GGMA Morning Brief: Verbal intervention in the yen continues, Strong NZ Mfg. PMI, Lane sees ECB on a steady path, Fed's balance sheet trilemma, Solid demand for US Treasuries, China slowdown to deepen, Poland may cut rates in Feb., US Fed speak, IP & NAHB in focus
Good morning,
I hope all is well.
Here are the main overnight news and market movers:
Markets: Yields rise in Japan and New Zealand, but edge lower in China
New Zealand bond yields edged higher overnight. The reason might be the stronger manufacturing PMI.
The Nikkei 225 edged lower, while USDJPY declined ahead of the Bank of Japan’s policy meeting next week. Bond yields rose slightly.
China’s stock market fell, while 10-year government bond yields declined, as the People’s Bank of China maintained a dovish policy stance.
US equity futures are higher following TSMC's strong earnings outlook. European stock markets are mixed. In commodities, precious metals declined, while energy prices edged higher. Bitcoin is only a little changed.
Japan: Verbal intervention, BOJ Sources: Scope to raise rates, BOJ watchers: BOJ too slow to raise rates, Snap election update
Japanese Finance Minister Satsuki Katayama said Friday that the government is ready to take action against any excessive yen movements, as the currency weakens toward levels that may trigger intervention. “I have repeatedly stated that we are prepared to take decisive action, including all available options,” Katayama said at a regular news conference. She added that currency intervention is an option included under agreements with the US (WSJ – Continue Reading)
Meanwhile, some Bank of Japan policymakers see scope to raise interest rates sooner than markets expect, with April a distinct possibility, as a sliding yen risks adding to already broadening inflationary pressure, four sources familiar with its thinking said. (RTRS)
Most Bank of Japan watchers judge that Governor Kazuo Ueda and his colleagues have been slow to tighten monetary policy and expect the next move to remain several months away in their base-case scenarios, according to Bloomberg.
Concerning Japan's snap election, Bloomberg has published an insightful article titled "Why a Snap Election Is a Gamble for Japan’s Prime Minister." Meanwhile, two key Japanese opposition parties, the Constitutional Democratic Party of Japan (CDP) and Komeito, announced on Friday the name of the new party -- Chudo-Kaikaku Rengo, or Centrist Reform Alliance -- which candidates from both will join for the upcoming snap lower house election. (Nikkei)
ECB Lane: On a steady rate path for now, but Fed tussle a risk
The European Central Bank will not debate any rate changes in the near term if the economy remains on course, but new shocks, such as a potential deviation by the Federal Reserve from its mandate, could disrupt the outlook, ECB chief economist Philip Lane said. The ECB has kept rates on hold since ending a rapid rate-cut cycle in June and signalled last month that it was in no hurry to change policy again, as economic growth is surprisingly strong and inflation appears to have settled around the 2% target for the next several years. (RTRS – Continue Reading) Here is the breakdown of the Eurozone harmonised inflation rate:
Fed faces ‘trilemma’ of how big its balance sheet should be
The Federal Reserve must determine how large its balance sheet should be after it stopped shrinking its $6.5 trillion portfolio, according to central bank economists. Determining the optimal size of a central bank’s balance sheet involves a trade-off between a small size, low interest-rate volatility and limited market intervention, researchers Burcu Duygan-Bump and R. Jay Kahn wrote in a paper published Wednesday. (BBG – Continue Reading) You can find the latest report on the Fed’s balance sheet here. It has started to expand again recently:
Foreign holdings of US Treasuries reached an all-time high in November, but China pulls back
Foreign holdings of U.S. Treasuries reached record highs in November, rising after two consecutive months of declines as market sentiment improved following the U.S. federal government's end of the longest-ever shutdown. (RTRS) Here is the chart with a breakdown of the major holders of US Treasuries. Japan, the United Kingdom, Belgium, and Canada led the increase in holdings.
China’s slowdown is set to deepen as pivot to consumption stalls
China's economy likely recorded its weakest quarterly growth in three years, with gross domestic product up 4.5% in the fourth quarter from the same period a year earlier. Consumption and investment are seen as the economy's weak links. The uneven growth pattern is likely to persist in 2026, buoyed by a positive outlook for exports, with Beijing unlikely to implement major stimulus measures as it continues to face risks tied to local government debt, according to Bloomberg.
UK statistics body weighs six-month delay to new jobs survey
The UK statistics agency has drawn up contingency plans to delay the launch of its new labour market survey by six months, raising the possibility of a further holdup as it battles to restore the credibility of the country’s economic data. (BBG)
New Zealand manufacturing expands at the fastest pace in four years
The Performance of Manufacturing Index rose to 56.1, its highest since December 2021, and was above 50 for the sixth straight month. The resurgence in business confidence and manufacturing adds to the risks of a rate hike later this year, according to Bloomberg.
Poland may cut rates already in February, MPC’s Kotecki says
Poland may return to interest rate cuts next month with a quarter-point reduction as prospects for continued low inflation improve, according to Monetary Policy Council member Ludwik Kotecki. “It is becoming increasingly clear that there is room for further rapid interest rate cuts,” Kotecki told Bloomberg in an interview. “I assume that in February the MPC will resume its activities from last year — the outlook for inflation is increasingly optimistic.” (BBG)
Today’s Macro Roadmap: US Industrial Production, NAHB and Fed speak in focus
In the US, industrial production is expected to edge higher in December, albeit at a slower pace than in November. However, some regional manufacturing surveys have picked up recently:
and industrial stocks would also suggest a recovery in industrial production:
The US NAHB housing market sentiment index is expected to edge higher in January. Recent housing activity numbers have improved, which may be due to falling mortgage rates.
Good luck today!