Daily Kickstart (“I Had Some Bad Chinese”)

We’re gonna need a weaker yuan.

Data out Friday showed China’s exports falling 6.1% y/y in dollar terms, well more than the 4% decline economists predicted. Imports rose 3.1%. The trade surplus for the month came in at $40.8 billion, lower than consensus ($47.6 billion).

(Chart: Bloomberg)

“External demand remains sluggish,” Wen Bin, a researcher at China Minsheng Banking Corp. in Beijing told Bloomberg. “The outlook for exports this year doesn’t look very promising.”

No it doesn’t. Not with the global economy still on shaky footing and the Trump administration set to deal a blow to global trade and commerce by pursuing a protectionist agenda aimed squarely at the Chinese. Here’s Citi’s quick take:

Given rising global uncertainty, we think China’s trade activity is unlikely to improve in 2017. In particular, Trump’s border tax adjustment and potentially rising trade friction with the US, all point to rising downside risks for China’s exports. In addition, we do not think the adjustment of CFETS could change market expectations, as the currency basket approach to managing the RMB’s valuation in a strong dollar environment indicates there is only a one-way depreciation path for the RMB exchange rate. Thus, the relative stability of the RMB exchange rate has become more important while the still sizeable trade surplus shows that the RMB is not overvalued amid large capital outflow. Despite the tightening regulation on residents’ FX purchase, we estimate that China’s net capital outflow could remain large at around US$160bn in Q1 2017. We maintain our call that the PBOC would cut RRR by 50bps in 2017 Q1 to offset the impact of large capital outflow.

Still, this probably isn’t the best time to short the yuan, HSBC says. “Investors should see if yuan cash crunch eases after Lunar New Year and if there’s more confidence about USD rally before betting against yuan,” Bloomberg quotes Hong Kong-based Paul Mackel, as saying. “The fixing has deviated from what’s implied by the PBOC’s mechanism and has become more defensive since U.S. election.” That last part is important. Recall the following chart from Goldman:

(Chart: Goldman)

On Friday, Bloomberg said China issued verbal instructions to Chinese banks this week regarding cross-border yuan payments. From this point forward, banks will have to balance yuan inflows and outflows. The effort is another measure aimed at curbing outflows.

Asian shares were mixed on Friday after the downbeat Chinese export data. Hong Kong and Japanese stocks closed green while Chinese shares were lower. The KOSPI was down after South Korea kept rates on hold. “Investors are locking in some of their gains,” Kim Kwie Sjamsudin, head of research at Yuanta Securities Indonesia, told Bloomberg by phone. “Volatility will remain and emerging markets will continue to be vulnerable with the likelihood of more hawkish policy from the Fed.”

• MSCI Asia Pacific down less than 0.1% to 141
• Nikkei 225 up 0.8% to 19287
• Hang Seng up 0.5% to 22937
• Shanghai Composite down 0.2% to 3113
• S&P/ASX 200 down 0.8% to 5721

In Europe, markets were higher as traders await bank earnings out of the US.

• Stoxx 600 up 0.5% to 364
• FTSE 100 up 0.4% to 7323
• DAX up 0.5% to 11575
• German 10Yr yield up less than 1bp to 0.32%
• Italian 10Yr yield up 2bps to 1.91%
• Spanish 10Yr yield up 2bps to 1.42%
• S&P GSCI Index down less than 0.1% to 400.3

In EM currency news, the lira is off its record lows as there are some signs that the central bank is tightening liquidity. CBT did not open an auction for 7-day repos for the second straight day.

In the US, futs are flat ahead of earnings from JPMorgan, Bank of America, and Wells Fargo.

• S&P 500 futures up less than 0.1% to 2265
• US 10-yr yield down 1bp to 2.35%
• Dollar Index down 0.2% to 101.15
• WTI Crude futures down 0.4% to $52.79
• Brent Futures down 0.4% to $55.80
• Gold spot up 0.2% to $1,198
• Silver spot up 0.1% to $16.80

We’ll also get retail sales, PPI, and consumer sentiment data this morning. Here’s a preview of US economic data releases via Deutsche Bank:

This morning’s retail sales data will sharpen forecasters’ expectations for Q4 consumption. Headline sales will be boosted by strong unit motor vehicle sales, which reached a post-recession high of 18.3 million last month. In fact, December was the strongest month for vehicle sales since July 2005 (20.6 million). Retail control, which is the core of the report and excludes sales of automobiles, building materials, and gasoline, are also expected to show a healthy gain. This is the component that is used to estimate goods spending in the GDP accounts. If our forecast is correct, retail control would be up 4.2% annualized in Q4, a solid improvement from its 1.1% annualized gain in Q3. However, there are signs that consumer spending may be even better in the quarters ahead.

In the wake of the US Presidential election, measures of consumer attitudes have soared. The Conference Board’s consumer confidence index and the University of Michigan’s consumer sentiment gauge both notched new postrecession highs last month. The preliminary January data for the latter are released this morning, and we expect further improvement that could push the series to the highest level in 13 years. These indices have historically been leading indicators of consumer spending.