What Signals Can Be Revealed From Social Financing?

Summary:

Another year, just over a month left until the Lunar New Year. At this critical time, pandemic controls have also been liberalized. Commodities as well as rights and interests have fortunately gained a short moment of spring. However, as China’s Social Financing released yesterday was less than expected, it poured cold water on the market again, leading to a rash correction. So what signal does that send?

Bullish Expectations Have Been Fulfilled While Bearish News Appears Frequently

After the low opening of China's stock market yesterday, prices continued to swing lower, with the main index in Shanghai dropping nearly 1%. Volumes of both markets were 909.8 billion, nearly 100 billion less than last Friday. The most conspicuous data is the net sale of 4.3 billion yuan of foreign capital, which is relatively rare in recent times and is also abnormal. With the liberalization of pandemic prevention in China, overseas turned to be optimistic about China unanimously, but yesterday it fled. However, markets go up, and markets go down. For the market of yesterday, it was more about the fulfillment of positive expectations after the pandemic was released and some bearish voices are loud as well.

On the weekend, the most searched information on the trending topic is still the pandemic, which can be described as overwhelming. The epidemic has spread significantly in Beijing and Hebei, and talks about runs on the healthcare system have even been widespread. As the Spring Festival Travel Rush is upcoming, the first round of pandemics in various regions will basically concentrate in January and February. Therefore, the hottest stock in the equity market yesterday was still the theme of anti-pandemic. So what does this phenomenon of huddling to warm up indicate? It indicates that the pandemic sentiments have not passed yet, and people are still pessimistic about the future.

What Signal Does the Social Financing Send?

The economic data for November, which was released yesterday, was also unsatisfactory. Although the growth of M2 reached a new high of 12.4%, the scale of new credit and social financing was less than expected. Perhaps bright economic data can hardly come out in the short term, while statistics are precisely the core of confidence stability, which is difficult to be optimistic in the short term. Several problems may have been reflected in this data:

Firstly, the confidence in residents' consumption is still insufficient.

Looking carefully at the social financing this time, residents' credit is still declining, which means that the demand and confidence of residents still have not picked up significantly. While the world is plagued by inflation, China may have to worry about deflation.

RMB deposits rose 2.95 trillion yuan in November, up 1.81 trillion yuan year-on-year. Faced with an uncertain future, most residents are saving money but spending it. Several phenomena can also be spotted in hog consumption. As the year draws to a close, hog prices are still falling, which have taken a sharp turn in early December. In addition, the price of hog futures plunged sharply yesterday morning, which was once close to the drop limit, with a deeper decline in today's opening.

Secondly, the financing of housing enterprises has shown signs of improvement.

Among the new loans in November, the performance of enterprises was extremely eye-catching in the medium and long term, with an increase of 736.7 billion yuan, which climbed 16% from the year before, and housing enterprises ranked first. Looking back on the whole of November, the three arrows of real estate played a good role in promoting the financing of real estate enterprises this time, especially the third arrow. As the CSRC supported the equity financing of real estate enterprises, which was liberalized again after a period of 6 years. Meanwhile, Many private real estate listed companies have thrown out refinancing announcements and quickly set up additional funds to develop real estate.

Thirdly, the demand of residents for housing has recovered.

New medium- and long-term credit to residents in November was 210.3 billion, a significant increase from 33.2 billion in October, but only 36% compared with the same period last year.

Since the beginning of this year, preferential policies for buying houses have been introduced constantly, with purchase restrictions have been relaxed in almost every region except for first-tier cities, and interest rates are also unprecedentedly low. However, the willingness of residents to buy houses is still not strong at present, which can also attribute to the lack of confidence.

The central bank is projected to cut the RRR again in December, and the LPR will be lowered accordingly. Can these strategies stimulate the property market? Perhaps the inflection point is still out of sight. China's retail investors have always been characterized by chasing up and down, who are always afraid of overpaying, and this wave of lowering interest rates will give them more expectations. Perhaps when interest rates stop falling, the housing market may have unexpected surprises. However, the height of the property market is just like that. Therefore, it is difficult for real estate to return to its former glory!

