Chinese Data, MLK Day and First Central Bank Rate Change of 2021

January 18, 2021

Financial markets this Monday will lack U.S. leadership due to the observance of MLK Day. In the wake of aroused racial strains that culminated in the 1/6 domestic terrorism attack on the nation’s capitol, there is extra poignancy to this year’s observance and uneasiness that more violence may mar this day.

The National Bank of Romania cut its key interest rate by 25 basis points to 1.25%. This reduction augments the full percentage point of cuts last year (50 bps in March and 25 bps each in May and August) and takes the rate level to its lowest point in the 21st century. A released statement notes that inflation remains below the 1.5-3.5% target midpoint and asserts that this latest “calibration of the monetary policy conduct is likely to provide an underpinning to the recovery of economic activity over the projection horizon with a view to bringing and strengthening over the medium term the annual inflation rate in line with the 2.5 percent ±1 percentage point inflation target, while safeguarding financial stability.” Last year’s decision to dispense with a prearranged schedule of policy reviews and to make adjustments on an as-needed basis remains in effect.

The dollar has opened the week well-bid, with the DXY trade-weighted index climbing to 90.95, its firmest level in almost six weeks.  The U.S. currency strengthened 0.8% versus the kiwi, 0.5% relative to the Australian dollar, 0.4% against the loonie, peso, and sterling, but just 0.1% versus the euro. The Swiss franc moved in lockstep with the dollar overnight, and the yen edged 0.1% higher.

Share prices in Asia experienced a difficult session, dropping 2.3% in South Korea, 1.0% in Japan and India, and 0.5% in Singapore. The Chinese and Hong Kong exchanges advanced 0.8-1.0%, however. U.S. stock futures are down over 0.5%, however, and markets in Australia and and New Zealand dropped even more sharply. The French, Italian, Spanish and British exchanges are marginally softer.

Ten-year German bund and Japanese JGB yields edged a basis point higher. WTI oil slipped 0.3%, and gold is trading unchanged on balance.

From a data release standpoint, the day belonged to China, where not only were monthly industrial production, retail sales, business investment, and unemployment figures released but also quarterly and full-2020 GDP results were announced as well.

  • A 7.3% on-year increase in industrial production beat analyst expectations and was the largest rise since mid-2017. This resulted in a 2.8% increase for 2020, down from 5.6% in 2019 but well above the 20.5% plunge in the first two months of last year.
  • Capacity utilization increased 1.3 percentage points to a 3-year high of 78.0% last quarter.
  • Retail sales growth in December unexpectedly slipped below November’s on-year pace to a 2-month low of 4.6%. Sales in full 2020 dropped 4.78% following an 8.0% rise in 2019.
  • Fixed asset investment rose 2.9% last year, down from a 5.2% increase in 2019, but on-year growth in December was somewhat faster than the average pace in year’s first eleven months.
  • The jobless rate was 5.2% in December, same as in November and December of 2019 but down from 6.2% last February when the Wuhan area was on extreme lockdown.
  • Last but not least, real GDP last quarter was up by a greater-than-forecast 6.5% from a year earlier. That followed on-year growth of 4.9% in the third quarter and -10.6% in 2Q that resulted in the weakest calendar year growth (2.3%) since 1976. GDP grew 6.1% in 2019, down from 7.0% on average in the prior five years (2014-2018), and 7.8% in 2013. The last year with growth of more than 8% was 2011 with a 9.5% pace.

The drop in Japanese industrial production during November was revised upward by a half percentage point to -0.5% on month and -3.9% on year. This was the first monthly decline in a half year. November also experienced on-month declines of 4.2% in industrial shipments, 1.5% in inventories, and 2.9% in capacity utilization.

Israeli real GDP growth in the third quarter of 2020 was revised upward by 0.7 percentage points to 8.7%. That followed drops of 8.5% in 2Q and 1.8% in 1Q and left GDP still 1.1% below its year-earlier level.

Italian CPI price deflation in December was revised downward by 0.1 percentage point to -0.2%.

A 0.9% monthly decline in the British Rightmove house price index depressed the 12-month rate of increase by half to a 7-month low of 3.3%.

In other news, Armin Laschet won the German Christian Democratic Union’s weekend party leadership vote by a narrow margin in the second round of 522-466 over his more right-wing opponent Friedrich Merz. Lasechet, whose views closely resemble those of outgoing Chancellor Angela Merkel, may or may not be named the party’s candidate in next September’s parliamentary election.

A more potential political uncertainty in Euroland concerns Italy, where Prime Minister Conte is trying to refashion a working majority and avoid a vote of no confidence.

Global coronavirus deaths went over the two million mark, and the United States accounts for about a fifth of that total. Like other aspects of the Covid saga, vaccine distribution has far underperformed expectations. The crisis has exposed the dysfunctional underbelly of a republic form of government. Like national defense, a pandemic requires national implementation and has been fouled up by relying upon states to run their own programs. This truth, as much as anything, tipped the 2020 presidential election in Joe Biden’s favor.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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