China cuts banks' reserve requirements

The PBOC announced a 50bp cut in banks’ reserve requirements yesterday, taking the RRR to 10% and releasing around CNY 1tn of liquidity. The cut to the RRR will come into effect on 5 February. Lending and discount rates for bank loans to agriculture and small business were also cut by 25bp. Easier monetary policy should support further bond issuance by the government to boost fiscal stimulus.

The Eurozone flash composite PMI rose to 47.9 in January from 47.6 in December – a six month high - but was lower than the median forecast. Both manufacturing and services remain in contraction territory but the manufacturing PMI rose more than 2 points from December in the preliminary reading, while the services PMI declined 0.4 points. However, price pressures in the services survey rose in January.

The UK composite PMI also rose in the preliminary reading to 52.5 in January, slightly higher than expected with both manufacturing and services PMIs improving. New orders rose and businesses were more positive about the outlook for 2024. The manufacturing index rose to a nine month high but was still below the neutral 50-level, while the services PMI was at an eight month high. Shipping disruptions in the Red Sea have lengthened supplier delivery times for goods, contributing to the stronger manufacturing index reading in January.

The US composite PMI came in higher than forecast at 52.3 in January, with the manufacturing index moving into expansion territory for the first time since April 2023, at 50.3 in the preliminary reading. Firms were the most optimistic about the outlook since May 2022, as new orders rose and as inflation appears to be slowing. The selling prices component of the index showed the weakest growth since May 2020.

The Bank of Canada kept rates on hold at 5.0% as expected yesterday and indicated that it won’t need to hike again if the economy evolves as expected. The tone of the policy statement and Governor Macklem’s remarks was more dovish although the governor said it was “premature” to talk about rate cuts.

Today’s Economic Data and Events

13:00 Germany IFO Business Climate (Jan) forecast 86.6, prev 86.4

17:15 ECB rate decision, no change expected

17:30 US Q4 GDP (advance reading) forecast 2.0%, prev 4.9%

17:30 US core PCE (Q4) forecast 2.0%

17:30 US durable goods orders (Dec) forecast, 1.5% prev 5.4%

19:00 US new home sales (Dec) forecast 649k prev 590k

Fixed Income

• US yields moved higher again on Wednesday and the curve steepened after strong PMI data. The 2y yield rose 1bp to 4.38% and the 10y yield was up 5bp to 4.18%. The 30y Treasury yield also rose, ending the day at 4.41%, the highest level since early December.
• Bond markets in Europe were mixed with 10y Gilts rising 2.4bp to 4.0% while Bund yields fell -1bp to 2.3%.

FX

• The USD index lost ground on Wednesday with most major currencies gaining against it. EUR was up 0.3% as was GBP. The yen continued this week’s rally and was up another 0.2% while CHF snapped its losing streak and gained 0.6%. 
• The commodity currencies were also stronger across the board, with NZD gaining 0.8% yesterday.

Equities

• US equities were unable to hold the gains seen early in the day, with the S&P 500 closing just 0.1% higher and the DJIA down -0.3% on the day. The Nasdaq 100 rose 0.6% largely due to Netflix and ASML, which both rallied on strong earnings reports.
• European stock indices posted gains with Euro Stoxx 50 index up 2.2%, the DAX up 1.6% and the CAC 40 up 0.9%. The UK’s FTSE 100 rose 0.6% yesterday.
• The DFMGI gained 1.8% yesterday led by Takafule and the banks. The index has gained 3.0% year-to-date. ADXGI was broadly unchanged yesterday while the Tadawul ASI rose 0.6%.

Commodities

• Oil prices rose on Wednesday as EIA data showed crude inventories in the US fell by more than 9mn barrels last week, much more than the market had expected and the biggest drop since August.  Brent oil prices rose 0.6% to USD 80.04/b while WTI rose 1% to USD 75.09/b.