Finally, the is a concern left. If we look at it in two months, the current data may still be the best month. As the population movement is the greatest during the Spring Festival period, the pandemic may usher in the largest outbreak, even in rural areas. When everyone has experienced this wave of the pandemic, the later stage will just eventually become a memory, and confidence may then have a substantial improvement. However, we should still pay attention to risks in the short term, not only personal risks but market risks.

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Devin

Economic

Britain's jobless rate rose for a second month and there were other signs in data on Tuesday that some of the inflationary heat in the labour market is cooling as the economy stumbles, including an increase in older people looking for work.

But the Bank of England (BoE) - which looks set to raise interest rates for the ninth consecutive meeting on Thursday - was likely to note the strongest rise in basic pay on record, not including the period around the COVID-19 pandemic.

Sterling briefly rose against the U.S. dollar and the euro after the figures were published by the Office for National Statistics (ONS), before falling back.

The unemployment rate increased to 3.7% in the three months to October from 3.6% in the three months to September. Vacancies in the September-to-November period fell on an annual basis for the first time since early 2021 when Britain was under lockdown.

But regular pay rose by a stronger-than-expected 6.1% in the August-to-October period, the biggest gain since records began in 2001, excluding jumps during the COVID-19 pandemic which were distorted by lockdowns and government support measures.

Total pay including bonuses also increased by an annual 6.1%, the ONS said.

Martin Beck, an economist with forecasters EY Item Club, said 6.2% growth in service sector wages would catch the BoE's attention but it would probably still slow the pace of its rate hikes to 50 basis points (bps) from November's 75 bps increase.

The central bank is weighing up signs that Britain's economy has already gone into a probably long recession with continued inflation problems coming from the labour market.

"The prospect of high services sector pay growth contributing to sticky inflation is more likely to make it harder for the Monetary Policy Committee (MPC) to cut interest rates next year," Beck said.

Both measures of pay continued to lag behind inflation - which topped 11% in October - representing a further cut to spending power for households.

Samuel Tombs, an economist with Pantheon Macroeconomics, said he expected pay growth to slow as the weakening economy takes its toll on the jobs markets.

"As a result, we continue to think that enough hard evidence of rising unemployment and slowing wage growth will accumulate by the MPC's meeting in mid-March for it to stop hiking Bank Rate, having already increased it to about 4%," he said.

The BoE was likely to take some comfort from other parts of Tuesday's labour market report.

It fears that the recent shrinking of the pool of workers in the labour market will add to inflation pressure in the economy.

The ONS said the economic inactivity rate - or the share of people not in work and not looking for it - fell in the three months to October to 21.5%, 0.2 percentage points lower than the previous three-month period.

The fall was driven mostly by more older people who had considered themselves retired but were now looking for work.

"This tallies with other data which suggest more people in their 50s are thinking of going back to work, at a time when the cost of living is rising rapidly," ONS statistician Sam Beckett said in a statement.

However, the inactivity rate was 1.3 percentage points higher than before the pandemic.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

European equities traded in the red at the start of the week, but equities in the U.S. rebounded as investors are hanging on to hope of slower inflation and reasonably hawkish Federal Reserve (Fed) by their fingernails.

Today and tomorrow will tell whether they are right being optimistic or not.

The latest U.S. CPI data will reveal whether inflation in the U.S. eased, and by how much. It's highly likely that we will see a number below the 7.7% printed a month earlier. But a number below 7.7% won't be enough as analysts expected it to ease all the way down to 7.3%.

Last Friday, the PPI figure showed that the U.S. factory gate prices eased in November, but not as much as penciled in – leading to some disappointment among investors. Today, a similar disappointment could erase yesterday's 1.43% rebound in the S&P500 and could easily send the index below its 100-DMA.

But if, by any chance, we see a softer CPI figure, then the S&P500 could easily jump above its 200-DMA, and even above the ytd descending channel top.

