Activity surveys mixed in January

• Germany's final January PMI for manufacturing rose to 59.8 from 57.4 in the previous month, coming in slightly lower than a flash reading of 60.5. It reflected a manufacturing sector that grew for the first time in six months in January, as easing supply bottlenecks allowed producers to boost output to meet higher demand. Shortages of semiconductors and raw materials, coupled with rising energy prices, have forced manufacturers to pass on the added costs to consumers, raising fears of an inflation spike that dampens both consumption and growth. The survey noted that the incidence of delays in manufacturers receiving inputs was the lowest in 13 months, in a sign of bottlenecks easing. This contributed to input price inflation dropping to its lowest level in nine months.
• Eurozone manufacturing activity accelerated last month with the final PMI rising to a five-month high of 58.7 in January from December's 58.0, below an initial "flash" estimate of 59. Output jumped to 55.4 from 53.8. Raw material prices continued to rise, albeit at a slower pace than in December, and factories passed more of that burden on to consumers. The output prices index climbed to 72.7 from 70.2 - the second-highest reading in almost two decades. The improvement was not evenly spread across member countries, with resurgent growth in Germany, the Netherlands and Austria contrasting with slowdowns in Italy, Spain and Greece and near-stalled production in France. Separately, Eurostat said the unemployment rate in the 19 countries sharing the euro fell to 7.0% of the workforce from a revised 7.1% in November -- the lowest rate on record since measurements started in April 1998.
• The UK Manufacturing PMI edged down to a four-month low of 57.3 in January from 57.9 in December. The survey showed the output index rose to 54.5 in January - its highest since July 2021 - from 53.6 in December, stronger than an initial flash estimate of 53.8. Factories hired workers at the second-fastest rate in 11 years, and they reported some easing of inflation pressures. The PMI showed manufacturers' input prices rose at the slowest pace since April 2021 while output prices rose at the slowest pace since May - although in outright terms both price increases are far above their long-run average.
• The Institute for Supply Management (ISM) said its index of national factory activity dropped to a reading of 57.6 last month, the lowest reading since November 2020 and followed a final reading of 58.8 in December. The ISM survey's forward-looking new orders sub-index fell to 57.9 last month, the lowest reading since June 2020, from 61.0 in December. It was the second straight monthly slowdown in new orders. But customer inventories remain depressed, which could help to limit the pace of moderation in order growth. The survey's measure of supplier deliveries was little changed at 64.6. A reading above 50% indicates slower deliveries to factories. The survey's measure of prices paid by manufacturers increased to a reading of 76.1 from 68.2 in December, suggesting that inflation could remain high for a while. The survey's measure of supplier deliveries was little changed at 64.6. A reading above 50% indicates slower deliveries to factories. The steady reading in the index is encouraging given fears the Omicron variant would keep more factory workers at home and further stress supply chains. Factories hired more workers last month, with the survey's measure of manufacturing employment increasing to a 10-month high.
• US Job openings rose 150,000 to 10.9mn on the last day of December, not too far from an all-time high of 11.098mn reached in July, the Labor Department yesterday in its monthly Job Openings and Labor Turnover Survey, or JOLTS report. The figures suggest a deceleration in employment growth at the end of last year was largely the result of worker shortages. The nearly broad rise was led by accommodation and food services, which reported an additional 133,000 job openings, with vacancies in information, nondurable goods manufacturing as well as state and local government education. The job openings rate was unchanged at 6.8%. Hiring fell 333,000 to 6.3 million. The decline was most pronounced in professional and business services, where hiring contracted by 159,000 jobs. The hiring rate was little changed at 4.2%.  The JOLTS report also showed the number of people voluntarily quitting their jobs decreased by 161,000 to a still high 4.3 million in December.
• Canada's economy grew 0.6% m/m in November from October, beating expectations for a gain of 0.3% m/m, but growth in December was likely flat, according to figures by Statistics Canada. The agency said annualized GDP in Q4 2021 was likely up 6.3% y/y, beating the Bank of Canada's forecast of 5.8% y/y. While those figures are preliminary estimates, economic activity is now 0.2% above February 2020 levels, a sign the economy climbed to above pre-pandemic levels for the first time in November. Canada's goods-producing sector expanded 0.5% m/m in November, while the service-producing sector grew 0.6% m/m. The economic momentum of November slowed in December as the Omicron variant took hold and provinces tightened restrictions.

