Weekly Market Analysis 16-20 January 2017

Good Morning All;
Global equities rose marginally last week, although many major markets dipped, with risk appetite hit by US President-Elect Donald Trump’s first press conference since the election, which provided little clarity around the US policy outlook
US retail sales were weaker than expected, despite continued robust consumer sentiment data
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In the US, December’s headline retail sales rose 0.6% mom, marginally less than the 0.7% expected. December’s details are quite disappointing, with vehicles and parts contributing 0.51 ppts and gasoline stations adding 0.15 ppts. Outside of these components, only non-store retailers saw a noteworthy addition of just 0.14 ppts. The control group (excluding autos, gas and building materials) also disappointed at 0.2% mom against 0.4% expected, with the prior month revised down to 0.0% mom from 0.1%. This data appears at odds with the continued rise in consumer sentiment, but it still translates into a firm core group yoy rate of 3.4% despite disappointing November and December releases. January’s University of Michigan Index of Consumer Sentiment preliminary release showed little change, dipping very slightly to 98.1 from 98.2. The current conditions index improved to 112.5, up from 111.9, while expectations edged lower to 88.9 from 89.5. Importantly, this remains incredibly close to December’s 13-year high, although the recent improvement has not translated into an acceleration in consumer spending. Interestingly, long-term consumer inflation expectations (during the next five to 10 years) rebounded from their all-time low of 2.3% yoy in December to 2.6% yoy, its highest level since July 2016.
The European Central Bank (ECB) account of the December monetary policy meeting showed that two “broadly equivalent” options with regard to the Asset Purchase Programme (APP) were presented by Chief Economist Peter Praet: maintain purchases at the existing EUR80 billion level for a six-month period or extend by nine months at a reduced purchase amount of EUR60 billion per month. The minutes highlight that “Mr Praet was leaning towards the second option” as it “allowed for a more sustained market presence and, therefore, a more lasting transmission of the Governing Council’s stimulus measures.” During the meeting, “a few members” voiced a preference for keeping the rate of purchases steady, only to later change their minds, with “very broad support” then emerging to adopt Praet’s preferred option. There was also broad agreement that this option was “needed to retain the necessary flexibility to again upscale APP purchases” if the economic outlook deteriorates or financial conditions tighten. The decision to cut purchases was also shown to be motivated by concerns “of declining market liquidity.” Meanwhile, industrial production in the region grew by 1.5% mom in November, beating expectations (+0.6%). This was the strongest monthly rate of expansion since April, with an upward revision to the October print (+0.2 ppts to +0.1% mom) also encouraging. The annual rate of growth was at 3.2% yoy, the highest since January 2016, but fairly flat on a 12-month moving average basis (around +2% yoy). The recent firming of eurozone industrial production echoes strong gains in the eurozone manufacturing PMIs (reaching a five-and-a-half-year high in December), robust German factory orders and exports data, amid evidence that euro weakness and a robust recovery in eurozone fixed investment is supporting activity in the sector. The November unemployment rate held steady at over a seven-year low of 9.8%, with rates in Germany and Spain both remaining unchanged at 4.1% and 19.2%, respectively. Elsewhere, an improvement in France (-0.2 ppts to 9.5%) was offset by an uptick in Italy, reaching a 17-month high (+0.1 ppts to 11.9%). Lastly, Germany’s November industrial production expanded by 0.4% mom, lower than expectations (+0.6%). Nevertheless, an upward revision to the prior month (+0.2 ppts to +0.5%) left annual growth at 2.2% yoy (versus +1.9% expected). Growth was supported by a 1.5% mom surge in construction output, while production of intermediate goods also rose strongly during the month (+0.9% mom).
China’s producer price (PPI) inflation continued to surprise on the upside (+5.5% yoy in December versus consensus at +4.6%) due to a recovery in upstream industries such as mining and raw materials (up +21.1% and +9.8% yoy respectively in December). Meanwhile, overall consumer goods producer prices increased by a more modest 0.8% yoy. The relatively low pass-through from commodities to consumer goods prices partly explains the moderation in consumer prices (CPI) inflation, which declined from 2.3% yoy in November to 2.1% (consensus at +2.2%). However, CPI ex-food gathered pace from 1.8% in November to 2.0% in December. On trade, exports dropped more than expected in December, down 6.1% yoy (consensus at -4.0%), partly due to negative base effects. Shipments to most parts of the world weakened, particularly to Hong Kong (-26.3% yoy) and the European Union (-4.7%), reflecting weak momentum in global trade at the end of last year. Meanwhile, imports were almost in line with expectations, at 3.1% yoy, down from 4.7% in November but still consistent with steady Chinese demand for imported goods as the economy stabilises. Overall, the trade surplus shrank from USD44.2 billion in November to USD40.8 billion, its lowest level since last April.