But, but, but…

Today's U.S. CPI data, unless there is a huge surprise, will probably not change the Fed's plan to hike the interest rates by 50bp this week. Activity on Fed funds futures gives 77% chance for a 50bp hike, and a slim chance of 23% for another 75bp hike.

What will probably change is where investors see the Fed's terminal rate, and for how long.

More importantly, it will give us an idea on how the market pricing for the Fed's terminal rate will clash with the dot plot projections that will come out tomorrow, and that will, in all cases, hammer any potentially optimistic market sentiment.

Therefore, even if we see a great CPI print and a nice market rally today, it may not extend past the Fed decision on Wednesday.

Energy up

European stock investors are uncomfortable this week due to the icy cold weather, that will get the countries to tap into the natural gas, and other energy supplies.

The U.S. nat gas prices jumped more than 30% since last week due to a powerful Pacific storm bringing cold and snow to the norther and central plains in the U.S.

In the UK, power prices hit another ATH yesterday.

Happily, we haven't seen a significant rise in the European nat gas futures, which in contrary kicked off the week downbeat.

But crude oil rallied as much as 2.60% on Monday as Russia said that the EU's $60 cap on its oil could lead to supply cuts, as Goldman said that Chinese reopening could boost demand by 1mpd – which would mean a $15 recovery in crude's price – and as a key pipeline supplying the U.S. closed following a spill discovered last week.

I think that the oil rebound due to these three factors could be short-lived and may offer interesting top selling opportunities for medium term bears looking for a further dip in oil prices to below $70pb. Because, the Russia is not harmed by $60pb currently, U.S. supplies will be restored and the Chinese reopening may not be smooth due to potential disruptions in economic activity, because people are sick.

Don't count on strong UK GDP

The British GDP grew more than expected last month and that was mostly due to the rebound in activity after Queen Elizabeth's death slowed activity earlier. But strikes across the country are so severe that they could wipe half a billion pounds off the hospitality industry's pre-Xmas earnings. PM Rishi Sunak thinks that military staff could help cover for striking workers.

Cable consolidates gains below 1.23 but is at the mercy of the U.S. dollar. The Bank of England (BoE) is expected to hike by 50bp at this week's MPC meeting, but the hike will certainly be accompanied by dovish statement as the UK economy is not strong enough to withstand a Fed-like tightening in the middle of an energy, and cost-of-living crisis.

Source: Swissquote Bank

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Samantha Luan

Forex

USD: November CPI front and centre

Traded levels of volatility for longer tenors (one month and three months) have been falling sharply over the last two weeks as the FX markets take a breather. Even though shorter-dated tenors' price in plenty of volatility over the next week, the view seems to be that into the first quarter of next year, FX markets can continue to settle. That view will be challenged over the next 36 hours with the release of the November US CPI at 1430CET today and the Federal Open Market Committee (FOMC) tomorrow at 20CET.

Given that last month's CPI release was a major trigger for the dollar sell-off, all eyes will be on today's figure. Our chief international economist, James Knightley, is forecasting the key core component at 0.3% month-on-month, the same as the consensus and the same as last month. James says the upside risk stems from shelter and Owners' equivalent rent not falling as quickly as consensus expects – it takes time for the decline in asking rents to feed into what is actually being paid. And downside risks come from used car prices again and whether medical costs stay soft after their technical fall last month. James says there will be more focus today on "services ex shelter" inflation, given that Fed Chair Jerome Powell highlighted that in a recent speech.

Today's release will set the dollar tone for tomorrow's FOMC meeting and into the first quarter of 2023. We think the market is being a little early in pricing 50bp of rate cuts for 2H23 and could see the dollar bouncing on any upside surprise in today's CPI data – including upward revisions to last month's reading. The data probably will not be a knock-out blow to the dollar – one way or the other – given tomorrow's big FOMC meeting including a new set of Dot Plots.

Therefore, plenty to play for over the next 36 hours. A DXY close above its 200-day moving average at 105.80 would be helpful in supporting our view that the dollar will be strengthening through 1Q23.

