US bond sell-off halted after strong 10Y auction; Asian equity markets mostly firmer
The S&P500 had been down as much as 0.6% on Wednesday as the sell-off in Treasury market continued, sending the 10Y yield above 1.18% for the first time since March last year. However, those yields proved very attractive to investors participating in the monthly 10Y auction, with the reopening awarded at a slightly lower rate than where notes had been trading ahead of the sale. This triggered a rally that has saw the yield backtrack to 1.13% as Wall Street closed, allowing the S&P500 to close virtually unchanged and prompting a renewed weakening of the greenback – clear evidence that both equities and the dollar are becoming sensitive to Treasury yields and yield differentials.
In US political news, as expected the House passed a resolution calling on VP Pence to invoke the 25th Amendment to remove President Trump from office – a vote that was merely symbolic as Pence had earlier told House Speaker Pelosi that he would not do so. This sets the stage for the Democrats to introduce – and possibly later vote on – an article of impeachment against Trump in the House today, which is certain to be supported by both Democrats and a small number of House Republican’s (the latter notably including the third-ranked Liz Cheney). The New York Times reported that Republican Senate leader McConnell was privately pleased to see the Democrats move forward with impeachment, which would make it easier for Republicans to purge Trump from the party. At this stage the timing of a subsequent Senate trial remains uncertain, and may depend on whether the Senate is allowed to simultaneously advance Biden’s immediate agenda – including fiscal stimulus and confirming nominees to the cabinet – and conduct a trial (a ruling on this has not been made).
US Treasury yields nudged slightly lower again in Asian and early European trading (the 10Y yield currently sitting below 1.12%). US equity futures are little changed, but the US dollar has weakened a little further. Against that background, and on a slow day for local economic news, Asian equity markets mostly recorded gains today. In Japan, the TOPIX increased 0.4% and the Nikkei225 an even greater 1% even as local media reports suggested that PM Suga will announce the expansion of the state of emergency to as many as seven additional prefectures – increasing the likelihood that the economy will contract in Q1 – when he addresses a press conference at 7pm local time. Meanwhile, the Nikkei newspaper reported that the BoJ would cut its forecast for FY20 growth at next week’s meeting, but boost its forecast for FY21 on account of the stimulus provided by the Government’s 3rd supplementary budget.
Meanwhile, in the bond markets, ACGBs followed USTs higher with 10Y yields about 4bps lower at 1.10%. And following yesterday’s sell-off, European govvies have similarly regained a lot of their lost ground too, with yields on 10Y Gilts back down 4bps to below 0.31% and 10Y Bunds down 3bps back to -0.50%. However, having closed yesterday more than 8bps higher near 0.65%, 10Y BTPs are currently little changed, with extra supply due tomorrow and the government of Italian PM Conte still looking extremely fragile. Former PM Matteo Renzi, leader of the small Viva Italia party, has signalled that he will announce later today (circa 5.30pm local time) whether he will withdraw his ministers from the cabinet and leave the government without a majority in the upper house. And his decision in this respect is hard to predict. However, given that none of the parties in the current administration would have much to gain, we continue to doubt that early elections will be required even if Conte fails to remain in post.
Japanese machine tool order growth firm at end-year as foreign orders rebound
Ahead of tomorrow’s machine orders report for November, today Japan’s Machine Tool Builders’ Association, which represents the nation’s largest manufacturers of machines, reported that its members received an 8.7%Y/Y increase in orders in December, up fractionally from the 8.6%Y/Y increase reported last month. That growth was due to orders from overseas, which increased 27.3%Y/Y. Sadly domestic orders fell 17.5%Y/Y, marking the largest decline since September.
In other news, benefiting from the BoJ’s large-scale liquidity provision, growth in Japan’s M3 money stock was steady at 7.6%Y/Y in December, while growth in M2 edged up to a new high of 9.2%Y/Y. Meanwhile, despite the pandemic, the number of corporate bankruptcies amongst firms with debts of over ¥10mn were reported to have declined 20.7%Y/Y in December.
Chinese credit growth slows in December as economy normalised, but still ample
While there were no major economic reports in China today, after local markets closed yesterday the PBoC released the money and credit aggregates for December. Aggregate financing increased CNY1.72trn, which was below market expectations and CNY0.48trn less than in the same month last year – the first time that annual growth has been negative since February. As a result, the outstanding stock of aggregate social financing grew at a slower pace of 13.3%Y/Y – down 0.3ppts from November but still very robust due to the very strong growth recorded earlier in the year. While growth in total credit surprised to the downside, a CNY1.26trn increase in bank loans was in line with market expectations and still greater than the same month last year i.e. all of the slowdown from a year earlier came from shadow banking. However, growth in the monetary aggregates slowed in December, with M0 easing 0.9ppts to 9.2%Y/Y, M1 easing 1.4ppts to 8.6%Y/Y and M2 eased 0.6ppts to 10.1%Y/Y.
The focus in China now turns to tomorrow’s December trade report, which will help to condition expectations for Monday’s Q4 GDP report.
BoF signals pickup in French economy at end-2020; euro area IP data due
Based on its latest business survey released this morning, the Bank of France judged that the level of economic activity in the French economy in December was down about 7% from the pre-Covid level having been down about 11% in November. The improvement reflected the lifting of key lockdown restrictions, including the reopening of non-essential stores on 28 November, and suggested that GDP dropped about 4.0%Q/Q over Q4 as a whole. Among the various sectors, the level of services activity in December was judged to be down 9% from the pre-Covid level following the drop of 15% the prior month. Activity in manufacturing and construction, however, remained steady in December and indeed was assessed to be little changed over the quarter as a whole. Looking ahead, the Bank of France currently judges the levels of activity in all main sectors in January to be little changed from December.
November industrial production data for the Italy and the euro area as a whole are due later this morning. Despite firm growth in Germany, weakness elsewhere could leave the aggregate euro area figure down on the month for the first time since April.
Trump’s impeachment, the CPI and Beige Book the focus in the US today
Inevitably, the key focus in the US today will be the introduction to the House of an article of impeachment against President Trump. However, today also brings the first of this week’s important economic releases in the form of the CPI report for December. Daiwa America Chief Economist Mike Moran expects higher energy prices to lift the headline index 0.3%M/M, but that the core CPI will have increased just 0.1%M/M (likely leaving annual core inflation steady at 1.6%Y/Y). Also today the Fed will release its latest Beige Book of economic anecdotes and the Treasury will release federal budget data for December (Mike expects a roughly 50%Y/Y rise in outlays, partly due to timing effects associated with social security payments, to underpin a bumper deficit of $190bn for the month).
Australian job vacancies continue to recover strongly in Q4
If there was any doubt about the strength of the recovery underway in the Australian labour market, this was surely put to rest by today’s ABS job vacancies report for Q4. According to the ABS, the number of vacancies increased by a further 23.4%Q/Q to a record 254.4k, leaving the series up 12.1%Y/Y – a result consistent with the sharp upswing in job advertising captured by the ANZ’s monthly survey of job advertisements.