 

Brazilian IPCA inflation fell from 10.71% yoy in December 2015 to 6.99% in November 2016. December’s release fell slightly more than expected to 6.29% yoy against 6.34% expected. Services and non-tradable inflation continued to decline, dropping to 6.35% yoy from 7.20% previously. This marks the first return to the COPOM’s 4.5%-6.5% target range since December 2014. Continued strong disinflationary pressures, well-anchored inflation expectations and a continuing sluggish economy were key factors in the Central Bank of Brazil’s decision to cut rates by 75 bps to 13.00% (market consensus at 50 bps). In its policy statement, the bank noted that given uncertainty over the global outlook, soft activity data in Brazil and anchored inflation expectations, it is “already appropriate to frontload the monetary easing cycle, and allows the new pace of easing.”
December’s headline Mexican CPI rose 0.46% mom, slightly less than the expected 0.50% mom. This left annual inflation at 3.36% yoy, slightly below the 3.41% yoy anticipated, although its highest since December 2014. Inflationary pressures have been predominantly driven by the Mexican peso’s 20% depreciation against the US dollar during 2016, with March’s forthcoming liberalisation of fuel prices likely to provide an additional source of upward pressure.

 

India’s December CPI inflation decelerated quicker than expected, at 3.4% yoy (consensus +3.5%), following November’s 3.6% increase. The main driver was food and beverages inflation (45.9% of the index), which slowed to 2.0% from 2.6% previously, offsetting higher “fuels and lighting” inflation (from +2.8% to +3.8%). Other subcomponents such as housing, footwear, and clothing and bedding remained largely unchanged. Meanwhile, in year-on-year terms, industrial production rebounded strongly in November, rising 5.7% yoy (-1.8% previously), much higher than expectations of 1.5%. All sectors saw higher growth, but the main contributions came from manufacturing, which added 4.3 ppts, while electricity and mining added 1.0 ppts and 0.4 ppts, respectively. However, the month-on-month figures showed weaker growth in all sectors, likely reflecting the short-term negative impact of demonetisation on economic activity
In the coming week, UK Prime Minister Theresa May will deliver a long-awaited speech on the government’s approach to Brexit
Oil prices fell on uncertainty over enforcement of OPEC’s production cut; gold prices rose for third week
Oil prices fell last week, amid rising concerns over the ability of OPEC to enforce planned production cuts as data showed Iraq exported a record amount of crude from its southern ports in December. Sentiment was also hit by the U.S. Energy Information Administration raising its forecast for US production in 2017 by 200,000 barrels per day, although this was offset to some extent by the organisation’s weekly report that showed an unexpected decline in inventories at Cushing, Oklahoma, the delivery point for WTI futures contracts. Overall, WTI crude fell (-2.6% to USD52.6 per barrel) as did Brent (-2.6% to USD55.6 per barrel).
Gold prices rose for the third consecutive week (+2.1% to USD1,198), boosted by the continuing pullback in the US dollar as well as higher jewellery demand ahead of the Lunar New Year. Lingering uncertainty over President-Elect Trump’s economic policy agenda – and the implications for US interest rates – are also proving supportive to the yellow metal.
Regards All.
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