EUR: Make or break

As above, CPI and FOMC inputs into the dollar equation will be a key driver of EUR/USD into year-end and early 1Q23. If we were to pick out two levels, we would say the 1.0600/10610 area is key resistance. A close above that on a soft US CPI release would warn of a lot more pain into year-end and EUR/USD drifting up to 1.08 and even 1.0950/1.1000. On the downside, the 200-day moving average is now 1.0350 and would be a level any investors trapped long dollars at higher levels might choose to offload some dollars.

Away from EUR/USD, the EUR/HUF cross rate continues its volatile path. News from Brussels last night is that there appears to be progress on the release of EU funds to Hungary. Investors have been here before with many false dawns, but it does indeed seem like progress is being made. As we discuss in our recently released Directional Economics, the Polish zloty, not the Hungarian forint, will probably be the market's target for scrutiny in 2023.

GBP: Better jobs data gives the BoE a headache

We have just seen the latest UK jobs data, where the November payroll increased more than double what was expected and the weekly earnings rate ex-bonus nudged up to 6.1% 3m/YoY, the highest in a year. This adds to thoughts of a full employment recession and supports some of the more hawkish pricing of the Bank of England (BoE) policy cycle. It is probably not enough to prompt the BoE into another 75bp hike on Thursday (a 57bp hike is priced) but will support sterling.

Today's UK data could light the fuse of a Cable rally, were US CPI data to oblige. Our prior has been that this rally stalls around this 1.2300/2310 area – but a close above here warns of another three to four big figures higher during thin, year-end markets.

ZAR: President Ramaphosa faces proxy impeachment vote

One might have expected the South African rand to be doing a little better over recent week. The dollar is weaker, the China re-opening narrative has prompted a rally in the industrial metals markets and seen South Africa's terms of trade improve markedly. But no, outside of the Russian rouble, the rand is the worst EMEA FX performer since 10 November – the release date of the soft US October CPI data.

Driving that rand underperformance seems to be politics. President Cyril Ramaphosa has been caught up in a scandal, whereby an independent panel has concluded he might have violated the constitution in the way he handled the investigation into the theft of cash at his property. The findings of that panel will today be put to a vote in the South African parliament – seen as a proxy impeachment vote for Ramaphosa. The question is how many disgruntled members of the ruling African National Congress (ANC) party will join with the opposition in supporting the panel's finding.

As above, we would have thought the rand would be trading a lot stronger were it not for this vote. But equally, if the vote goes through, USD/ZAR could easily be trading over 18.00 in thin December markets. In short, current levels near 17.50 may not last for long.

Source: ING

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Thomas

Political

Boosting military spending may be Japanese Prime Minister Fumio Kishida's best hope of reviving his sinking popularity, but there is a catch, analysts say: paying for it with unpopular new taxes could undermine an already wobbly premiership.

About two-thirds of Japanese voters back a government plan for the country's biggest military build-up since World War Two, arming it with missiles that can strike targets in neighbouring China or North Korea.

That is more than double Kishida's approval rating, which has plummeted amid revelations about his ruling Liberal Democratic Party's (LDP) ties to the controversial Unification Church and the resignation of three scandal-tainted ministers.

The problem with the crowd-pleasing defence policy is that Kishida's administration has been unclear about how it will pay for the estimated $320 billion splurge over the next five years. The increase would push defence spending to 2% of the country's gross domestic product, or about a tenth of current public spending.

His government has said cost cutting won't cover it, and with growing unease about how financial markets will react to signs of profligacy, Kishida is turning to tax increases that few voters appear to want and many LDP lawmakers oppose.

"From his perspective, he is engaged in a delicate balancing act," said Koichi Nakano, a professor of political science at Sophia University in Tokyo. "If I had to bet, then I would probably bet against him (Kishida) surviving the entire calendar year next year."

Kishida, who leads one of the LDP's smaller factions, needs public support to keep the fractious group in line so he can govern Japan while navigating a slowing global economy, inflation and geopolitical tensions with the country's nuclear-armed neighbours.

Although there are no signs of leadership challenges, analysts say digital minister Taro Kono, who stood against Kishida in last year's leadership run-off, and former foreign minister Toshimitsu Motegi could be successors.

