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• Chinese GDP growth probably quickened in Q4
• But doubts remain about 2024 outlook
• Risk assets could rally if data due on Wednesday, 02:00 GMT is upbeat

China’s rebound hits a wall

China’s economic recovery has been a big talking point for the markets over the past year, as the lifting of most Covid curbs at the end of 2022 failed to propel growth as intended. Instead, the world’s second largest economy became a drag on global growth, as authorities struggled to get to grips with a worsening property crisis.

Annual growth slowed to 4.9% in the third quarter, having notched up 6.3% growth in the second quarter. However, it’s likely that a pickup in consumption as well as some signs of stabilization in the beleaguered real estate sector boosted GDP in the fourth quarter.

Is the economy at a turning point?

GDP is expected to have expanded by 5.3% year-on-year in the final three months of 2023. If confirmed, this would mean the government would have comfortably achieved its growth target of around 5.0%. However, a poor reading in the same period a year ago is expected to flatter the Q4 number, taking some of the shine off any rebound, unless there is a big upside surprise.

Investors will also be scrutinizing the monthly prints for retail sales, industrial production and fixed asset investment for additional clues on the health of the economy. Retail sales and industrial output have been steadily improving since the summer, in a possible sign that the drip-feed stimulus being administered by Beijing is starting to filter through the economy.

A property market still in turmoil

However, one area that hasn’t seen much of a bounce is investment in fixed assets, which has been flatlining all year amid the ongoing pain in the property market. After amassing a vast amount of debt over the decades, liquidity has started to dry up for China’s oversized property developers, amid constrains from both lenders and buyers.

The problem is partly self-induced as Beijing is determined to see through its goal of deleveraging the country’s heavily indebted sectors. The need to maintain tough lending standards as well as refrain from bailing out troubled businesses has limited the government’s scope to roll out a large stimulus package. Most of the measures announced so far have been targeted and on a regional scale.

Rising risks

But the real estate woes are not the only headache for the economy. Fears are growing of a spillover of the property crisis onto other sectors, mainly on the shadow banking industry after a major financial conglomerate recently filed for bankruptcy. Businesses are also under pressure from the government’s relentless crackdowns on some industries, particularly on large tech companies.

There have been hints that President Xi Jinping plans to broaden the crackdowns on other sectors, including energy and finance, in an anti-corruption drive. Meanwhile, Washington and Beijing remain at loggerheads over trade and 2023 was a poor year for exporters.

Aussie hoping for a China lift

With the growing list of challenges facing the economy, a stronger-than-expected GDP print on Wednesday would likely provide only short-term relief for China-sensitive assets such as industrial commodities, regional equities and the Australian dollar.

The aussie finished 2023 virtually flat against the US dollar so some good news on the Chinese GDP front could help the currency build some positive momentum at the start of 2024.

An upbeat set of numbers could help the aussie to re-challenge its December peak of $0.6871 and then aim for last February’s high of $0.7157.

However, if the GDP data disappoints, the aussie is likely to test its medium-term uptrend line in the $0.6650 region. A drop below it would turn the spotlight on the 50- and 200-day moving averages at $0.6634 and $0.6582, respectively. If there is an even sharper slide, the price could fall all the way until the $0.6500 level.

The latest update on business sentiment pointed to resilience in activity and easing inflation pressures.

Key results (seasonally adjusted)

• General business confidence: -10.2 (Previous: -49.0)
• Trading activity, past three months: 6.3 Previous: -16.8)
• Trading activity, next three months: 4.9 (Previous: -12.1)
• % of businesses reporting a rise in operating costs over the past 3 months: 54.5 (Previous: 66.3)
• % of business who increased output prices over the past 3 months: 38.8 (Previous: 55.8)

The NZIER’s latest update on business conditions pointed to a Goldilocks combination of economic conditions at the start of 2024. Trading activity has been resilient and businesses are looking to take on staff. At the same time, the strong inflation pressures that have been buffeting the economy are easing.

On the activity front, businesses have reported a pick-up in trading activity through the final months of 2023. That includes a sizeable rise in manufacturing activity and retail sales, as well as gains in other sectors.

Businesses are also feeling more optimistic about the outlook for trading conditions over the coming months, though the survey is still pointing to modest growth. Conditions are mixed across the economy however. Balanced against firmer activity in sectors like retail, there is expected to be continued softness in areas like construction.

One reason for the firming in business sentiment may have been the change in government, with the new centre-right coalition expected to be much more business friendly. At the same time, many businesses will likely have welcomed the gradual easing in inflation and the related expectation that the interest rate tightening cycle has come to a close.