Today’s Economic Data and Events

• 14:00 EU CPI (YoY) (Jan) Forecast 4.30%
• 17:15 US ADP Nonfarm Employment Change (Jan)Forecast 208K
• 19:30 US Crude Oil Inventories 

Fixed Income

• With few substantial data points to shift the market one way or the other, Treasuries oscillated overnight. Yields on the 2yr moved from lows of less than 1.14% to as high as 1.21% before settling lower on the day at 1.1651%, down a bit more than 1bps. The 10yr showed a similar pattern, falling midway through the day to around 1.74% before popping higher to 1.82% and closing slightly at 1.7875%, up 1bps.
• St Louis Fed president James Bullard pushed back against expectations of a 50bps hike saying “I don’t think it helps us” in getting inflation under control, instead favouring a “disciplined approach” to hiking rates. Bullard is a voter on the FOMC this year.
• Among other developed market bonds, gilts ended the day higher with yields marginally lower to 1.297% on the 10yr. Markets are pricing in a near certainty of a 25bps hike from the Bank of England tomorrow, the second hike in a row from the BoE and are expecting as many as five hikes by the end of this year. In the EU both German and French bonds moved lower on the day as markets bring forward ECB rate hike expectations to two hikes later this year.
• Turkish bonds rallied among emerging market assets overnight with yields down 46bps to 21.920% on 10yr local currency bonds. South African bonds also rallied with yields down 9bps to 9.709%. Indian bonds dipped overnight, however, with yields closing up at 6.8279%.

FX

• The US dollar fell for a third day running against the Euro as markets look ahead to a potentially disappointing January non-farm payrolls number and increase their expectation that the ECB could actually raise rates at some point this year. EURUSD added 0.33% overnight to 1.1272 while USDJPY also moved in favour of the yen with the pair closing down by 0.35% at 114.71.
• Among the more risk oriented currencies there was a broad move higher. GBPUSD added 0.56% ahead of tomorrow’s BoE meeting to settle at 1.3522 while USDCAD moved in favour of the loonie by 0.17% to 1.2687. AUDUSD jumped 0.88% to 0.7129 even as the RBA struck a relatively dovish tone in its meeting while NZDUSD added 0.9% to 0.6638.

Equities

• After a rocky January overall, notwithstanding something of a recovery in the closing days of the month, equity markets have started February on the front foot, with gains seen in most major global indices on the first day of the month amid a general turn back towards risk.
• All three major US indices closed higher, with both the Dow Jones and the NASDAQ adding 0.8%, and the S&P 500 0.7%. In Europe, the FTSE 100 and the DAX gained 1.0% and the CAC 1.4%. Italy’s FTSE MIB added 1.5% amid some positive signals on the political side.
• Things had been more muted earlier in the day in Asia with Chinese and Hong Kong markets shut for the new year celebrations. The Nikkei added 0.3% and is currently trading up 1.6% in the morning session.

Commodities

• Oil prices were mixed overnight ahead of today’s OPEC+ meeting. Brent settled down 2.2% at USD 89.16/b while WTI was essentially flat at USD 88.20/b. Both contracts are nudging higher in early trade today. OPEC+ should be able to quickly endorse a plan to increase output by 400k b/d for March at their meeting today and may consider even larger increases to accommodate the elevated geopolitical tension affecting oil markets.
• However, market surveys of OPEC production show that hitting the monthly increases is proving to be a challenge. Total production among OPEC countries was up by just 50k b/d in January according to Bloomberg estimates as Libyan output fell back sharply thanks to militants disrupting infrastructure. Saudi Arabia, the UAE and Kuwait all managed to increase output, however. Among the countries participating in the OPEC+ arrangement, they increased output by 160k b/d compared with a target of around 250k b/d.
• The joint technical committee from OPEC+ estimates that the oil market will record a surplus of 1.4m b/d in 2022 as large supply increases, both from within the producers bloc as well as outside it, will accommodate the sustained rise in demand this year.

Click here to download charts and tables