Funding Options

Missile tests and other aggressive acts by North Korea have solidified public support for a stronger Japanese military.

Yet only 20% of respondents to an October poll published by the Yomiuri newspaper, Japan's biggest daily, favoured tax increases to pay for increased defence spending, compared with 40% who backed government borrowing.

In a survey by Fuji Television last month, 66% of people said they opposed higher taxes to pay for a bigger military.

Kishida's advisers, however, have prodded him to embrace tax increases.

A panel of experts the premier established to guide him on defence last month urged "broad tax measures" to pay for the spending alongside financial prudence from the world's most indebted large industrial nation.

The report even made vague reference to the turmoil unleashed on financial markets when former British Prime Minister Liz Truss announced unfunded tax cuts in September that were hastily withdrawn and led to her resignation.

Rare Rebuke

Kishida's experts seem to be winning his ear, even though many in his own party disagree.

At a news conference on Saturday, Kishida, who needs an extra $30 billion a year for his defence plan once money from other reserves runs out, said Japan would pay for any spending shortfall with tax revenue rather than government bonds, which would expand national debt that is already more than twice the size of the economy.

On Monday, however, Kyodo News reported that the government would issue about 1.6 trillion yen ($11.61 billion) in construction bonds for Defence Force facilities.

Kishida also pledged that tax increases would not squeeze peoples' incomes, earning him a rare public rebuke from one of his own cabinet ministers for suggesting that businesses would have to cover the cost.

"I can't comprehend why the Prime Minister would make remarks that will discourage wage increases," economic security minister, Sanae Takaichi wrote on Twitter. Takaichi stood against him in the LDP leadership race in 2021.

Many in Kishida's party are opposed to tax increases, including 70% of the LDP committee that has formulated much of Kishida's defence plan, according to Masahisa Sato, an upper house lawmaker and former deputy defence minister, who is one of the LDP's most vocal proponents of a stronger military.

Among those opposed, "some are just against it, but others want more time to discuss a funding plan," he said, a course both he and Takaichi advocate.

For now it seems Kishida's best policy may be silence, even if that just puts off awkward questions, analysts say.

"To head off any manoeuvring within the LDP that threatens his administration, Kishida will have to pander to the whims of lawmakers," said Tomoaki Iwai, professor emeritus at Nihon University, who predicted the defence plan may not bolster Kishida's popularity at all.

($1 = 136.5600 yen)

Source: Reuters

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Owen Li

Central Bank

U.S. CPI to skew the way the market reacts to the Fed tomorrow

The upside to yields we expected into this week's U.S. CPI release and central bank meetings is materialising, but it is still limited and unlikely to amount to much of a change in market narrative. The predominant view, judging by market moves in recent weeks, remains that inflation is on its way down and should allow the Fed to slow, and eventually stop, its hiking cycle at the coming meetings. Data on that front is encouraging. Consumer inflation expectations in the University of Michigan and New York Fed surveys is, globally, on its way down, and the price components of surveys such as the ISM are also suggesting the direction of travel is lower.

The problem of course is that there is no guarantee that inflation continues to converge on a linear path towards the Fed's target. One key worry, for instance, is that after an initial drop, inflation upside resumes. In that context most, including us, expect the Fed to continue striking a cautious tone at this and subsequent meetings. Since the summer, this has resulted in the Fed pushing back against instances of easing of financial conditions. Lately, that pushback has been less effective, due to more encouraging data. Today's CPI release should be no exception. A core monthly print at 0.3% could take the edge off Powell's hawkish tone, but we think it is a higher reading that would have the most market impact, as it would wrong-foot almost two months' worth of bond rally.

It is still too early to talk about a change in the market's economic outlook. Most telling market moves, the richening of 5Y on the curve and the flattening of the 2s10s slope, have merely stopped, rather than reversed. In addition to the uncertainty about the sign of the inflation surprise today, and about the strength of the Fed's pushback, one needs to add uncertainty about the market's reaction. The speed of the moves since October make a retracement most likely, before rates converge lower and before the curve re-steepens in the course of 2023.

