-        Ifo survey still likely to be upbeat on Germany’s economic outlook (09.00 GMT)

-        Fall in China’s flash manufacturing PMI further evidence that the rebound is fading

-        Bank of Japan probably on hold until second half of 2014

 

Key Market Themes

Recent statements from officials at the People’s Bank of China (PBC) suggested that intervention in the currency market would basically end and that it is no longer in China’s favour to increase its currency reserves appear at first glance to be negative for US Treasuries. However, we are not convinced this would be the case.

 

China’s previous efforts to limit the appreciation of the renminbi have caused it to amass foreign exchange reserves, which are now over $3.5 trillion. Around 70% are estimated to be dollar-denominated assets such as US Treasuries. One consequence of this policy was a surge in China’s net lending abroad as its efforts to hold down the renminbi generated a growing current account surplus. Net lending abroad is much lower today than it was in 2007, but that has been primarily due to an increase in investment rather than a fall in savings. (See Chart 1.)

 

China’s shift to a more consumption-led model and desire to liberalise its currency may result in a decline in its surplus savings. But, contrary to what some believe, we do not think this would automatically drive US Treasury yields higher. Indeed, yields have remained low despite the decline in China’s surplus savings over the past few years. This is because any additional spending by China on imports initially causes an offsetting increase in income and savings elsewhere, so the level of global savings remains unchanged. (For more, see our Global Markets Focus, “Treasury yields have further to fall”, 17th June 2011.)

 

That said, a decline in China’s surplus savings could conceivably push up US Treasury yields indirectly if it prompted the Fed to tighten monetary policy. After all the key determinant of long-term US Treasury yields is the expected path of US short-term interest rates.

 

However, for this to happen, any decline in China’s surplus savings would have to prompt a sufficiently large increase in US aggregate demand and inflation. This is very unlikely. And in any case, there is still significant slack in the US economy. The upshot is that the Fed is likely to keep monetary policy very loose for a long time.

 

What’s more, even if demand from China for US Treasuries does wane, this may be partially offset by a significant decline in the supply of Treasuries. After all, the Federal budget deficit has shrunk sharply over the past few years as the economy has recovered. (Jessica Hinds)

 

What to watch for today: US

No major data or events scheduled for today.

 

Pipeline price pressures in the US remained weak in October, but the threat of a period of consumer price deflation is still low. The 0.2% m/m decline in producer prices last month was mainly due to a 3.8% m/m drop in gasoline prices. (Data published on Thursday.) This left the annual rate of PPI inflation in line with September’s four-year low of 0.3%. Price pressures are not as weak outside of the energy sector, however. Core PPI inflation was 1.2%, down from 1.4% in September. Overall, though, with the lagged effect of previous declines in commodity prices fading and the outlook for industry improving, core PPI inflation is unlikely to fall much further. (Paul Dales)

 

Canada

Retail sales (13.30 GMT) were probably unchanged in September, following the small gain in the previous month. Preliminary figures suggest that new vehicles sales are likely to have slipped month-on-month, while gasoline station sales were unchanged. Flat food prices indicate that grocery store sales were also likely to have been unchanged.

 

Meanwhile, we think that October’s annual headline inflation rate (13.30 GMT) fell to 0.7%, from 1.1% in the month before. The core inflation measure probably dipped to 1.1%, from 1.3% in September. The main factor behind the stronger decline in headline inflation would be gasoline price inflation, which we think fell to -3.3% in October from -0.7% in the prior month. (David Madani)

 

Continental Europe

Like the ZEW, the Ifo survey (09.00 GMT) has painted a pretty upbeat picture of the outlook for Germany’s economy over recent months. That said, the weak GDP figures in Q3 suggest the survey has been overly optimistic and the business climate indicator appears to have flattened off in the last few months. Against that background, we forecast another broadly stable outturn of 107.5 in November. That would still point to stronger growth ahead, but we continue to treat that message with caution. (Jonathan Loynes)

 

November’s fall in the euro-zone composite PMI (data released on Thursday) suggests the region’s fragile recovery may be losing more steam. The decline in the headline index, from 51.9 to 51.5, was weaker than the consensus forecast of a small rise to 52.0 and was the second consecutive monthly fall. On past form, the index is now consistent with quarterly growth in euro-zone GDP of about 0.1%, in line with Q3’s expansion. (Ben May)

 

UK

No major data or events scheduled for today.

