Chinese population shrinks for the first time in six decades

Market movers today

Today's key data release will be the ZEW index from Germany. It will be interesting to see whether the recent rebound in leading indicators persists into Q1, which would give us a signal that recession in Europe could actually be milder and shorter than we have previously anticipated. We also get final December CPI figures from Germany.

In the UK, labour market data out today will together with inflation figures (out tomorrow) be of large interest ahead of the BoE meeting in the beginning of February. Wage growth is expected to take another step up to 6.2% y/y compared to 6.1% y/y in October and add further pressure on the BoE that in their November projections estimated wage growth at 5.75% during Q4. Unemployment rate out at the same time is estimated to be unchanged at 3.7%. Our forecast is for a 25 basis hike in February but higher wage growth and/or inflation figures could bring a March hike into play.

On central bank front, we have ECB's Centeno and Müller on the wires in the morning, while Fed's Williams will give a speech in the evening European time.

Overnight, we will get rate decision by the Bank of Japan. Consensus expects no changes in monetary policy, but after December's surprise move to expand the band for the 10-year yield target from +-25bp to +-50bp, a similar decision would not be as shocking this time. The markets are pricing in the first rate hike by summer.

The 60 second overview

China: GDP in China grew 3% last year, topping consensus expectations of a 2.7% growth but falling short of the initial government target of 5.5%. Despite stalling in the last quarter (0.0% q/q) economic performance was better than expected (-1.1% q/q). On a year-on-year basis, GDP grew 2.9% compared to consensus expectations of 1.6%. Activity was weak in December but not as bad as feared. Industrial output grew 1.3% from previous year (cons. 0.1%) while retail sales shrank 1.8% compared to a predicted decline of 9.0%. Fixed asset investment increased by 5.1% y/y, slightly better than expected, and the urban jobless rate unexpectedly fell to 5.5% from 5.7% in November. All in all, the data implies a solid starting point for the economy in 2023, and we expect activity to rebound in February-March once the epidemic has peaked.

Longer term, the Chinese economy faces some of the same challenges that most western economies do. While last year's GDP print was the second weakest since the 1970s, the local demographics also give reason for concern. According to the NBS, last year, the Chinese population shrank for the first time in six decades. In future, slower population growth implies shrinking labour force, weaker growth in domestic demand and rising pressure on the country's pension system. Many businesses are already re-assessing their risks and exposure to China from a geopolitical perspective, and aging of the Chinese population adds to these considerations. In an era of rising geopolitical tensions and growing shortages of skilled labour, outsourcing is not necessarily the similar low hanging fruit as it used to be. 

FI: It was a relatively quiet day in European rates markets yesterday with US closed. European yields ended marginally higher. Bund spreads remained stable after the 2bp tightening on Friday to 58bp. 10y German yields stand at 2.17%.

FX: Yesterday was relatively quiet, as the US was out for holiday. Over night we have seen strong macro data out of China, but thus far the market reaction has been rather muted. We are also seeing broad-based, albeit limited yen weakening in anticipation of tomorrow's BoJ meeting. EUR/USD is unchanged on the day, but Scandies are somewhat weaker compared to where we started the week.

Credit: The primary Credit market in Europe got off to another good start this week with new issues exceeding EUR8bn in total on Monday. iTraxx Xover was flat at 415bp and Main was also unchanged at 79bp.