Weekly macroeconomic and market review – 9 January 2017

A look back over macroeconomic events for the period ending 6/1/17. Decent US jobs data and PMI numbers fuelled optimism on the other side of the Atlantic, while sharp movements in the Chinese renminbi has raised some eyebrows. This week there are some mid-level economic data to look forward to, as well as the start of the corporate reporting season, with the potential to trigger some movements in the market.

Fresh optimism in the US

There was fresh optimism in the US labour market in the non-farm payrolls (NFP) data on Friday. Although the reading for December of 156,000 jobs added was short of the 178,000 expected, this came with upward revisions to the last two readings and a strong rebound in wages. Average earnings grew 0.4% month-on-month in December, from -0.1% in November, and against expectations for 0.3%.

Unemployment ticked up 0.1% to 4.6% but so did the participation rate, often considered a sign of discouraged workers returning to the potential labour pool. The optimistic mood was also helped by continued strength in the PMI readings, with the ISM Manufacturing PMI increasing from 53.2 to 54.7 (53.6 expected) and the Non-Manufacturing PMI holding steady at 57.2 (a fall to 56.6 was forecast). These positive signs have so far supported the continued rally in US equities in the short term. But as we have written previously, the equity market continues to look overvalued with the short-term movements ignoring the potential medium and long-term challenges for the US.

The Chinese economy faces serious structural headwinds

The Chinese authorities strengthened the daily currency ‘fix’ by the most since the peg to the US dollar was removed in 2005. The midpoint for the onshore market versus the US dollar was increased 0.9% on Friday, following sharp strengthening in the less-tightly controlled offshore market, which peaked at 2.8% before softening at the end of the week. Some of this strength was subsequently given up, but this is being closely watched in the market, as sharp movements in the Chinese currency can sometimes trigger wider concerns and are often a signalling mechanism for the Chinese authorities.

China has announced fresh capital controls, reversing years of capital market liberalisation as it attempts to control deprecation of its currency amid significant capital outflows, which can be particularly acute at the start of the year when the $50,000 personal quotas are refreshed. It is also worth noting that the US dollar was just over 1% weaker during this period on a trade-weighted basis, and the Chinese authorities have stated before that they would be looking to value the renminbi against a basket of currencies, rather than just the US dollar. These latest movements are most likely technical and short-term in nature – a short squeeze in the fairly illiquid offshore-renminbi market as traders have sought to close out their short-yuan positions following the announcement of capital controls. More fundamentally, the Chinese economy faces serious structural headwinds which are unsustainable in the long-term, and appear to be becoming increasingly difficult to manage in the short-term as well.

Other macro events

• In China, the Caixin Manufacturing PMI surprised, with an increase to 51.9 in December from 50.9 in November (forecast was for 50.7). Services PMI ticked up to 53.4 from 53.1 (53.3 expected).

• UK manufacturing PMI for December surged from 53.6 to 56.1, ahead of an expected weakening to 53.3. Construction PMI was also up at 54.2 (from 52.8 in November and expectations for 53.0).

• The Eurozone business confidence survey showed growing confidence, increasing from 0.41 to 0.80 (forecast was for 0.40), the highest reading since 2011. Still in the Eurozone, December inflation increased to 1.1% year on year from 0.6% in November. Core inflation rose 0.1% to 0.9% year on year.

What’s happening in the markets?

Equity markets continued to edge higher, while UK and European bonds softened further.

Equities

Major equity bourses were all up in the first week of the year. In local currency terms, UK equities (MSCI United Kingdom) were up 1.0%, Europe was up 0.7% (as measured by MSCI Europe ex-UK) and in the US the S&P 500 advanced 1.8%. In the Far East, equity markets were also strong, with both the Japanese TOPIX and the Hang Seng in Hong Kong returning 2.3%

Bonds

UK and German government bonds were weaker, with ten-year gilt yields rising 12 bps to end the week at 1.37% whilst the equivalent bund yields were also up 12 bps to 0.30%. In the US, Treasuries stabilised after recent weakening, the ten-year yield was 3 bps lower on the week, ending at 2.42%

Commodities

Gold regained some strength on the week after recent weakness, ending the week at US$1,173/ounce. Oil largely range-traded, with Brent crude finishing at US$56.75 and copper was somewhat stronger on the week, to close out at US$2.54/lb.

Currencies

Sterling was weaker overall last week, finishing at US$1.22, €1.16 and ¥143.

The week ahead

There is a reasonable amount of economic data out this week, though there is no single event of major importance. UK industrial production for November is released on Tuesday, which is expected to have rebounded from a surprising -1.1% year on year contraction in October to 0.6% growth. Eurozone industrial production for November is reported on Wednesday, with a similar uptick expected (to 1.6% from 0.6% year on year previously). Early Friday morning will see the latest Chinese trade data released, and then Friday afternoon will see US Retail Sales for December (0.7% month on month expected from 0.1%). Reporting season also kicks off this week, with US banks at the end of the week likely to be a source of interest, while in the UK trading statements from housebuilders and the retail sector are likely to be carefully watched. Elsewhere:

Monday: German industrial production figures are out, a preview of the dominant economy ahead of the broader Eurozone-wide release later in the week. This is followed by Eurozone unemployment figures and then the US Labor Market Conditions index from the Federal Reserve later in the afternoon.

Tuesday: Overnight Chinese inflation data are out, with the producer prices index expected to continue surging. Later in the morning, though still well before breakfast, Japanese consumer confidence figures are released. It’s then fairly quiet until the afternoon when there is the US JOLTs Job Openings report and wholesale inventories data out.

Wednesday: Aside from the UK’s industrial production figures, Japan will release its Coincident Index of the state of the economic cycle and Leading Economic Index measure, with the Japanese Current Account data released late in the evening (UK time).

Thursday: As well as Eurozone Industrial Production figures, we also have the ECB Monetary Policy Meeting Accounts. In the afternoon, the US will update on its import and export prices for December, and the Initial Jobless Claims data will also be released.

Friday: Alongside Chinese trade data and US retail sales, the US will also update on changes to the Producer Prices Index, business inventories and then the US Michigan Consumer Sentiment survey sees the week out.