At the same time, there has been a sharp rise in the number of businesses who are planning on taking on staff in the new year. That comes at the same time as record levels of net migration have made it much easier for businesses to find staff with the skills they’ve been looking for. There’s also been a sharp fall in employee turnover – as economic growth has slowed, increasing numbers of workers who are currently in employment are choosing to stay put. Combined, those conditions likely point to an easing in wage growth over the year ahead.

On the inflation front, today’s survey still pointed to strong price and cost pressures, consistent with inflation lingering above 3% for some time yet. However, while still strong, those inflation pressures are dropping back. There’s also been a related lift in profitability.

As with other parts of today’s survey, inflation pressures have been mixed across industries – retailers and those in the services sector are still reporting strong pressure on input costs and output prices. In contrast, some gauges of construction cost pressures (which drove much of the strength in domestic inflation over the past year) have fallen to low levels.

• Jobs, inflation, and retail data to come from the UK
• Markets expect 125 basis points of rate cuts
• Consolidation in GBPUSD ahead of the data

We’ll get a lot of economic data from the UK this week which will tell us how the economy ended the year and whether markets are on the right path with respect to rate cuts in 2024.

Markets are pricing in 125 basis points of cuts this year, although even more so than with other major central banks, there appears to be quite an array of views on what they’ll actually do and how the data will perform.

This week we’ll get figures on the labor market on Tuesday, inflation on Wednesday, and consumer spending on Friday. BoE Governor will also make an appearance on Tuesday so it’ll no doubt be an interesting week for the pound sterling.

Rising triangle ahead of UK data

The pound has been consolidating against the dollar recently, forming a rising triangle in the process.

GBPUSD Daily

This could be viewed as bullish, given the rising lows and steady peaks but with so much data to come just as it would appear a breakout is near, it could easily go either way depending on how the numbers fall.

• Gold reversed from support level 2020.00
• Likely to rise to resistance level 2075.00

Gold recently reversed up from the pivotal support level 2020.00 (former minor support from the middle of December).

The support level 2020.00 was strengthened by the lower daily Bollinger Band and by the 61.8% Fibonacci correction of the upward impulse 1 from last month.

Given the clear daily uptrend, Gold can be expected to rise further to the next resistance level 2075.00 (top of the previous minor impulse wave 1).

• EURCHF reversed from support level 0.9300
• Likely to rise to resistance level 0.9400

EURCHF currency pair recently reversed up from the key support level 0.9300 (intersecting with the lower weekly Bollinger Band and the support trendline of the weekly down channel from the start of 2023).

The upward reversal from the support level 0.9300 stopped the previous downward weekly impulse wave (5) from the end of last year.

Given the oversold daily and weekly Stochastic, EURCHF currency pair can be expected to rise further to the next resistance level 0.9400 (former low of wave (3) from last year).

According to the Bank of Canada Business Outlook Survey (BOS) Canadian business sentiment remained downbeat in the fourth quarter of 2023. The BOS indicator, a statistical summary of survey results, was -3.15 in 2023 Q4, up only slightly from the post-pandemic low of -3.45 in 2023 Q3.

The pessimistic tone was broad-based across sectors and firm sizes. The share of firms preparing for a potential recession in the coming year remained the same (roughly one-third), but this quarter's concerns are focused on demand, credit and uncertainty around economic conditions, rather than labour shortages and supply chains.

The good news is that both input and output price growth expectations are trending downwards, indicating some easing of inflationary pressures. Fewer businesses than last quarter plan larger-than-normal increases in their output prices. Importantly, the BoC cites that "firms' pricing behaviour is slowly returning to normal". The Bank has previously cited this as a force keeping inflation elevated.

Anticipated wage growth has slightly decreased, with fewer firms reporting pressure to increase wages due to cost of living adjustments or retention issues. Still, businesses expect their wage adjustments to be higher than average over the next 12 months with roughly three-quarters of firms expecting wage growth to return to normal by 2025.

Results in the parallel Canadian Survey of Consumer Expectations (CSCE) showed Canadian consumers have grown more pessimistic about the economy, with heightened concerns about cost of living increases in the near term. The perception of current inflation cooled only slightly to 5.9% from 6.6% in Q3, but expectations for inflation in the long-term have fallen further below the historical average.

As a result of continuous price gains, households are reducing or postponing purchases. In addition, more consumers reported that higher interest rates are increasingly affecting their spending behaviour and worsening their financial situation. These two factors remained key in affecting consumers' perception of the economy, making them increasingly worried about the future.

