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In December, UK payrolled employment rose 28k or 0.1% mom to 29.9m. That's a rise of 2.3% yoy or 676k over the 12-month period. ONS also noted that the number employees were rising in line with pre-pandemic trends. Median monthly pay rose 7.7% yoy to GBP 2194. Claimant count rose 19.7k.

In the three months November, unemployment rate was at 3.7%, 0.2% points higher than the previous three-month period, but 0.3% below pre-pandemic levels. Employment rate was unchanged at 75.6%. Economic inactivity rate was down -0.1% to 21.5%. Both average earnings including bonus and excluding bonus rose 6.4% 3moy.

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Market movers today

Today's key data release will be the ZEW index from Germany. It will be interesting to see whether the recent rebound in leading indicators persists into Q1, which would give us a signal that recession in Europe could actually be milder and shorter than we have previously anticipated. We also get final December CPI figures from Germany.

In the UK, labour market data out today will together with inflation figures (out tomorrow) be of large interest ahead of the BoE meeting in the beginning of February. Wage growth is expected to take another step up to 6.2% y/y compared to 6.1% y/y in October and add further pressure on the BoE that in their November projections estimated wage growth at 5.75% during Q4. Unemployment rate out at the same time is estimated to be unchanged at 3.7%. Our forecast is for a 25 basis hike in February but higher wage growth and/or inflation figures could bring a March hike into play.

On central bank front, we have ECB's Centeno and Müller on the wires in the morning, while Fed's Williams will give a speech in the evening European time.

Overnight, we will get rate decision by the Bank of Japan. Consensus expects no changes in monetary policy, but after December's surprise move to expand the band for the 10-year yield target from +-25bp to +-50bp, a similar decision would not be as shocking this time. The markets are pricing in the first rate hike by summer.

The 60 second overview

China: GDP in China grew 3% last year, topping consensus expectations of a 2.7% growth but falling short of the initial government target of 5.5%. Despite stalling in the last quarter (0.0% q/q) economic performance was better than expected (-1.1% q/q). On a year-on-year basis, GDP grew 2.9% compared to consensus expectations of 1.6%. Activity was weak in December but not as bad as feared. Industrial output grew 1.3% from previous year (cons. 0.1%) while retail sales shrank 1.8% compared to a predicted decline of 9.0%. Fixed asset investment increased by 5.1% y/y, slightly better than expected, and the urban jobless rate unexpectedly fell to 5.5% from 5.7% in November. All in all, the data implies a solid starting point for the economy in 2023, and we expect activity to rebound in February-March once the epidemic has peaked.

Longer term, the Chinese economy faces some of the same challenges that most western economies do. While last year's GDP print was the second weakest since the 1970s, the local demographics also give reason for concern. According to the NBS, last year, the Chinese population shrank for the first time in six decades. In future, slower population growth implies shrinking labour force, weaker growth in domestic demand and rising pressure on the country's pension system. Many businesses are already re-assessing their risks and exposure to China from a geopolitical perspective, and aging of the Chinese population adds to these considerations. In an era of rising geopolitical tensions and growing shortages of skilled labour, outsourcing is not necessarily the similar low hanging fruit as it used to be.

FI: It was a relatively quiet day in European rates markets yesterday with US closed. European yields ended marginally higher. Bund spreads remained stable after the 2bp tightening on Friday to 58bp. 10y German yields stand at 2.17%.

FX: Yesterday was relatively quiet, as the US was out for holiday. Over night we have seen strong macro data out of China, but thus far the market reaction has been rather muted. We are also seeing broad-based, albeit limited yen weakening in anticipation of tomorrow's BoJ meeting. EUR/USD is unchanged on the day, but Scandies are somewhat weaker compared to where we started the week.

Credit: The primary Credit market in Europe got off to another good start this week with new issues exceeding EUR8bn in total on Monday. iTraxx Xover was flat at 415bp and Main was also unchanged at 79bp.

Daily Pivots: (S1) 1.0791; (P) 1.0833; (R1) 1.0863; More...

Intraday bias in EUR/USD remains neutral for consolidation below 1.0874 temporary top. Further rally is expected as long as 1.0482 support holds. On the upside, break of 1.0873 will resume larger rally from 0.9534 to 61.8% projection of 0.9630 to 1.0733 from 1.0482 at 1.1164 next.

In the bigger picture, current development suggests that the rally from 0.9534 low (2022 low) is a medium term up trend rather than a correction. Further rally is in favor to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 next. This will remain the favored case as long as 1.0482 support holds.

Daily Pivots: (S1) 1.2150; (P) 1.2219; (R1) 1.2267; More...

Intraday bias in GBP/USD remains neutral for the moment. On the upside, above 1.2288 will resume the rebound from 1.1840 to retest 1.2445 high. Decisive break there will resume whole rally from 1.0351 to 1.2759 fibonacci level. On the downside, break of 1.2086 minor support will turn intraday bias back to the downside for 1.1840 support instead.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1644 resistance turned support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248.

