Indian PMI survey slipped in December

• India’s manufacturing PMI slipped to 55.5 in December, compared to November’s 57.6. While the headline reading has slipped from the previous month, it remains high compared to historical averages, with Indian businesses benefitting from accommodative fiscal and monetary policy and the recovery from the pandemic crisis. That said, the price rises and supply chain dislocations which have weighed on manufacturing elsewhere in the world continue to constrain sentiment in India also, while concerns over the Omicron variant were also at the fore in respondents’ answers and business optimism remained below average.
• Germany’s December final PMI for manufacturing, which accounts for about a fifth of the economy, was unchanged at 57.4, slightly lower than a flash reading of 57.9, as supply bottlenecks held back manufacturing activity in Europe’s largest economy. The outlook for factories in Germany has been clouded by shortages of semiconductors and raw materials, affecting the German auto industry in particular. That, coupled with rising energy prices, have forced manufacturers to pass the added costs on to consumers, further adding to concerns over rising inflation.
• Turkish CPI inflation rose to 36.1% y/y in December, levels last seen in 2002. This was up from the previous month’s 21.3% and exceeded consensus projections of 27.4%. Core inflation hit 31.9% y/y, while prices were 13.6% higher than in November as a sharp depreciation in the lira prompted rapid and severe price adjustments through the period. There likely remain further price pressures to come as PPI inflation hit 79.9% in December and the currency remains volatile amidst an ongoing commitment to cutting rates. Real interest rates have fallen to -22.1% following the latest inflation print and the 500 bps of cuts to the one-week repo since September, which has taken the benchmark interest rate to 14.0%. Meanwhile, Turkey’s manufacturing PMI survey rose modestly to 52.1 in December compared to 52 in November. While higher prices are exerting pressure, businesses have also been benefitting from higher export demand as the currency has depreciated.
• UAE CPI rose 0.6% m/m and 2.6% y/y in November, up from 1.9% y/y in October.  Transport costs remain a key driver of inflation, and rose a further 2.0% m/m (18.0% y/y) in November, while food prices increased 0.7% m/m (3.7% y/y). Housing costs were unchanged m/m but down -3.0% y/y.  Food and housing together account for almost half the CPI basket. We expect inflation to accelerate in H1 2022 off last year’s low annual base, before slowing in H2.  Average inflation is forecast at 2.0% this year, up from 0% in 2021.

Today’s Economic Data and Events

12:55     German Unemployment Change (Dec) Forecast-15K       

13:30     UK Manufacturing PMI (Dec) Forecast 57.6           

19:00     US ISM Manufacturing PMI (Dec) Forecast 60.4  

19:00     US JOLTs Job Openings (Nov) Forecast 11.033M

Fixed Income

• US Treasuries sold off in the first full trading day of 2022 as markets looked beyond the impact of the spreading Omicron variant of Covid-19 toward another year of balancing risk and reward in favour of risk assets. Yields jumped across the curve with yields on the 2yr UST up nearly 4bps to 0.7678% and the 10yr yield jumping almost 12bps to 1.628%. The 2s10s spread bear steepened and rose to 86bps, its highest level since the end of November.
• UK markets were closed for public holidays overnight but German markets showed a similar tone to Treasuries. Yields on 2yr bunds added 2bps to -0.612% while the 10yr added 6bps to -0.122%, their highest level since the start of November.
• Among emerging markets, Turkish bonds fell overnight as high inflation continues to impact Turkey’s economy. Yields on the 10yr government bond rose almost 10bps to 23.31% while in South Africa yields dipped by 2bps to 9.776% and Indian bonds were steady.
• In the region, Israel kept policy rates unchanged at 0.1% as the Bank of Israel expects to see moderating inflation pressures in 2022.

FX

• Currency markets began 2022 carrying over much of the trend witnessed in 2021. The dollar gained strongly with the DXY index up almost 0.6% to 96.213, its largest single daily gain since the start of November last year. Most of the gains came at the expense of EURUSD which fell 0.64% overnight to 1.1297, sinking considerably in the US session in line with the pop in UST yields.
• Among other majors the dollar showed persistent strength. USDJPY gained 0.2% to 115.32 while GBPUSD fell almost 0.4% to 1.3480 as the near-term outlook for the UK remains clouded by the effects of the Omicron variant of Covid-19.
• Commodity currencies failed to get much benefit from the apparent risk-on tone in markets with USDCAD rising 0.85% to 1.2745, AUDUSD down more than 1% to 0.719 and NZDUSD down 0.6% to 0.6785.

Equities

• US equity markets started the year on the front foot amid a general environment of risk-on tone. The NASDAQ was the primary gainer, closing up 1.2%, while the S&P 500 added 0.6% and the Dow Jones 0.7%.
• In Europe, the UK’s FTSE 100 was closed yesterday (the Shanghai Composite and the Nikkei were also closed), but both the CAC and the DAX added 0.9% on the first day of trading in 2022.
• The year has started on a more tentative note within the region, as the DFM closed down -0.2% and the ADX -0.3% on the indices’ first day of trading on the new weekly schedule. In Saudi Arabia the Tadawul closed flat and Egypt’s EGX 30 lost -0.3%.

Commodities

• Oil prices started 2022 on a strong footing with Brent futures up 1.5% to USD 78.98/b and WTI adding a bit more than 1% to USD 76.08/b. Output has been shut down in Libya in order to repair damaged pipelines with total production there falling more than 500k b/d in the last few weeks.
• Today OPEC+ is likely to endorse its plan to add 400k b/d in February, a similar pace to what it’s done since August, even as there are downside marginal risks to demand from the Omicron variant. Expectations of higher output from OPEC+ are likely being interpreted as confidence that market balances are indeed tight and that the market needs more output.
• OPEC has named Haitham al-Ghais as its new secretary-general to take effect from August. Al-Ghais has worked in Kuwait’s petroleum industry as well as participated in the country’s representation to OPEC. The secretary-general role will be crucial to maintain the integrity of vision among core OPEC members as they roll out a post-pandemic strategy in cooperation with the rest of OPEC+ producers.

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