Reflecting this increasing concern about future prospects, consumer confidence in the labor market softened. Despite this, expectations for wage growth roughly unchanged at a high level.

Key Implications

Both businesses and consumers continue to be concerned about elevated prices and high interest costs. The reduction in consumer spending is becoming more widespread and is being felt more acutely by businesses that are now increasingly affected by competitive market pressures and weakening consumer demand.

As we see from both surveys, despite economic concerns, wage growth is likely to remain elevated in 2024. It is also becoming more apparent that the gap between consumers' perception of inflation and actual price changes is creating a real communication challenge for the Bank of Canada as it prepares to step on the path of rate cuts. According to the consumer survey, persistently high expectations for inflation for services such as rent may be slowing progress in returning overall inflation expectations to a historic norm. As we noted in our recent report, the Bank of Canada should shift its public messaging to highlight that housing expenses are not the sole determinants of Canada’s wider inflation patterns. Failing to make this distinction risks curtailing economic growth by too much.

• Data have to turn quickly negative for the March gathering to become live
• Market assigns only 30% chance for a March move; April rate cut is a done deal
• January concludes with preliminary PMIs and the January 25 ECB meeting

Despite the upside surprise at the December inflation report, the market remains convinced that the ECB will probably be the first one to announce a rate cut in 2024. The market is currently pricing in a 30% probability of a March 7 rate move. With President Lagarde remaining adamant that the ECB is not yet in an easing mood, what needs to happen for the ECB to cut rates in March?

1. Inflation falling aggressively

Contrary to the Fed's dual mandate, the ECB’s only target remains price stability i.e. 2% inflation over the medium term. Hence, an unexpected drop in inflation, particularly in the core indicator, would clearly open the door to a more dovish stance. The next CPI release for the month of January comes on January 31 and February 1 for Germany and the euro area respectively.

Energy prices played a massive role in pushing inflation to double digits. As our colleague Marios Hadjikyriacos wrote in a recent special report, downside risks for oil prices are mounting with a price war possibly around the corner. Such an outcome would mean much lower oil prices going forward with inflation dropping aggressively due to the negative base effects. Of course, lower oil prices would potentially fuel growth and consumer spending but that would be a problem for another day.

2. Growth tanking

Last year was a difficult one in terms of growth. The Euro area on the whole managed to grow but Germany has probably contracted. The IMF, the OECD and the European Commission agree that 2024 will be a stronger year with Germany returning to positive growth territory. However, these forecasts were made before the German debt shenanigans with the resulting fiscal tightening further complicating the outlook. The ECB’s own projection for euro area growth is a mere 0.8%. The next German IFO survey will be published on January 25 with the preliminary PMI surveys for January scheduled for a February 5 release.

3. Fiscal tightness = no more energy support programmes

Following four years of fiscal relaxation, the euro area countries agreed to reactivate the Stability and Growth Pact. In layman terms, euro area countries must have a credible plan of cutting their debt and should aim mostly for balanced budgets. In case of another strong oil rally, the euro area governments would be unable to offer financial support to consumers, with the crashing consumer spending appetite causing an acute economic slowdown.

4. External events

An escalation in Ukraine and/or the Middle East, or even a flare-up in one of the world's troubled areas would impact world trade routes and investment appetite, thus resulting in a significant drop in growth. As mentioned earlier, Europe is already barely growing. Should such an event occur, the ECB will be forced to cut interest rates in order to stop the economy from falling off in a recession.

Euro to suffer from an early rate cut?

Despite the evident divergence between the decent growth seen in the US and the continued economic weakness recorded in the Euro area, euro-dollar has been enjoying an upleg from the October lows. The contradictory rhetoric at the December central banks meetings supported this rally but data releases will probably determine the short-term outlook.

A gradual build-up of market expectations for a March ECB rate cut could open the door for correction towards the 1.0735 area. On the flip side, with the market continuing to inflate the expected rate cuts by the Fed, euro bulls could feel more confident in targeting another rally towards the recent peak of 1.1139.

Brent prices have been rising for three consecutive days as of this Monday. The price of a Brent barrel has climbed to 79.00 USD, and there are underlying reasons for this surge.

The focal point of attention is the unfolding events in the Red Sea, where the situation is challenging. This holds significant importance for the crude oil market as numerous tankers with energy carriers pass through these waters. Any disruptions in transportation accessibility could potentially impact the crude oil supply. The market incorporates this concern into its quotes. While some tankers have already altered their routes, others continue passing through the Red Sea.