Daily Pivots: (S1) 0.9225; (P) 0.9257; (R1) 0.9295; More...

Range trading continues in USD/CHF and intraday bias remains neutral first. Outlook stays bearish as long as 0.9407 resistance holds. Break of 0.9165 will resume whole fall from 1.0146. However, firm break of 0.9407 will turn bias back to the upside for stronger rebound.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 should be a medium term down trend itself. Next target is a test on 0.8756 low. Strong support should be seen there to bring rebound. Still, further decline will now be expected as long as 0.9407 resistance holds, in any case.

Daily Pivots: (S1) 127.54; (P) 128.21; (R1) 129.18; More...

Intraday bias in USD/JPY stays neutral for consolidation above 127.20. Further decline will remains in favor as long as 134.76 resistance holds. Break of 127.20 will resume the fall from 151.93 to 121.43 fibonacci level next. Nevertheless, firm break of 134.76 will confirm short term bottoming and turn bias back to the upside.

In the bigger picture, the firm break of 55 week EMA (now at 131.59) raises the chance of medium term bearish reversal, but that's not confirmed yet. Strong support could be seen around 61.8% retracement of 102.58 to 151.93 at 121.43 and 38.2% retracement of 38.2% retracement of 75.56 to 151.93 at 122.75 to bring rebound. But break of 134.76 resistance is needed to indicate bottoming first. Otherwise further fall will remain in favor.

Daily Pivots: (S1) 0.6924; (P) 0.6972; (R1) 0.7002; More...

A temporary top was formed at 0.7018 with current retreat. Intraday bias in AUD/USD is turned neutral for consolidations first. But outlook will stay bullish as long as 0.6721 support holds. Break of 0.7018 will resume larger rise from 0.6169 to 61.8% projection of 0.6169 to 0.6892 from 0.6721 at 0.7168.

In the bigger picture, corrective decline from 0.8006 (2021 high) should have completed with three waves down to 0.6169 (2022 low). Further rally should be seen to 61.8% retracement of 0.8006 to 0.6169 at 0.7304. Sustained break there will pave the way to retest 0.8006. This will now remain the favored case as long as 0.6721 support holds.

Daily Pivots: (S1) 1.3368; (P) 1.3393; (R1) 1.3433; More....

Intraday bias in USD/CAD remains neutral and outlook is unchanged. Further decline could still be seen, but downside should be contained above 1.3224 key support level. Above 1.3451 minor resistance will turn bias back to the upside for 1.3704 resistance. However, sustained break of 1.3222/4 cluster support will resume the whole fall from 1.3976 and carry larger bearish implications.

In the bigger picture, as long as 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) holds, larger up trend from 1.2005 (2021 low) is still expected to resume through 1.3976 high at a later stage. However, firm break of 1.3222/3 will indicate that the trend might have reversed. Deeper fall would be seen to next cluster support at 1.2726 (61.8% retracement at 1.2758).

Markets are generally stuck in tight range in Asian session today, with better than expected data from China providing no inspirations. Dollar is staying in consolidations in tight range, with no sign of a sustainably rebound yet. Similarly, Yen is in retreat in rather shallow manner. Volatility might start to jump with UK employment and Canada CPI featured today, while the US will be back from holiday.

Technically, GBP/CAD would be an interesting one to watch today. Pull back from 1.6846 short term top is contained by 55 day EMA so far. Break above 1.6433 minor resistance will argue that such correction has completed, and bring stronger rise to retest 1.6846 high. On the other hand, break of 1.6099 will extend the fall from 1.6846 to 1.5811 cluster support (38.2% retracement of 1.4069 to 1.6846), even as a corrective move.

In Asia, Nikkei closed up 1.23%. Hong Kong HSI is down -1.07%. China Shanghai SSE is down -0.13%. Singapore Strait Times is down -0.16%. Japan 10-year JGB yield is down -0.0056 at 0.509.

ECB Lane: Interest rates have to be higher under vast majority of scenarios

ECB Chief Economist Philip Lane said in an FT interview published today, "we're not yet at the level of interest rates needed to bring inflation back to 2 per cent in a timely manner", and "it still requires work".

Under the "vast majority" of the scenarios, "interest rates do have to be higher than they are now". "Risks are not yet two-sided, and under a wide range of scenarios, it's still safe to bring interest rates above where they are now," he said.

"The question is how do you get from mid-threes at the end of 2023 to the 2% target in a timely manner," Lane said. "That's where interest rate policy is going to be important... to make sure that the last kilometer of returning to target is delivered."

Lane also noted, the self-reinforcing low inflation environment in Eurozone was gotten rid of as a "byproduct" of the inflation shock. He added, "the chronic low-inflation equilibrium we had before the pandemic will return."

BoE Bailey: Labor force shrinkage the major risk to UK inflation

BoE Governor Andrew Bailey told a parliamentary committee yesterday that inflation could fall back substantially this year. Still, there are risks from labor shortage and China.

