The New Year is here and bonds are rocketing!..
Week Commencing Monday 4th January 2016
Overriding Market Themes
Government bonds across both North America and Europe rocketed in early January trading after a plunge in Chinese equity prices drove international investors to seek the safety of sovereign debt. Tensions between Iran and Saudi Arabia are also helping to drive demand for safe assets. China’s shares collapsed after an industry report showed manufacturing contracted in December. The latest manufacturing PMI fell to 48.2 in December, below the 48.6 level of November and market expectations of an increase to 49.0. The post was the lowest since September, marking the tenth consecutive month that the index remained below the 50 level that separates expansion from contraction. Economists have warned of downside risks faced by the Chinese economy even though the government is likely to achieve its 2015 growth target of “about seven percent”. President Xi Jinping said in November that annual expansion of only 6.5 percent would be enough to meet the government’s goals, the clearest signal yet Beijing will lower its growth targets for the coming years. Either way, this level of growth remains unprecedented in western markets, so expect China to continue to plug the gap with the US in the years to come.
Moving back to home shores, UK mortgage lending grew at the fastest rate since the start of the financial crash in April 2008. Lending increased by GBP 3.9 billion in November when compared to the previous month, pushing gross lending to GBP 20.3 billion. It seems the British love of credit is booming across all sectors, with net consumer credit growing by GBP 1.5 billion, the most since February 2008. Record low interest rates continue to fuel this new credit boom, with the average interest rate on secured loans dropping to 3.01 percent while unsecured hovers around 6.76 percent. The only disappointing sector remains business lending, with the amount lent to mid-sized businesses dropping by nearly GBP 1 billion, while the decline in lending to larger business also dropped by just over GBP 1 billion. This does appear to be the wrong way round, given that increased mortgage lending tends to push property prices higher while business investment stokes economic growth. Banks, government and the population at large would be wise to try and encourage the financial system to flip this statistic around!
Moving over to Europe, we have some surprising news for once! Manufacturing in the Eurozone continued to pick up the pace in December as new orders pushed output to a fresh high. The economic recovery across the continent is picking up as quantitative easing by the ECB is reaching companies and households. Bank lending accelerated in November in a sign of increased spending and investment, and economic confidence is at the highest level in more than four years. The development is positive news for the eurozone's economy, which has long struggled with poor credit, and indicates some success for the ECB's money-printing scheme despite buying chiefly government bonds. This release was also boosted by news that eurozone consumer confidence rose ahead of expectations in December, with consumer sentiment increasing by 0.7 points to -3.7.
GBP This Week
The mixed December PMI’s are likely to impact sentiment on this round of PMI’s out this week. We start with Manufacturing on Monday, with consensus sitting at 52.8 but risk remaining to the downside. Construction is due on Tuesday with consensus for a small uptick to 56.0 from the 55.3 in December. Finally we have the all-important Services PMI release on Wednesday with consensus sitting at 55.6 versus a previous print of 55.9. Sterling was one of the worst performers in the global majors during the back end of December, chiefly as traders concentrated on downside risks associated with the government’s solid austerity plan and the upcoming EU membership referendum.
With the above in mind, coupled with the current trend, we expect a poor week for Sterling. With GBP/USD hovering around the 1.4750 mark and GBP/EUR struggling to maintain support above 1.35 we could see some further downside as we draw into the first week of the year.
USD This Week
The greenback should perform well this week, especially as traders continue to seek US treasuries post Chinese manufacturing disappointment. We are looking forward to Friday’s Non-Farm Payrolls report, where we expect to see average job creation of around 150k which should please FOMC members. We also expect ISM manufacturing services to be released on both Monday and Wednesday respectively, with the consensus looking to see a moderate increase in both (49.0 from 48.6 in manufacturing and 56.0 from 55.9 in services). Finally, December factory orders on Wednesday are expected to drop by 0.2 percent after the big increase seen in November.
Finally, the minutes from the FOMC’s meeting on 16th December will be released on Wednesday; however we do not expect any huge surprises given that the press conference seemed to answer most pertinent questions. If there is any mention of a accelerated pathway to the next rate hike however, we should see some volatility.
EUR This Week
The main focus of markets in the European sessions will be the headline and core December inflation figures on Tuesday, where we expect both to increase by 0.4 percent and 1.0 percent respectively. This is obviously considerably lower than the ECB’s target of 2 percent, but does represent progress considering negative inflation was a concern last year.
Finally, Euroarea PMI’s are due to be released this week, including manufacturing on Monday where consensus sees a moderate growth to 53.1 from 52.8. Services are next with consensus sitting just below last month’s release at 53.9 versus 54.2. All in all, it should be a mixed bag for the Euro this week with Sterling continuing to be in its crosshairs.