 

October’s UK public finance figures (published on Thursday) showed that net borrowing, excluding the temporary effects of the financial interventions, was £8.1bn in October, only a touch below the £8.2bn recorded a year ago. Nonetheless, borrowing is still on track to undershoot the OBR’s March forecast of £120bn by up to £15bn this year. So, with upward revisions to the OBR’s forecasts for growth in GDP and tax receipts in future years also likely, the Chancellor certainly has some scope to fund a net giveaway during his Autumn Statement next month. (See our Autumn Statement Preview, to be published next week.) Even so, the big picture remains that the fiscal consolidation still has much further to run and will limit the pace of economic recovery for many years to come. (Samuel Tombs)

November’s CBI Industrial Trends Survey (also released on Thursday) provides further grounds for optimism that the recovery in manufacturing is gaining even more pace. The total orders balance rose from -4 to +11, reversing last month’s fall and reaching its highest level since 1995. On the basis of past form, this points to an acceleration in annual growth in the official measure of manufacturing output to around 6%. (Jack Allen)

 

Japan

No major data or events scheduled for today

 

The Bank of Japan’s decision to maintain the current pace of asset purchases after its Policy Board meeting on Thursday was no surprise. Governor Kuroda emphasised the Bank’s willingness to ease further, but also that it is too early to conclude that the planned monetary expansion will be insufficient to hit the 2% inflation target. Our view is that the Bank is more likely to wait until the second half of 2014, rather than to move sooner (as many others predict) to cushion the economy against the impact of next April’s consumption tax hike. The government’s intention to offset the bulk of the fiscal tightening with other tax and spending measures has weakened the case for additional monetary stimulus early next year. However, assuming that underlying inflation is still well below target, as we anticipate, more action will be needed by end-2014.  (Marcel Thieliant)

 

China

No major data or events scheduled for today

 

The HSBC/Markit flash manufacturing PMI for November dropped from 50.9 in October to 50.4 this month, weaker than most had expected. The fall, the first since July, suggests that momentum in the sector is cooling. According to the breakdown, most of activity components show signs of deterioration. In particular, the more forward-looking component for new orders fell for the first time since the summer. Our broader China Activity Proxy (CAP) suggests that recent strength of activity in industry has not spread more widely. In other words, any slowdown in the area would very likely mean that the wider economic rebound had run its course. (See Thursday’s China Data Response for more.) (Qinwei Wang)

 

Other Asia-Pacific

No major data or events scheduled for today

 

Thursday’s revised GDP data showed that Singapore’s economy grew by 1.3% annualised in the third quarter, despite the advance estimate released last month pointing towards a contraction of 1.0%. Given that industrial production and non-oil domestic exports strengthened in September, an upward revision to GDP growth looked likely. Nevertheless, growth still came in better than expected. In y/y terms, growth accelerated to 5.8%, from 4.4% in Q2. (Daniel Martin)

 

Latin America

Peru is due to release an estimate of Q3 GDP growth today. The latest activity data point to an easing of domestic demand, as well as continued weakness in the export sector. We are forecasting an expansion of 4.4% y/y, down from 5.6% y/y in Q2. If we are right, that would be the slowest pace of growth since 2009. (Michael Henderson)

 

Meanwhile, data published on Thursday showed that Mexico’s economy continued to struggle in the third quarter. GDP growth slowed to just 1.3% y/y in Q3, from 1.6% y/y in Q2, on the back of weak construction and mining output. But with growth in the key manufacturing sector picking up, and demand from the neighbouring US strengthening, we continue to expect GDP growth to accelerate to over 4% y/y in 2014-15. (David Rees)

 

Emerging Europe

No major data or events scheduled for today.

 

Middle East & Africa

No major data or events scheduled for today

 

The South African Reserve Bank (SARB) left rates on hold on Thursday at 5.00%, as expected, but it gave its clearest indication yet that the next move in interest rates will be up. The renewed slump in economic growth means that the SARB will be reluctant to raise rates for now, but a tightening in global monetary conditions over the next year or so may eventually force its hand. (Shilan Shah)

 

Key Data and Events

Fri 22nd                          -         Per       GDP (Q3)

                                   07.00     Ger       GDP (Q3, Final)

                                   09.00     Ger       Ifo Business Climate Index (Nov)

                                   09.00     Ita         Retail Sales (Sep)

                                   13.30     CA        Retail Sales (Sep)

                                   13.30     CA        Consumer Prices (Oct)

                                   14.00     CA        Core Consumer Prices (Oct)

Back to News