policy rate unchanged at 0.5% in December. The central bank maintained a dovish tone as in recent meetings. While acknowledging that global market conditions have 'strengthened', 'undiminished' uncertainty has continued to undermine 'business confidence and dampening investment in Canada's major trading partners'. Of particular note is that BOC explicitly indicated its different from the Fed, attempting to dampen hopes that BOC would follow the Fed in raising interest rates. It also attributed the recent increase in Canadian treasury yields to US factors, instead of domestic fundamentals. We expect BOC to leave the policy rate unchanged, as well as maintaining a dovish tone, throughout 2017.

RBA Kept Policy Rate Unchanged At 1.5% In December

RBA left the cash rate unchanged at 1.5%, as widely anticipated. Little news was seen in the accompany statement with the more notable change was policymakers' acknowledgement in the rise in commodity prices. However, they stopped short of projecting its impacts on growth, for now. Today's announcement lacks indication for the central bank's monetary policy outlook. We expect future moves remain data-dependent but the central bank is not urgent in making another change in the policy rate.

Chinese Manufacturing Activities Improved Further In November

The official manufacturing PMI for China climbed +0.5 point higher to 51.7 in November, another month of big increase after October's 0.8-point gain. The non-manufacturing PMI (services and construction activities) soared +0.7 point to 54.7. The services PMI added +1.1 points to 53.7, while the construction PMI slipped -1.4 points to 61.4. The Caixin/Markit version of manufacturing PMI, by contrast, fell to 50.9 in November from a 27-month high of 51.2 a month ago. Despite the fall, Markit noted that it remains the second-highest reading in 2 years and indicates that 'the manufacturing industry continued to pick up steam'. Moreover, although index readings for both output and new orders declined, those 'tracking input and output prices rose at a faster pace to hit their highest levels in 5 years, pointing to further intensification of inflationary pressure'.

OPEC and Non-OPEC Agree to Cut, but Can This Really Boost Oil Prices?

To the market's surprise, OPEC announced to cut production to 32.5M bpd, the lower end of the target range indicated in the "Algiers Accord" in September. It also represents a -1.2M bpd, or -3.7%, reduction from October levels. Meanwhile, OPEC noted that non-OPEC countries have also agreed to cut output by -0.6M bpd with half of the contribution coming from Russia. Initial market reaction was buoyant with crude oil prices rallying the highest levels in a month. However, performance of commodity currencies under our coverage was not as robust as expected. Indeed, all of aussie, kiwi and loonie ended the day lower after initial rally, mainly due to a stronger US dollar. Higher oil prices as a result of output cut lift inflation expectations, lifting US dollar and Treasury yields.

Quick Guide to Italian Referendum on Senate Reform

Following Brexit and Donald Trump's victory in US presidential election, the Italian referendum this coming Sunday is the latest event that could cause huge volatility in the financial markets. Indeed, with the "no" camp leading in opinion polls, Italian shares and bonds have underperformed of late. The banking sector has suffered most with the FTSE Italia Banks Index losing almost -9% in November. Italy's FTSE MIB index has fallen -2.65% this month, compared with a -0.74% drop in the pan-European Stoxx600 index. Meanwhile, the 10-year Italian/German yield spread widened to a 1.5-year high of 1.874% last Thursday. The market's key concern is that a "no" vote leading to resignation of Prime Minister Matteo Renzi would trigger massive selloff in bank shares, forcing the debt-ridden Banca Monte dei Paschi di Siena to suspend plans for a critical 5B euro capital increase and then making other banks, such as UniCredit, to delay similar plains too. Such risks might be contagious, spreading to other peripheral countries and result in another European financial crisis.