Market news 11 January 2021

Moderation in Chinese PMIs, albeit from elevated levels; Europe lags; US surges

• The headline Caixin manufacturing PMI index normalised in China last month to 53.0 (November: 54.9, consensus: 54.7). Sub-indices reflected the slowdown in momentum; production fell from 57.1 to 55.4 in December, new orders from 58.3 to 54.6 and new orders 53.3 to 51.8. The input price index rose +4.5pp to 59.2 and the output price index was up +2.1pp to 54.6, suggesting some inflationary pressure and reflecting in a decline in inventory indices. The employment index fell from the 10-year high reached in November (51.3) to 49.9.
• The Caixin services PMI painted a similar picture, -1.5pp in December to 56.3 (November: 57.8, consensus: 57.9). Overall new business activity moderated from 58.7 to 54.3 and new export business suffered from the resurgence of the virus in various key export markets (-2.9pp to 51.8). The services employment index was also lower in December, falling -2.2pp to 52.0, although respondents remain optimistic about future business, with the expectations index rising to 66.5 (highest since March 2011).
• The Euro area composite PMI was revised -0.7pp lower from flash estimates to 49.1 in December. The German and French composites were revised down -0.5pt and -0.1pt respectively, but the downward revision was driven by the periphery (-1.4pts from flash reading). Spain saw the largest upward revision, +7.0pts to 48.7, driven by stronger domestic services (total services: +8.5pts to 48.0). The UK composite was revised down -0.3pts as the new strain of the virus resulted in further lockdown restrictions. The German PMI composite remained the most promising. December's final readings; Germany 52.0, France 49.5, Spain 48.7, Italy 43.0, UK 50.4.
• The US ISM Manufacturing index rose 3.2 points in December to 60.7 (November: 57.5, consensus: 56.8). This reflects a strong recovery since the onset of the virus, when the index reached a record low of 41.7 in April. However, hard data from November shows that manufacturing production is still 3.6% below its average level in 2019. The non-manufacturing index also exceeded expectations of a decline in December, +1.3pts to 57.2 (consensus: 54.5, November: 55.9). The underlying composition of the report was mixed, as business activity and new orders improved (+1.4pts to 59.4 and +1.3pts to 58.5 respectively), whilst the employment sub index declined -3.3pts to 48.2.

FOMC minutes add nothing new; US nonfarm payrolls register unexpected decline

• The FOMC minutes from the December meeting noted detailed discussions on the current asset purchase program but gave little new information on tapering plans. “All participants” supported adoption of qualitative outcome-based guidance on asset purchases and agreed that judgement on the current guidelines of “substantial further progress” would be broad, qualitative and not measurable against set thresholds. Participants reiterated that the current monetary policy stance was “essential” to support an economic recovery.
• US non-farm payrolls were weak in December, reporting a decline of -140,000 jobs over the month. This was driven by layoffs in the leisure and hospitality sector which saw -498,000 jobs lost, including -372,000 jobs in food and drink places. Retail trade provided some offset, adding 120,000 jobs over the month. Unemployment was unchanged in December at 6.7% (consensus: 6.8%). The number of unemployed persons on temporary layoffs rose by 277,000 to 3 million and the number on permanent layoffs fell to 3.4 million. With some workers exiting the labour force entirely, the participation rate is -1.8% since February.

Equity markets surge in response to Democrat gain of Senate

• Markets shrugged off the unrest on Capitol Hill, preferring to focus on the prospects for greater fiscal stimulus thanks to the Democrat victories in Georgia Senate run-offs - giving them a “clean sweep” of both chambers of Congress and the White House.
• The Value factor led the rally, US Treasury yields rose sharply up 20bp on the week to ca 1.10%, a level not seen since last March just prior to the COVID crash. By the end of the week there were signs that the speed of the increase in rates was starting to have negative repercussions for other markets (for example precious metals – gold was down over 3% and silver fell over 6% on Friday as the rise in Treasury yields drove USD higher).