Daily Kickstart (China FX Edition)

Well, just as a weak yen propelled Japanese equities to a blockbuster start to 2017 on Wednesday, so has a stronger yen weighed on shares in Thursday trade.

As tipped here a few hours back, the dollar fell sharply against its G10 peers in early overnight trade as traders reacted to the release of the Dec. Fed minutes and trimmed positions ahead of Friday’s NFP data. The Nikkei fell around half a percent.

Meanwhile, the offshore yuan advanced as much as 2.5% as deposit rates and forward points surged to records on tight liquidity.

jesus.. CNH OVERNIGHT DEPOSIT RATE JUMPS TO 27.5%

— Heisenberg Report (@heisenbergrpt) January 5, 2017

(Chart: Bloomberg)

“Given the recent capital controls, the channels for domestic institutions and retails to bring out onshore cash to the offshore market have also been tightened,” Becky Liu, a rates strategist at Standard Chartered told Bloomberg. “There is a lack of supply of yuan liquidity.”

Here are the important bullets via Bloomberg:

CNH rallies for fourth day, +0.6% to 6.8232 per dollar as of 6:24pm in Hong Kong after earlier rising as much as 1.2%; CNY advances 1.1% in two days, most since 2005, to 6.8856 per dollar
CNH tomorrow next forward points climb 210.5 pips to 275; earlier touches 285, highest ever
CNH overnight deposit rate surges as much as 86.5 ppts to record high of 100%; now up 46.5 ppts at 60%
PBOC raises yuan fixing by 0.31% to 6.9307
7-day repo rate rises 2.5 bps to 2.3239%
Yield of 10-year govt bond rises 7bps to 3.25%, extending three-day climb to 15 bps
SHCOMP +0.2%; SZCOMP -0.2%; in Hong Kong, HSI +1.5%; HSCEI +1.7%

Elsewhere, the dollar had no trouble against the Turkish lira. “As long as the central bank remains reluctant to raise interest rates aggressively amid prevailing political pressure, the path of the least resistance will be to the upside in USD/TRY,” Rabobank strategist Piotr Matys remarked.

(Bloomberg)

European shares are mixed despite upbeat inflation and generally positive PMI prints. Here’s the data and a market wrap:

(GE) Dec. Markit Construction PMI 54.9, prior 53.9
(IT) 3Q Deficit to GDP YTD 2.3%, prior 2.3%
(EC) Dec. Markit Retail PMI 50.4, prior 48.6
(GE) Dec. Markit Retail PMI 52, prior 49.6
(IT) Dec. Markit Retail PMI 47.9, prior 48.8
(FR) Dec. Markit Retail PMI 50.4, prior 47.3
(UK) Dec. Markit/CIPS Composite PMI 56.7; est. 55, prior 55.2
(UK) Dec. Markit/CIPS Services PMI 56.2; est. 54.7, prior 55.2
(EC) Nov. PPI 0.1% YoY; est. -0.1%, prior -0.4%
(EC) Nov. PPI 0.3% MoM; est. 0.3%, prior 0.8%
Stoxx 600 down less than 0.1% to 365
FTSE 100 down less than 0.1% to 7186
DAX down 0.2% to 11560
German 10Yr yield up less than 1bp to 0.28%
Italian 10Yr yield up 4bps to 1.91%
Spanish 10Yr yield up 5bps to 1.48%
S&P GSCI Index down less than 0.1% to 396

Gold is up amid USD weakness while oil is also higher after API data showed U.S. crude stockpiles falling 7.43m bbl last week.

Finally, US futs are flat as investors await Friday’s jobs number.

Here’s Deutsche Bank’s Jim Reid with some color to get you apprised on anything I might have missed:

A quick scan through last night’s FOMC minutes will reveal no mention of President-elect Trump’s name but it’s pretty clear where the debates and discussions at the Fed now lie. In a nutshell “almost all” officials made mention of upside risks to their growth forecasts as a result of prospects for more expansionary fiscal policies while interestingly “about half” of the Fed officials incorporated fiscal policy into their forecasts. The caveat though is that the outlook is distinctly uncertain. Indeed the minutes acknowledged that “participants emphasized their considerable uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply”. Officials also acknowledged that this “made it more challenging to communicate to the public about the likely path of the federal funds rate”.

The minutes also acknowledged that the staff’s forecasts for higher real GDP growth over the next few years “were substantially counterbalanced by the restraint from the higher assumed paths for longer-term interest rates and the foreign exchange value of the dollar”. Away from Trump the rest of the minutes didn’t offer a whole lot of new information with officials seemingly a bit more confident about the balance of risks. That said there was a subtle change to the number of officials concerned about a sizable undershooting of the longerrun normal unemployment rate from “a few members” in November to “several members” in December.

