Today’s podcast

Overview: Early year optimism

• Modest retracement of early year fall in bond yields, USD
• AUD/USD back sub-0.69 from early-week high of 0.6950
• US NFIB Small Business Optimism drops by more than expected…
• ,,,while France industrial production expands by much more than expected
• China credit data highlights dependence on bank loans with Aggregate Financing weaker
• Yellen to stay on as US Treasury Secretary as mid-year debt ceiling bun-fight looms
• AU November monthly CPI, Retail Sales today

Ahead of tomorrow night’s all-important US CPI release, which comes against the backdrop of a US money market now much better positioned for a 25bps rather than 50bps Fed Funds rate rise on February 1, bond and currency markets have retraced a little of their hitherto year to date moves, though US equities are having another (modest) up day with an hour or so of the NYSE trade still to go. AUD/USD is back sub-0.69 having been a high as 0.6950 on Monday.

Economic new flow overnight has been relatively light, though playing with the grain of the suggestion from last week’s US data (ISM Services) that the US is in process of losing its global growth leadership position (or perhaps more pertinent, will be weakening just as much, or more, than most other developed economies in the first half of 2023).

The NFIB Small Business Optimism survey fell to 89.8 from 91.9, below the expected 91.5, and wholesale trade sales fell by 0.6% against a rise of 0.2% expected.  On the other side of the data ledger, French industrial production rose by a much stronger than expected 2.0% and manufacturing output an even stronger 2.4% (both expected 0.8%) though Finnish and Dutch data was weaker.  Overall industrial production for the Eurozone reported on Monday, was +0.2% on the month.

China published its December credit and money supply data after last night’s APAC session close, with mixed results.  New Yuan (bank) loans expanded by a slightly stronger than expected ¥1.4tn. last month (¥1.2tn. expected) but Aggregate Financing was much weaker than expected at ¥1.3tn. (1.85tn expected) while M2 money supply growth slipped back to 11.8% from 12.4% in November and below the 12.3% consensus. The data highlights the dependence on (largely state owned) banks for the economic recovery the Chinese authorities are furiously intent on securing, having abandoned most of the zero covid strictures since late November amid rising social discontent.

On the central bank front, yesterday’s Riksbank symposium on central bank independence featured a star-studded cast of central banks including Fed chair Powell, in which he said that “What the Fed is doing to bring down inflation won’t be politically popular, and we know that, and that’s why we have this institutional arrangement that provides more autonomy to do our job”. The ECB’s Schnabel, speaking t the same event, said that (ECB) rate must still rise significantly and that policy must turn restrictive to fight inflation.  Eurozone money markets are very well priced for +50bps on 2 February (48.5bps) while the Fed meeting the data before is currently priced for just 31bps.  BoE on 2 Feb. is at 44bps and RBA on 7 February at 16bps.

In political news, US Treasury Secretary Janet Yellen has announced that she will stay in her post through the remainder of President Biden’s current term (at his request). This as the early exchanges in the newly elected House of Representative make clear that the debt ceiling issue – that the US will need to confront by mid-year – is seen as the main point of leverage Republicans have in their quest to overturn chunks of policy measures put in place by the Biden administration in the last year or so.  The House has already voted to repeal ~$80tn of additional funding for the Internal Revenue Service, but which of course won’t get through Senate, at this stage at least.

Market wise, in FX the USD is some 0.2% firmer in DXY terms relative to Monday’s NY close, led by losses of 0.2-0.3% for GBP, CHF, CAD, and JPY (EUR/USD is virtually unchanged). AUD/USD, which made a high of 0.6950 on Monday in the context of a fall in USD/CNY down through 6.80 and bringing its year -to-date fall to some 3%, is down 0.4% alongside NOK, but remains the best performing G20 currency year to date (+1.1%).

In bonds, the 2-year note received a small fillip from a well-received 2-year note action, which cleared 2bps through the 4.0% when issued yield just prior to the sale.  2s are currently still 5bps up on the day, 10s by 9bps, reducing their YTD falls to 17bps and 25bps respectively. European benchmark 10s earlier closed between 3bps (Gilts) and 7.5bps (Bunds) firmer.

US equities come into the last hour showing gains of 0.5% for the S&P500 and 0.6% for the NASDAQ4, led by gains of close to 1% in Consumer Discretionary and Communication Services stocks.  European stocks earlier close with losses of 0.3-0.6%.  The Hang Seng, which fell by 0.3% yesterday, remain the best performing stock market year to date, up 8%.

Coming Up

• The new Australia monthly CPI Indicator, for November, is expected to reaccelerate to comfortably above 7% y/y. The indicator slowed in October to 0.2% m/m and 6.9% y/y, but we do not interpret that as evidence inflation had peaked. We pencil in a 0.8% m/m and 7.3% y/y outcome (consensus 7.2%) and expect year-ended inflation in the monthly indicator to move higher again in December as higher electricity prices are captured. Higher fuel, fruit and vegetable pieces are among the drivers of the expected upturn in the annual rate in November. Highly uncertain seasonal patterns and a short back history mean there is high uncertainty around the outcome of the Monthly Indicator, though we see the risks as skewed to a higher outcome. The RBA will see the full Q4 CPI on 25 January ahead of its meeting on 7 February.
• Australia November retail sales is also due, which will really need to be read in conjunction with the December numbers out 31 January to have any confidence in the evolution of consumer spending given highly uncertain seasonal patterns. That said, we pencil in seasonally adjusted growth of 1% in the month (consensus +0.6%) which would reflect still resilient spending and some boost from Black Friday.
• There is nothing of great note on the offshore calendar this evening.

Market Prices

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