China is very much at center stage after the Shanghai Composite slumped nearly 5.5% today
The dollar rose to two-month highs against the yuan, while the gap between the offshore (CNH) and onshore (CNY) yuan widened to about 0.9%
Japanese data was mixed, and those thinking the BOJ will be forced to expand its asset purchases next year are unlikely to be discouraged
The political tension from the Iberian Peninsula may be easing
The downward surprise in consumer confidence was the highlight among the many data points of the UK
Retail sales for Norway and Sweden came in on the strong side, but the implications for policy are different
Colombia’s central bank is expected to hike rates 50 bp to 5.75%
Price action: The dollar is mostly firmer against the majors, with the Swedish krona the lone exception and up 0.2% on the day. The Swiss franc and the Kiwi are underperforming. The former is the weakest of the majors and the dollar is trading at new five-year highs against the franc. The euro is down slightly, trading just below $1.06, while sterling is trading softer near $1.5030. Dollar/yen is trading near 122.60. EM currencies are mostly softer. PHP and CNY are outperforming, while MYR and RUB are outperforming. MSCI Asia Pacific fell 1%, with the Nikkei down 0.3%. MSCI EM is down 1.2%, with the Shanghai Composite down 5.5% and the Shenzen Composite down 6.1% on negative news regarding three mainland brokers. Euro Stoxx 600 is flat near midday, while US futures are pointing to a small positive open. The 10-year UST yield is down 2 bp at 2.21%, while European bond markets are mostly firmer. Commodity prices are mostly lower, though copper is up 1.5% even as oil is down 1-2%.
The US dollar is firmer but within its recent ranges against the major currencies. Participants are clearly focused on next week’s events, and in particular, the prospect for additional easing measures by the ECB. In addition, next week’s speeches by Yellen and the monthly jobs report is expected to underpin expectations for the Fed’s lift-off in the middle of December.
China is very much at center stage after the Shanghai Composite slumped nearly 5.5% and the Shenzhen Composite lost 6.1%, the largest losses since August’s rout. The proximate cause appears to be news that the three top brokers are under investigation in part of the larger anti-corruption campaign. News that corporate profits fell 4.6% in October after a 0.1% decline in September also weighed on investor sentiment.
The dollar rose to two-month highs against the yuan, while the gap between the offshore (CNH) and onshore (CNY) yuan widened to about 0.9%. This is the widest since early September. Although the PBOC is thought to have tried to minimize the gap before it reached this magnitude in the past, its agents have not been seen. Perhaps some of the tolerance is linked to speculation ahead of Monday’s IMF decision. That the yuan is included seems to be a forgone conclusion. The issue now is the weight it is given in the basket.
In a report over the summer, the IMF staff suggested that if just exports are used for the calculation, as the yuan’s share of global reserves is very low (~1.1%), the weighting would be 14-16%. However, the use of the yuan is well below the other members of the SDR basket (dollar, euro, sterling and yen). The market consensus, according to one newswire is for about a 10% weighting. We suspect that it may be a bit lower. For Chinese officials, getting in is the important thing. The weighting is less significant. It can be confident that as the yuan’s role in the global economy increases, so will its weight in the SDR.
Some observers are linking the weakness of the yuan to anticipation of a smaller weighting. But as we have noted, there is also speculation that after the formal SDR decision is made, Chinese officials will allow the yuan to depreciate. However, we note that the yuan has been steadily falling since the start of November. Officials do not appear to be waiting. We also note that this month, the US dollar has risen against all the major currencies but the Australian dollar, and against all the emerging market currencies save Brazil and Malaysia. The same macro-considerations that lift the dollar against other currencies are also operative against the yuan.
Japanese data was mixed, and those thinking the BOJ will be forced to expand its asset purchases next year are unlikely to be discouraged. For the third consecutive month, Japan’s core inflation (excludes fresh food) was -0.1% on a year-over-year basis. It has not been above zero since June. Despite this being the formal target measure, the BOJ has looked past the decline in oil prices, and finds some comfort in its measure of inflation that excludes food and energy, which it says was steady at 1.2%, though the MOF calculations differ (lower).