"The biggest single reason inflation has risen to that level is the war in Ukraine. It is also the most likely reason that we're going to see a rapid fall in inflation in the year ahead, because we are not seeing energy prices rising further. In fact, they're coming down," he said.

"Going forwards, the major risk to inflation coming down in the way that it will is the supply side," Bailey said. "In this country particularly the question of the shrinkage of the labor force," which has pushed up wages.

"First of all in the economic outlook it think it's quite likely we will see a negative impact in the short run in China from what's going on at the moment from the release of the Covid restrictions and the impact that's having," Bailey said. "I'm not sure that would be very long lasting."

China GDP growth slowed to 2.9% yoy in Q4, but beat expectations

China's GDP growth slowed to 2.9% yoy in Q4, down from Q3's 3.9% yoy but beat expectation of 1.8% yoy. For 2022 as a whole, GDP grew 3.0%, sharply lower than 2021's 8.4%, but was better than 2020's 2.2%. That's still the second worst on record nonetheless.

In December, industrial production rose 1.3% yoy, above expectation of 0.3% yoy. Retail sales declined -1.8% yoy, much better than expectation of -9.5% yoy. Fixed asset investment grew 5.1% ytd yoy, above expectation of 5.1%.

"The foundation of domestic economic recovery is not solid as the international situation is still complicated and severe while the domestic triple pressure of demand contraction, supply shock and weakening expectations is still looming," NBS said in a release.

Also released, China's population decreased by -850k in 2022, the first contraction in more than six decades. Birthrate was at  6.77 births per 1000 people, sharply down from 2021's 7.52 births, and marked the lowest level on record. Death rate rose from 7.18 to 7.37 per 1000 people, highest since 1976.

NZ NZIER business sentiment hit record low

New Zealand NZIER Quarterly Survey of Business Opinion showed, in Q4 on a seasonally adjusted basis, a net 73% of businesses expect general economic conditions to deteriorate over the coming months. That's the worst level in the survey's history.

A net 13% of businesses reported a decline in their own activity over the past quarter, worst since Q2 2020 during the full impact of the first pandemic lockdown. A net 33% expected decline in activity in the coming quarter.

"Firms have also reduced investment plans substantially, particularly when it comes to investment in buildings," NZIER said. Retail businesses were feeling "very downbeat", it found.

Australia Westpac consumer sentiment rose 5% in Jan

Australia Westpac Consumer Sentiment rose 5.0% mom to 84.3 in January, the largest monthly gain since April 2021. It's also the second straight month of improvement, with combined rise of 8.1%. Current Conditions index rose 2.8% mom while Expectations Index rose 6.3% mom. Unemployment Expectations also improved 8.4% mom.

Westpac said: "One likely explanation for the lift in confidence is that January was the first month since April last year that did not see an increase in the RBA cash rate. While that was because there was no RBA Board meeting in the month rather than an explicit decision by the Bank to leave rates unchanged, the break in the tightening cycle looks to have provided some relief."

Regarding RBA rate decision, Westpac expects another 25bps hike on February. It also expects clear message from RBA that the February increase will not be the last in the tightening cycle, because of a lift in annual inflation, strong retail sales growth and ongoing tight labor market.

Looking ahead

UK employment and Germany ZEW economic sentiment are the major focuses in European session. Later in the day, Canada CPI is the main feature.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.3368; (P) 1.3393; (R1) 1.3433; More....

Intraday bias in USD/CAD remains neutral and outlook is unchanged. Further decline could still be seen, but downside should be contained above 1.3224 key support level. Above 1.3451 minor resistance will turn bias back to the upside for 1.3704 resistance. However, sustained break of 1.3222/4 cluster support will resume the whole fall from 1.3976 and carry larger bearish implications.

In the bigger picture, as long as 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) holds, larger up trend from 1.2005 (2021 low) is still expected to resume through 1.3976 high at a later stage. However, firm break of 1.3222/3 will indicate that the trend might have reversed. Deeper fall would be seen to next cluster support at 1.2726 (61.8% retracement at 1.2758).

Economic Indicators Update

ECB Chief Economist Philip Lane said in an FT interview published today, "we're not yet at the level of interest rates needed to bring inflation back to 2 per cent in a timely manner", and "it still requires work".

Under the "vast majority" of the scenarios, "interest rates do have to be higher than they are now". "Risks are not yet two-sided, and under a wide range of scenarios, it's still safe to bring interest rates above where they are now," he said.

"The question is how do you get from mid-threes at the end of 2023 to the 2% target in a timely manner," Lane said. "That's where interest rate policy is going to be important... to make sure that the last kilometer of returning to target is delivered."

Lane also noted, the self-reinforcing low inflation environment in Eurozone was gotten rid of as a "byproduct" of the inflation shock. He added, "the chronic low-inflation equilibrium we had before the pandemic will return."