So the overall tone fits in with Yellen’s post-meeting statement last month where she said that the Fed is “operating under a cloud of uncertainty at the moment”. So every Trump move will continue to be closely watched and scrutinized. With that in mind it’s worth circling the 11th January in your diary as it’s when Trump is due to hold a ‘general news conference’. It’s his first since the election victory and comes just 9 days before his official inauguration so it should be a closely watched event. Evaluating Trump’s administration appointments in the mean time will continue to be a focus for now though. One which stands out is the appointment of Robert Lighthizer as his new trade representative. Lighthizer is seen as a longstanding advocate of greater protectionism and was formerly a trade official under Ronald Reagan. The WSJ also notes that Lighthizer has three decades of experience arguing for punitive tariffs on overseas companies. So it appears that the appointment confirms what is likely to be a major shift in trade policy under a Trump presidency.

Meanwhile markets turned a fairly blind eye to the minutes yesterday. 10y Treasury yields were hovering around 2.450% leading into the minutes before closing the day at 2.440% and 0.5bps lower on the day. 2y yields finished flat at 1.216% while the USD index, which had struggled as the session wore on, closed -0.67% but again with little reaction post the minutes. It’s been nothing but good news for risk assets in the US so far this year though. The S&P 500 finished +0.57% and so taking the 2017 YTD gain to +1.43%. That’s the best start to the year since 2013. Consumer names were a big driver yesterday although it’s worth noting that both Macy’s and Kohl’s tumbled after market (by -8% and -9% respectively) after both lowered earnings guidance following softer holiday season sales. The MSCI EM equity index also returned +0.35% and has now gained in 7 of the last 8 sessions. The rally in Europe had earlier stalled however with the Stoxx 600 closing down a fairly modest -0.12%. Elsewhere credit has also gotten off to a flier, particularly across the pond and yesterday we saw CDX IG tighten just over 2bps to take the index to the tightest level since May 2015. The new issue market hasn’t taken any time to warm up either with Bloomberg reporting that US IG primary issuance is over $45bn in the first two trading days of the year already and so overtaking that for the first week in 2016 and 2015.

As we refresh our screens this morning it’s been a bit of a mixed performance in Asia so far. While the Hang Seng (+1.30%) has risen strongly led by gains for the energy sector, bourses in China are little changed while the Nikkei is -0.24%. The Kospi (-0.09%) is also a shade lower while the ASX (+0.29%) is up a touch. US equity index futures are also slightly in the red. There was also some data in China this morning where the Caixin services PMI was confirmed as rising 0.3pts to 53.4 in December. That’s helped push the composite reading up to 53.5 from 52.9 and to the highest level in 45 months.

Moving on. Away from the minutes, yesterday’s economic data was also generally supportive. In the US we learned that total vehicles sales increased to an annualized rate of 18.3m in December (vs. 17.7m) from 17.8m in the month prior. Over in Europe it was revealed that the estimate of headline Euro area CPI had risen more than expected in December after printing at +1.1% (vs. +1.0% expected) from +0.6% in November. That puts headline inflation at the highest level since September 2013 and encouragingly while higher energy prices led, the increase was actually relatively broad based. The core was also up after rising one-tenth to +0.9% yoy. Meanwhile the remaining PMI’s were also out in Europe yesterday. The final composite PMI for the Euro area in December was revised up to 54.4 from 53.9 after the services reading was revised up 0.6pts to 53.7. That is the highest PMI reading since 2011, just beating the 54.3 seen in August and December 2015. Our European economists also noted that at the same time, a number of the sub-indices, including the composite input and output prices and the backlog of orders, were confirmed at new cyclical highs. Across countries the news was broadly positive across the EMU countries while Italy was the relative disappointment with the composite down 0.5pts to 52.9, although this came after a 2.2pt rise in November. Our colleagues go on to say that at 53.8 on average in Q4 the composite PMI was back to in line with its 2015 levels, a year in which Euro area GDP grew on average by 0.5% qoq.

France from the Euro and also redenominate French government debt in a new national currency. Le Pen confirmed that she wanted “a national currency with the euro as a common currency” and as the FT made mention to, suggests some softening in her views in favour of a looser form of currency sharing rather than a hard return to a national French currency. Meanwhile in the UK, PM Theresa May moved quickly and decisively to replace Sir Ivan Rogers as the UK Ambassador to the EU by appointing Tim Barrow to the role. He was previously the political director of the government’s Foreign and Commonwealth Office.

Looking at the day ahead, the diary is a bit thinner in Europe this morning with the only notable data due out being the remaining December PMI’s in the UK (services and composite) and the PPI print for the Euro area. This afternoon in the US the early data print is the ADP employment change reading for last month which should help anchor expectations for tomorrow’s payrolls. Market consensus for the ADP print is currently 175k which compares to 216k in November. Also due out is the latest weekly initial jobless claims reading while the final services and composite PMI’s will also be confirmed. Also of note is the ISM non-manufacturing reading for last month which will come hot on the heels of the strong manufacturing print earlier this week. Market consensus for this is 56.8. Away from the data we’re due to hear from BoE Chief Economist Andy Haldane this afternoon when he speaks at an event in London