Inflation in China accelerates in December

China’s CPI inflation print for December came in at 1.8% y/y, in line with expectations and marginally faster than the 1.6% recorded in November. Chinese inflation has been far slower than seen in the other major global economies over recent months, as the stringent zero-Covid lockdowns crimped domestic demand pressures, especially in the services sector. Core inflation ticked up modestly to 0.7%, following three months at 0.6%. PPI inflation meanwhile was at -0.7% y/y in December, a greater drop in prices than the predicted -0.7% but nevertheless a smaller contraction in factory gate prices than seen in October and November. Expectations are that the reopening of China’s economy should provide a demand boost and see inflation tick up in 2023, although in the near term the reported rise in Covid-19 cases will continue to dampen demand.

Bloomberg has reported that Saudi Arabia’s Crown Prince Mohammed bin Salman has ordered the Saudi Fund for Development to conduct a study around increasing Saudi Arabia’s deposit at the State Bank of Pakistan from USD 3bn to USD 5bn, and to boost investments in the country to USD 10bn. Pakistan’s economy has been under pressure owing to the fallout from the pandemic crisis and then flooding which covered huge swathes of the country last year.

Today’s Economic Data and Events

• 16:00 India industrial production, November, % m/m. Forecast: 2.8%
• 17:30 US CPI inflation, December, % y/y. Forecast: 6.5%
• 17:30 US initial jobless claims, week to January 7. Forecast: 215,000

Fixed Income

• US Treasuries extended their year-to-date rally overnight as market enthusiasm grows that the US CPI report will show a substantial slowdown underway in the pace of inflation. The 2yr UST yield fell almost 3bps to 4.2179% while the 10yr dropped about 8bps 3.5392%. A softer than expected CPI print will set another downward trajectory for yields, at least until the FOMC at the end of the month.
• European markets were substantially stronger overnight with gains across the board. Yields on 10yr French bonds dropped 14bps to 2.654% and the 10yr bund yield fell 10bps to 2.2%.
• Bond markets generally caught a bid along with equities as markets grow more optimistic on the outlook for the year. A high-yield index added 0.5% overnight, the same amount as an index of EM USD-denominated bonds.

FX

• The weakness in the dollar continued overnight though the moves were more limited. EURUSD added 0.2% to settle at 1.0757 while GBPUSD actually dipped, down 0.1% at 1.2146. USDJPY has fallen sharply in early trade today, down 0.5% to 131.76, as market chatter suggests the BoJ may continue to adjust policy.
• Commodity currencies settled mixed with only moderate change.

Equities

• Equity markets were largely positive yesterday, as investors raised hopes for a significant slowdown in the pace of US CPI inflation which could mean a more rapid easing off of the rate-hiking cycle. In the US, the Dow Jones, the S&P 500 and the NASDAQ added 0.8%, 1/3% and 1.8% respectively.
• In Asia, the Hang Seng closed up 0.5% but the Shanghai Composite lost 0.2%. Japan’s Nikkei added 1.0%.
• Locally, markets were less buoyant yesterday as the DFM dropped 0.5% and the ADX 0.7%. Saudi Arabia’s Tadawul ended the day 0.2% lower.
• In Europe, the FTSE 100 closed at its highest level since 2018 as it added 0.4%. The DAX ended the day 1.2% higher.

Commodities

• Oil prices posted a large gain overnight on increasingly bullish sentiment. Brent futures added 3.2% to USD 82.67/b while WTI rose by 3.1% to USD 77.41/b. EIA data showed an enormous build in US crude stocks last week, with an 19m bbl build in commercial crude stocks and a 4.1m bbl build in gasoline inventories. Production also edged higher, adding 100k b/d to 12.2m b/d.

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