PBOC cuts rates as growth slowed in Q4

• China’s GDP growth slowed to 4.0% y/y in Q4 2021 from 4.9% y/y in Q3 but ahead of the consensus forecasts.  For 2021 as a whole GDP grew 8.1%, up from 2.2% in 2020 and exceeding the government’s “more than 6%” goal despite the slowdown in the final quarter.  Industrial production in December was better than expected at 4.3% y/y, up from 3.8% y/y in December but retail sales slowed to 1.9% y/y in December from 3.9% in November, well below forecasts. Property investment slowed to 4.4% in 2021, with the amount of new property constructed last year down more than -11% y/y.
• The PBOC cut policy rates overnight for the first time since 2020 in a bid to support growth this year.  The seven-day reverse repo rate was cut to 2.1% from 2.2% and the one-year medium term lending facility rate was cut to 2.85% from 2.95%. The PBOC also increased the funds offered in both the medium-term lending facility and the seven-day repos, injecting additional liquidity into the financial system.
• US retail sales declined by -1.9% m/m in December, significantly worse than the -0.1% m/m forecast by analysts. Excluding autos and gas, the decline was even sharper at -2.5% m/m.  While some of the decline may have been due to consumers doing their holiday shopping earlier last quarter because of concerns about supply chains and shortages, the data could also reflect the impact of higher prices on consumer demand, as inflation accelerated to 7.0% in December.
• Indeed the University of Michigan consumer sentiment survey declined by more than expected in January (preliminary data).  The sentiment index fell to 68.8 from 70.6 in December as both the current conditions and expectations components declined. The spread of the Omicron variant of the coronavirus likely weighed on consumer sentiment, but the survey also highlighted concerns about inflation.  Fed policy makers will also have noted that consumers’ long-term inflation expectations rose to 3.1% in January from 2.9% in December, an 11-year high.
• US industrial production slipped -0.1% m/m in December, with manufacturing declining -0.3% m/m.  Further disruption to manufacturing because of Covid-related absenteeism could worsen supply chain issues in the near term.

Today’s Economic Data and Events

US markets are closed for Martin Luther King Day.

Fixed Income

• US Treasury markets fell a second week running as hawkish commentary from Federal Reserve officials and an elevated inflation print clear the way for rate hikes to begin soon. A broad index of USTs fell 0.2% last week with the front end of the curve dropping the most. Yields on 2yr USTs added almost 11bps to settle just short of 1% while the 10yr yield rose a more modest 2bps to 1.7841%.
• European bond markets held up comparatively better with long-dated bunds holding steady last week—yields closed essentially unchanged at -0.048%—while gilt yields also slipped. On the 2yr gilt yields dropped 3bps to 0.789% while the 10yr fell almost 3bps to 1.148%.
• Among emerging market bonds, Turkey stood out with 10yr local bonds rallying. Yields dropped 20bps last week to 22.825%. South African bonds also showed a modest upward move as yields fell about 3bps to 9.824% while Indian 10yr local currency bonds added 4bps to 6.581%.
• S&P affirmed Kuwait’s sovereign rating at ‘A+’ while maintaining the rating on a negative outlook.
• Among central banks setting policy this week, the BoJ meets on January 18 while banks in Turkey and Indonesia meet on January 20.

FX

• The dollar managed to recover some ground at the end of the week but wasn’t enough to make up for losses earlier last week. The DXY index closed down by 0.6% last week to 95.165 with USDJPY providing much of the losses. USDJPY closed at 114.19, down 1.2% while EURUSD added 0.45% to settle at 1.1411. Sterling was another notable gainer with GBPUSD up 0.64% at 1.3675.
• Among the commodity currencies CAD was the standout gainer. USDCAD fell 0.7% as markets are pricing in a more aggressive hiking cycle from the Bank of Canada this year compared with the Federal Reserve. Both AUD and NZD rallied by around 0.4% each to 0.7208 and 0.6804 respectively

Equities

• It was a choppy week for US equity markets which were buffeted by concerns over monetary tightening and inflation, tempered by some greater optimism over growth, but by Friday all three major indices had closed down, despite the NASDAQ recouping some losses by adding 0.6% on Friday. In the end it was the Dow Jones which was the biggest loser over the period, dropping -0.9% w/w, while both the NASDAQ and the S&P 500 lost -0.3%.
• In Europe, the UK’s FTSE 100 was the only notable gainer, adding 0.8% w/w, while the DAX lost -0.4% and the CAC -1.1%. The composite European STOXX 600 also closed down -1.1% over the week.
• In the UAE, the ADX added 0.6% w/w while the DFM dropped -0.6%. Saudi Arabia’s Tadawul closed up 0.3% yesterday meanwhile, for a 4.8% w/w gain.

Commodities

• Oil prices extended their gains for a fourth week running with Brent futures up 5.3% to USD 86.06/b while WTI added more than 6% to USD 83.82/b. The director of the IEA gave the market an additional boost last week, noting that demand was performing better than expected given the headline coverage of the spread of the Omicron variant of Covid-19.

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