The Libyan factor also supports oil bulls. Protests in the country might lead to a shutdown of two additional oil and gas organisations. Earlier, operations were halted at the Sharara field, causing the market to lose approximately 300 thousand barrels of crude oil daily.

Meanwhile, various drivers exert pressure on the market. Increasing crude oil production among non-OPEC+ members, including the US, is one such factor. Additionally, there is uncertainty in Chinese crude oil demand.

Brent technical analysis

On the H4 Brent chart, a growth wave structure is emerging towards 82.15. Once this level is reached, a correction link to 79.30 is expected, followed by a rise to 83.43. This is a local target. Technically, this scenario is confirmed by the MACD: its signal line is above zero, strictly pointing upwards.

On the H1 Brent chart, a consolidation range is developing around 79.35. A growth structure to 81.45 is expected, followed by a correction to 79.40 and a rise to 82.15. This is a local target. Technically, this scenario is confirmed by the Stochastic oscillator, with its signal line above 50, aiming strictly upwards to 80.

Markets

US markets are closed today for Martin “I have a dream” Luther King Day. That brought Europe at the center of attention today and that’s what we’ll do in this report as well. Our angle is German, as the country reported a first, very early estimate of growth in 2023. The Federal Statistic’s Office (Destatis) reported GDP to be -0.3% lower last year than in 2022. Elevated prices put a damper on economic growth, as did unfavourable financing conditions due to rising interest rates and weaker domestic and foreign demand. In the sectoral divide, industry (ex. construction) contracted 2% while most service branches expanded their economic activities, be it at a weaker pace than in the two preceding years. Construction saw a modest 0.2% growth. Household consumption was down 0.8% in the expenditure based approach, with the statistics office citing high consumer prices as the key reason for this. Gross fixed capital formation tanked 2.1%. Trade supported the economy but only because imports experienced a greater contraction (-3%) than exports (-1.8%). From the yearly estimate, Destatis also derived a first preliminary Q4 quarterly reading at -0.3%. Because of an upward revision to Q3 growth from -0.1% to +0.1%, Germany did avoid a technical recession. It's a meager consolation to what is the first contraction over a full 12 months since the pandemic and (one of) the weakest performances in the landscape of major advanced economies.

We switch from the economy to monetary policy. Central bank interviews in the sidelines of the WEF in Davos already prove interesting. ECB’s/Buba’s Nagel questioned by Bloomberg said it’s too early to talk about rate cuts as inflation is still too high. He called markets over-optimistic and suggested the ECB can wait for the summer break before mulling cuts. Holzmann joined his hawkish colleague a bit later and took it even further. The Austrian policy member said one shouldn’t count on rate cuts at all in 2024, even as the economy has disappointed. He referred a.o. to the geopolitical situation in which the Houthi rebel threat in the Red Sea region could boost inflation anew. Both ECB policymakers reinforced the earlier German yield rise, leading to changes between +5.4 (30-y) and +7.6 bps (2-y). Euro area money markets still discount 150 bps of rate cuts by end 2024 though. The euro is doing pretty well against major peers in FX space. But an equally solid dollar bid is keeping EUR/USD locked in the mid 1.09/1.10 area. European stocks slip about half a percent but JPY is unable to profit from that minor risk off with the rise in core rates weighing more heavily. USD/JPY bounces to 145.86, EUR/JPY to 159.66.

News & Views

Statistics Sweden reported inflation in December to have slowed slightly less than expected. Headline inflation still rose 0.7% M/M but positive base effects allowed the Y/Y measure to decline from 5.8% to 4.4% (4.3% was expected). CPIF inflation (with fixed interest rates), the preferred target measure of the Riksbank, printed at 0.6% M/M and 2.3% Y/Y (from 3.6%). Core CPIF inflation excluding energy remains high at 0.7% M/M and 5.3% Y/Y (from 5.4%). The decline in headline inflation was mainly due to significantly lower electricity prices compared to December 2022. The interest rates for household’s mortgages rose substantially Y/Y and contributed with 2.3 percentage points to annual CPI inflation. Regarding the monthly dynamics, price rises still remained broad-based. Prices for clothing and footwear rose 2.8% M/M, housing and utilities added 1.1%. Healthcare and medicine as well as prices for transportation rose 0.8% compared to November. The Riksbank in its end November forecasts left the door open for an additional rate hike, but recent comments of MPC members suggested that this won’t be necessary. Even so, higher core inflation might delay a first Riksbank rate cut to the August meeting rather than a first step in May or June. Any SEK gains post the release were limited and short-lived. EUR/SEK currently trades little changed near 11.27.