China Cuts RRR By 100bps In Preparation Of Its Lunar New Year Holiday

Notes/Observations

• China PBoC cuts RRR by 100bps to release cash into the economy to support growth ahead of its Lunar New Year holiday in Feb
• European inflation data disappoints (France, Portugal, Italy and Euro Zone all miss expectations)
• Euro Zone Dec Advance CPI moves back below the ECB target for 1st time in 7 months; oil a contributing factor
• European Services PMI data mixed (Beats: UK, Italy, Spain; Misses: France, Germany, Euro Zone)
• Confirmation of a new round of trade talks between the US and China sends some positive signals to risk markets
• US Dec payrolls seen capping a strong year with underlying pace of job growth remaining solid but questions arise on 2019 outlook

Asia:

• China Dec Caixin PMI Services hits a six-month high (53.9 v 53.0e)
• China Commerce Ministry (MOFCOM) confirmed that China and US to hold vice ministerial level trade talks on Jan 7-8th (Mon-Tues)
• Japan PM Abe reiterated stance that was not intending to dissolve Japan Lower House, no plans for dual Lower & Upper House elections
• Japan Finance Ministry (MOF) Currency Head Asakawa comments on recent FX volatility and noted that speculative moves were seen in thin markets. Reiterated G7-stance that excessive FX moves are undesirable for stable economy. To closely monitor if speculative movesware behind forex movements
• BOJ said to be considering lowering its fiscal 2019 forecast for CPI growth to around 1% from last October’s projection of 1.4%. Policymakers are also looking at a minor downward revision to the fiscal 2020 forecast of 1.5%.

Europe:

• UK Brexit Min Barclay reiterated govt stance that a second referendum would cause yet more division in the UK
• Telegraph poll shows most Tories would select ‘No-deal’ Brexit
• Ireland PM Varadkar and German Chancellor Merkel recently discussed how to help PM May to get through Withdrawal Agreement . Varadkar stated that EU was happy to offer reassurance and guarantees to the United Kingdom but not reassurances and guarantees that contradict or change what was agreed back in November (Reminder: PM May to hold talks on Brexit this week with Germany Chancellor Merkel, Dutch PM Rutte, and EU Council Pres Tusk to press EU leaders for Brexit concessions)
• UK Dec BRC Shop Price Index Y/Y: 0.3% v 0.1% prior (highest since April 2013)

Americas:

• Rep. Nancy Pelosi (D-CA) elected House Speaker (As expected)
• US Democrat controlled House votes 241to 190 to pass spending package to reopen the government, without border wall funds (as expected); White House has said it would veto any measure that did not include funding for border wall
• President Trump invited congress leaders for 11:30am Friday meeting
• US 2-year Treasury yield briefly fell below the Fed Funds Effective Rate (first time since 2008), notes some expectations that the Fed may pause rate hikes and eventually cut rates

Energy:

• Weekly API Oil Inventories: Crude: -4.5M v +6.9M prior

Macro

• (CN) China: The PBOC cut RRR by 100bp to 14.5% in a move flagged in advance by Premier Li after he had met with banks earlier in the session. Most of the RRR cut is merely covering the maturing MLF funding in Q1.
• (EU) Eurozone: The December Composite PMI was unexpectedly revised down to 51.1 from the 51.3 preliminary reading. The services reading was revised to 51.2 from 51.4 and down from 53.4 in November. The composite output reading was the at the weakest level in over four years and in part reflects the impact of the increasingly violent protests against government policies, which underpinned what looks like the first fall in economic output for 2.5 years. The economic recovery is running clearly out of steam with corporates now concerned about future demand and output growth going forward.
• (DE) Germany: Jobless numbers fell -14K in December, leaving the adjusted unemployment rate at a fresh record low of 5.0%. Worth noting that the labor market is a lagging indicator and part of the current improvement reflects a high degree of uncertainty about the outlook where companies are reluctant to invest heavily in the expansion of production capacities but employ more manpower to fulfill orders.

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

• Equities Indices [Stoxx600 +1.4% at 338.4, FTSE +1.1% at 6766, DAX +1.6% at 10580, CAC-40 +1.2% at 4664, IBEX-35 +1.5% at 8650, FTSE MIB +2.0% at 18575, SMI +0.4% at 8501, S&P 500 Futures +1.3%]
• Market Focal Points/Key Themes: European Indices rebound this morning after sharp falls in the US yesterday with the majority of the Indices up over 1% on trade optimism as China Commerce Ministry (MOFCOM) confirms China and US to hold vice ministerial level trade talks early next week. Markets also await December Jobs numbers out of the US later today. On the corporate front Spectrum trades higher in Norway after preliminary Q4 Rev; Johnson Service Group and Basilea Pharma trade higher following trading updates and Sales guidance. German Auto name BMW trades higher after management confirmed its full year margin target; Volvo also rises after announcing provisions of SEK7B in Q4 related to emission control component issue. Gear 4 Music trades notably lower after 2019 outlook; Circassia and McColl Retail also trades lower following a trading update and new CFO announcement. Looking ahead notable earners include Cal-Maine Foods, RPM International, AngioDynamics and Lamb Weston.