The BOJ may also find solace in the continued tightening of the labor market. The unemployment unexpectedly fell to 3.1% from 3.4%. This is the lowest rate in two decades. The job/applicant ratio remained at 1.24, the highest since mid-1992. However, it was disconcerting to learn then that household consumption fell 2.4% in October (year-over-year) after a 0.4% decline in September. It was the poorest report since March. Since the beginning of last year, household consumption on a year-over-year basis has only been positive for four months.
This is where Abe’s supplemental budget comes in. Reports today suggest a JPY3.5 trillion package, which is a little more than had been suggested previously. The supplemental budget may include support for poor pensioners and a hike in the government’s minimum wage. Extra budgets around this size are relatively common in Japan.
Turning to Europe, the political tension from the Iberian Peninsula may be easing. This may be helping Spanish and Portuguese bonds outperform today. In Spain, the Finance Minister from Catalonia encouraged negotiations with Madrid rather than pushing the secessionist route. In Portugal, the new government promised to comply with EU rules, but remains committed to modifying some of the previous government’s austerity measures.
Separately, Spain reported that its harmonized inflation measure improved to -0.4% from -0.9% in October. The Bloomberg consensus had expected somewhat less improvement (-0.7%). Deflationary forces are easing quicker than the year-over-year figures suggest. In the last three months, the harmonized measure of Spanish inflation has risen at a 3.6% annualized rate.
This does not impact the outlook for the ECB next week. The ECB is focused what it sees as too slow of an improvement on inflation. The market expects a deeper push into negative territory with the deposit rate (perhaps a two-tier system, which seems to us to punish German and French banks which among the largest depositors at the ECB), increased asset purchases, and a six-month extension of the purchase program. Although it has been suggested that the ECB could buy sub-sovereign debt or even distressed loans, we are not convinced that an agreement on these can be hammered out. However, the ECB could increase the agencies that qualify.
The downward surprise in consumer confidence was the highlight among the many data points of the UK. The consumer confidence index fell to 1, a six-month low and down from 7 just two months ago. This compares with expectation for the index to remain at 2. The Nationwide house price also came in worse than expected at 3.7% y/y growth, compared with 4.2% expected. The housing sector will be in focus after the tax increases in buy-to-let and second properties announced in the Autumn Statement yesterday. Lastly, GDP 3Q preview came in as expected at 2.3% y/y, the same as in the last quarter. In contrast to the consumer confidence number reported today, the GDP breakdown showed that domestic demand continues to drive UK growth, with consumer spending rising for a 17th consecutive quarter. This helped outweigh the negative contribution of net trade at 1.5 percentage points.
Retail sales in Sweden came in on the strong side. The October print came in at 5.0% y/y, compared with expectations for an increase of only 3.8%. In addition, the September number was revised considerably higher to 5.7% from 3.7%. The Riksbank’s concern is not the real economy but deflation. Falling prices have not deterred consumption. Norway’s retail sales gains are more important, surprising on the upside at 0.9% m/m, compared with -0.8% in the previous month. In Norway, growth is more of a concern for policymakers than inflation, which is highest among the majors. Norway’s unemployment rate came in as expected at 2.9% for November.
Colombia’s central bank is expected to hike rates 50 bp to 5.75%. This would follow a larger than expected 50 bp hike last month. However, the market is somewhat split. Of the 40 analysts polled by Bloomberg, 23 see a 50 bp hike, 15 see a 25 bp hike, and 2 see no hike. Inflation continues to move higher. At 5.9% y/y in October, it’s the highest since March 2009 and above the 2-4% range for the ninth straight month. As such, further tightening seems likely as we move into 2016. Lower oil prices will weigh on the economy, but the bank seems focused on anchoring inflation expectations.