Today's events and market view

Italian industrial production and Germany's Zew surveys are the two main releases in the European morning. Consensus is for the expectations component of the latter to continue its bounce back from very depressed levels.

Italy will auction 2Y, 3Y and 7Y debt. The U.S. Treasury will sell 30Y T-bonds.

Both headline and core U.S. CPI are expected at 0.3% MoM which is an improvement on the 2021 and 2022 average but still too high to be consistent with inflation at 2% annualised. Any deviation to consensus is likely to skew market expectations ahead of tomorrow's Fed meeting but the bar is high for market to price a 75bp hike in our view. NFIB small business activity completes the list of releases for today.

Source: ING

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Samantha Luan

Commodity

Historically, crude oil and iron ore prices are strongly correlated, which is unsurprising given they are both commodities tied to the state of the global economy. But in recent weeks the link has largely been severed.

Crude oil has trended weaker since Brent futures nearly touched $100 a barrel early in November, while spot iron ore for delivery to north China has surged higher.

Brent futures reached an intraday high of $99.56 a barrel on Nov. 7, but then dropped 25% to a low of $75.11 on Dec. 9.

Spot 62% iron ore, as assessed by commodity price reporting agency Argus, jumped 42% from a close of $79 a tonne on Oct. 31 to finish at $112.15 on Dec. 9.

The divergence was maintained during Monday's trade, even though the direction changed, with Brent gaining 4.1% to close at $78.18 a barrel, while iron ore shed 1.8% to close at %110.15 a tonne.

Notwithstanding the small change in fortunes at the beginning of this week, the trend for the past weeks has been weaker crude and stronger iron ore.

The questions are what are these two key commodities are telling us about the state of the world economy and whether their divergence is justified or participants in one are calling the outlook incorrectly.

The first point to note is that iron ore is much more of a China story than anything else, given that the world's second-biggest economy buys about two-thirds of all seaborne volumes of the steel raw material.

While China is also the world's largest crude importer, its share of seaborne volumes in that market is closer to 20% of the global total.

Iron ore's rally is largely a function of the market view that Beijing will successfully stimulate its sluggish economy, boosting demand for steel as the residential property sector recovers in the new year.

This sentiment has been further boosted by China's relaxation of its strict zero-COVID policies, which had crimped economic growth and led to mounting public dissatisfaction with restrictions on everyday life.

It's likely that Monday's decline in iron ore was linked to the sharp increase in COVID-19 cases in China and some signs the medical system may be struggling to cope.

Any sign that Beijing will reverse its easing of COVID-19 measures will undermine the bullish view of China's economy for the first quarter of next year.

Conversely, if the authorities stick to the current re-opening plan and manage to weather the increase in hospitalisations, it will be viewed as an economic positive, notwithstanding the accompanying increase in sickness and deaths.

Crude Demand Worries

Crude oil's declining trend has been somewhat linked to China, as the market has fretted over the state of demand, given the earlier COVID-19 restrictions.

While these worries have eased and China appears determined to boost its economy, concerns about demand in the rest of the world have overtaken optimism over China's re-opening.

A global economic slowdown is likely to cut crude oil demand, possibly by as much as 2 million barrels per day (bpd), or roughly 2% of daily demand.

The price has also declined as the market has taken a view that the Group of Seven nations' price cap on Russia's exports and the European Union's ban on imports from Russia are unlikely to have much of an impact on global supply.

Rather it appears that Russia has been able to divert much of its crude to buyers in Asia, mainly China and India, although logistical and financial constraints may lead to lower export volumes for several months.

The overall point is that the signals from the crude oil and iron ore markets can both be correct and contradict each other at the same time.

Iron ore's rally does appear justified by Beijing's concrete steps to stimulate growth in steel-intensive sectors and by the easing of pandemic restrictions.

Crude oil's decline was justified by rising concern over a global economic slowdown and the weakening of fears of a Russia-led supply crunch.

What remains to be determined is whether China's re-opening will be enough to keep iron ore prices strong, and also if it's enough to lift crude oil as well.