Equities

• Consumer discretionary: Gear 4 Music [G4M.UK] -48% (Trading update), McColl’s Retail [MCLS.UK] -2.2% (new CFO), Vapiano [VAO.DE] +3.4% (divestment), Johnson Controls [JSG.UK] +3.4% (Trading update)
• Healthcare: Circassia Pharma [CIR.UK] -10% (Trading update), Basilea Pharma [BSLN.CH] +8.7% (Cresemba Sales figures), Bayer [BAYN.DE] +3.7% (Reportedly Judge restricts evidence in case claiming Bayers Roundup is carcinogenic)
• Industrials: BMW [BMW.DE] +2.1% (Affirms margin outlook), Volvo [VOLVA.SE] +2.5% (Makes a provision of SEK7B relating to estimated costs to address degrading emission control component issue)
• Energy: Spectrum [SPU.NO] +9% (Prelim Q4)

Speakers

• ECB’s Coeure (France) reiterated General Council stance that rates to remain low for as long as necessary
• Northern Ireland DUP Brexit Spokesman Wilson reiterated party stance that could not support PM May’s Brexit plan
• Czech Central Bank (CNB) Dec Minutes: Saw roughly balanced risks to forecasts; see tougher rate decisions in 2019 compared to 2018. Vote was not unanimous to keep policy steady; members Benda and Michl voted for a 25bps hike . If CZK currency (Krone) was weaker than current forecasts there would be room for further rate hikes more quickly in 2019. Some rate setters noted that any decision to raise rates would further need to take into account the external environment
• China PBoC cuts RRR by 100bps to ease liquidity fluctuation ahead of the Lunar New Year holiday. The move to be done in two phases with a 50bps cut on Jan 15th and another 50bps cut on Jan 25th. RRR cut was aimed to replace the MLF that were maturing in Q1 and the move would release CNY1.5T in liquidity

Currencies/Fixed Income

• Optimism on the trade front provided some unwinding of safe-haven flows. A RRR cut by China to alleviate liquidity concerns ahead of its feb Lunar New Year holiday also helped sentiment
• The JPY currency was weaker as Japanese markets returned from an extended holiday. The USD/JPY briefly tested below 105 level on Thursday for 9-month lows but climbed above the 108 handle during Friday’s session. Japanese Currency Head Asakawa commented on recent FX volatility and noted that speculative moves were seen in thin markets. Reiterated G7-stance that excessive FX moves are undesirable for stable economy
• EUR/USD was holding above the 1.14 level in the session but faced headwinds as PMI Services data generally disappointed and Dec inflation readings continued to disappoint. Euro Zone Dec Advance CPI moves back below the ECB target for 1st time in 7 months; oil a contributing factor

Economic Data

• (IN) India Dec PMI Services: 53.2 v 53.7 prior (7th month of expansion); PMI Composite: 53.6 v 54.5 prior
• (IE) Ireland Dec PMI Services: 56.3 v 57.1 prior; PMI Composite: 55.5 v 56.6 prior
• (UK) Dec Nationwide House Prices M/M:-0.7% v + 0.1%e; Y/Y: 0.5% v 1.5%e
• (DK) Denmark Nov Unemployment Rate (Seasonally Adj): 3.1% v 3.2% prior; Gross Unemployment Rate: 3.9% v 3.9% prior
• (NO) Norway Nov Credit Indicator Growth Y/Y: 5.5% v 5.7% prior – (BR) Brazil Dec FIPE CPI (Sao Paulo): 0.1% v 0.0%e
• (ZA) South Africa Dec PMI (Whole Economy): 49.0 v 48.2 prior (6th straight contraction)
• (CN) Weekly Shanghai copper inventories (SHFE): 108.9K v 118.7K tons prior
• (SE) Sweden Dec PMI Services:56.4# v 61.1 prior
• (FR) France Dec Preliminary CPI M/M: 0.0% v 0.1%e; Y/Y: 1.6% v 1.8%e
• (FR) France Dec Preliminary CPI EU Harmonized M/M: 0.1% v 0.1%e; Y/Y: 1.9% v 2.0%e
• (HU) Hungary Nov PPI M/M: -0.2% v 0.6% prior; Y/Y: 5.1% v 6.4% prior
• (ES) Spain Dec Services PMI: 54.0 v 53.7e (62nd month of expansion); Composite PMI: 53.4 v 53.7e
• (TW) Taiwan Dec Foreign Reserves: $461.8B v $461.4B prior
• (NG) Nigeria Dec PMI: 55.0 v 55.5 prior
• (IT) Italy Dec Services PMI: 50.5 v 50.1e; Composite PMI: 50.0 v 49.3e
• (FR) France Dec Final Services PMI: 49.0 v 49.6e (confirmed 1st contraction in 30 months and lowest since Nov 2014)); Composite PMI: 48.7 v 49.3e
• (DE) Germany Dec Unemployment Change: -14K v -13Ke; Unemployment Claims Rate: 5.0% v 5.0%e
• (DE) Germany Dec Final Services PMI: 51.8 v 52.5e (confirmed 66th month of expansion but lowest since Sept 2016); Composite PMI: 51.6 v 52.2e
• (EU) Eurozone Dec Final Services PMI: 51.2 v 51.4e (confirmed 66th month of expansion); Composite PMI: 51.1 v 51.3e
• (PL) Poland Dec Preliminary CPI M/M: 0.0% v 0.1%e; Y/Y: 1.1% v 1.1%e
• (UK) Dec Services PMI: 51.2 v 50.7e (29th month of expansion); Composite PMI: 51.4 v 50.8e
• (UK) Nov Net Consumer Credit: £0.9B v £1.0Be; Net Lending: £3.5B v £4.0Be
• (UK) Nov Mortgage Approvals: 63.7K v 66.0Ke
• (UK) Nov M4 Money Supply M/M: 0.0% v 0.7% prior; Y/Y: 0.8% v 1.0% prior; M4 Ex IOFCs 3M Annualized: 1.7% v 2.2% prior
• (UK) Dec Official Reserve Changes: $1.4B v $0.5B prior
• (PT) Portugal Dec Preliminary CPI M/M: -0.2% v -0.4% prior; Y/Y: 0.7% v 0.9% prior
• (PT) Portugal Dec Preliminary CPI EU Harmonized M/M: -0.4% v-1.0 % prior; Y/Y: 0.6% v 1.2%e
• (EU) Euro Zone Dec Advance CPI Estimate Y/Y:1.6 % v 1.7%e; Core CPI Y/Y: 1.0% v 1.0%e
• (EU) Euro Zone Nov PPI M/M: -0.3% v -0.2%e; Y/Y: 4.0% v 4.2%e
• (IT) Italy Dec Preliminary CPI (includes tobacco) M/M: -0.1% v -0.2% prior; Y/Y: 1.1% v 1.5%e
• (IT) Italy Dec Preliminary CPI EU Harmonized M/M: -0.1% v +0.1%e; Y/Y: 1.2% v 1.4%e
• (CY) Cyprus Dec CPI M/M: -1.4% v -0.2% prior; Y/Y: 1.7% v 2.7% prior
• (NO) Norway Dec House Prices M/M: -0.2%; Y/Y: 2.8%

