The Week Ahead

With the Martin Luther King holiday in the US starting the week things were always going to be on the quiet side to begin with.

Tuesday, we had China’s Q4’21 real GDP slowing to +4% yoy, (from 4.9% in Q3’21), beating expectations for +3.3% yoy growth, with the full year coming in at +8.1% in 2021, well above the central bank’s 6% annual target. If we look a bit deeper into the breakdown, consumption was the main driver of growth at 5.3% while investments contributed 1.1%, exports also remained strong at a 1.7% contribution to annual growth.

Then, in a move which took markets by surprise, the PBoC cut its policy interest rate by 10bps to 2.85%, the first reduction since April 2020. The central bank also cut the seven-day reverse repo rate and injected CNY200bn additional liquidity into the banking system. Clearly policymakers are concerned about cooling growth, resulting from the indebted property sector, the broader regulatory crackdown on the likes of Tech, for example, and ongoing disruptions from the “zero-Covid” strategy. It is also evident that, in easing earlier than markets expected, the PBoC wishes to remain ahead of the curve, and position domestic markets ahead of the upcoming US hike, to limit volatility.

Brent oil extended its gains to the highest level in seven years, around $88, as geopolitical tensions stirred in the Middle East and concerns about the demand impact of the Omicron virus variant eased.

Mid-week the big news was for the first time since May 2019 German 10-year bund, considered a benchmark for the whole euro zone yields, traded above zero, continuing the selloff that started last year after Euro zone inflation hit a new record high in December

UK inflation jumped to its highest annual rate for 30 years last month as higher energy prices, increasing demand and ongoing supply chain issues continued to drive up consumer prices. Inflation hit an annual rate of 5.4%, its highest since March 1992 and up from 5.1% in November, itself a decade high. Consensus had been for an increase of 5.2%. The retail price index, which is used for pricing some public services including train fares, surged 7.5%. That is well ahead of the 7.1% forecast and the most since 1991. RPI excluding mortgage payments hit 7.7%.

However, U.K. retail sales plummeted in December as the spread of the Omicron variant kept shoppers at home. The volume of goods sold in stores and online fell 3.7% from November, the biggest drop since January 2020’s lockdown, the Office for National Statistics said Friday. Economists had expected a decrease of 0.6%. Sales excluding auto fuel dropped 3.6%.
 
Markets finished the week on a decidedly risk-off note. The US 10-year did test 1.9% earlier in the week to settle at 1.75%. The same went for the 30-year, eyeing 2.20%, before easing back to 2.07%. The sell-off in US equities was much more aggressive. The NASDAQ closed the week down nearly 12% on the year, with the S&P down close to 8% YTD and the DOW over 5.5%.

The week ahead

In the US highlight of this week’s calendar will be the FOMC meeting on Wednesday. We have GDP on Thursday, along with consumer confidence and new home sales. In supply, Treasury will auction 2-, 5-, and 7-year notes for $54bn, $55bn, and $53bn, respectively.

Europe has Fourth-quarter GDP data for Germany, France, and Spain on Friday. All eyes will be looking to see how badly the resurgence in infections hindered the recovery at the end of last year.

Asia, we have China's industrial profit growth, due Thursday, with other key prints this week including South Korea GDP and Australian inflation tomorrow, and New Zealand CPI and Philippine GDP on Thursday. Tokyo CPI rounds out the week. 

Fixed Income Team