China activity slows but at a “managed” pace supported by credit easing measures and Phase On trade deal
- Total Social Financing (TSF), a measure used as an indication of credit and liquidity in the Chinese economy, rose to CNY251.3 trillion in December. This represented a 10.7% increase over the year (CNY2.1 trillion) and was above analyst expectations. The measure was adjusted to include central government and local government bonds, but the underlying data represents a stabilisation in credit growth in recent months, supportive of a pickup in growth momentum.
- GDP in China stabilised at 6.0% in Q4, in line with expectations, leaving 2019 GBP growth +6.1%. Industrials production beat to the upside (+6.9% YoY, November: +6.2% YoY), as did fixed asset investment (+5.4% YoY, November: +5.2%), a sign that capital expenditure may be picking up. Retail sales were flat in December, +8% over the year, not helped by weaker income growth and a sluggish job market. There were some disappointments in the data – consumption growth remained subdued and manufacturing investment fell -3.1%, although net exports increased. Individual GDP components will be closely watched in the coming months as economists determine the long-term impact of recent tariffs implemented by Washington.
- After months of negotiations, a “Phase One” deal between the US and China was signed on Wednesday. President Trump is predictably posing the agreement as a win for his administration, calling it “one of the greatest trade deals ever made”. The agreement covers intellectual property protection for US companies, loosening barriers for food and agriculture trade, and opening the financial services industry, among other items. Cybersecurity from Chinese companies and US technology investments are expected to be negotiated in the next phases of negotiation.
Poor UK data strengthen likelihood of a rate cut at Bank of England’s month-end meeting
- Despite reasonably strong real wage growth, UK retail sales (ex auto fuel) fell 0.8% MoM in December versus expectation for a 0.8% gain. This followed poor November industrial production data released earlier in the week. Should next week’s PMI surveys fail to rebound, it will likely seal the argument for a rate cut at the Bank of England meeting on 30 January.
- Market-implied probability of a rate cut this month leaped to ~70% by the end of the week from ~25% at the end of the previous week given the poor data after a slew of dovish MPC member comments.
Equities continue to surge
- The “liquidity-driven market” continued unabated, with equities rallying and phenomenal demand in the primary fixed income markets over the week (the new 10-year Spanish government issue drew €53bn of demand – the largest order book in euro primary market history).