Fixed Income Issuance

• (IN) India sold total INR120B vs. INR120B indicated in 2020, 2027, 2031, 2035 and 2055 bonds

Looking Ahead

• 06:00 (BR) Brazil Nov PPI Manufacturing M/M: No est v -0.8% prior; Y/Y: No est v 14.1% prior
• 06:00 (UK) DMO to sell €5.5B in 1-month, 3-month and 6-month bills (£1.5B, £2.0B and £2.0B respectively)
• 06:30 (IN) India Weekly Forex Reserves w/e Dec 28th: No est v $393.3B prior
• 06:45 (US) Daily Libor Fixing
• 07:00 (BR) Brazil Dec PMI Services: No est v 51.3 prior; PMI Composite: No est v 51.6 prior
• 07:00 (CL) Chile Nov Retail Sales Y/Y: 1.8%e v 7.5% prior; Commercial Activity Y/Y: No est v 8.7% prior
• 08:00 (IN) India announces upcoming bill issuance (held on Wed)
• 08:10 (UK) Baltic Dry Bulk Index
• 08:30 (US) Dec Change in Nonfarm Payrolls: +184Ke v +155K prior; Change in Private Payrolls: +185Ke v +161K prior; Change in Manufacturing Payrolls: +20Ke v +27K prior
• 08:30 (US) Dec Unemployment Rate: 3.7%e v 3.7% prior; Underemployment Rate: No est v 7.6% prior; Labor Force Participation Rate: No est v 62.9% prior
• 08:30 (US) Dec Average Hourly Earnings M/M: 0.3%e v 0.2% prior; Y/Y: 3.0%e v 3.1% prior; Average Weekly Hours: 34.5e v 34.4 prior
• 08:30 (CA) Canada Dec Net Change in Employment: +6.0Ke v +94.1K prior; Unemployment Rate: 5.7%e v 5.6% prior; Full Time Employment Change: No est v +89.9K prior; Part Time Employment Change: No est v +4.1K prior; Participation Rate: 65.4%e v 65.4% prior; Hourly Wage Rate Y/Y: 1.6%e v 1.5% prior
• 08:30 (CA) Canada Nov Industrial Product Price M/M: No est v 0.2% prior; Raw Materials Price Index M/M: No est v -2.4% prior
• 09:45 (US) Dec Final Markit Services PMI: 53.4e v 53.4 prelim; Composite PMI: No est v 53.6 prelim
• 10:15 (US) Fed Chair Powell plus Bernanke and Yellen interviewed at AEA
• 10:15 (US) Fed’s Bostic Speaks at AEA meeting in Atlanta
• 10:30 Weekly EIA Natural Gas Inventories
• 11:00 (US) Weekly DOE Crude Oil Inventories
• 13:00 (US) Weekly Baker Hughes Rig count data

Weekend data

Sat

• 12:00 (CO) Colombia Dec CPI M/M: 0.3%e v 0.1% prior; Y/Y: 3.2%e v 3.3% prior