The reflation case continues to support higher bond yields and equity markets
Market movers today
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There are no big market movers today and markets this week will watch for comments from Fed members following the US employment report on Friday that showed the highest wage growth since 2009 (see Flash Comment US: Jobs report on the hawkish side for the Fed, 6 January 2017). The Fed's Lockhart (non-voter, neutral) speaks tonight at 18.30CET and on Friday Fed chair Janet Yellen is due to speak. The market is pricing two rate hikes from the Fed next year in line with our own forecast, but the risk is increasingly skewed towards three hikes given the tightening labour market.
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The rest of the week is very quiet on the data front with China inflation (Tuesday) and US retail sales (Friday) being the main releases. In Scandinavia there are no releases today and the focus is on inflation data due in Sweden, Norway and Denmark during the week.
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In today's global releases we look for solid German industrial production on the back of strong factory orders recently. We expect the euro Sentix index to rise slightly and project the euro unemployment rate to be unchanged at 9.8% for November.
Selected market news
The US employment report added to the data underpinning the US reflation case with the labour market tightening further and wage growth continuing to strengthen. This comes on top of other releases last week pointing to reflation (see Strategy: 2017 starts off where 2016 ended, 6 January 2017). The reflation case continues to support higher bond yields and equity markets.
Over the weekend Chinese FX reserves for December showed a further decline of USD41bn to USD3.01trn. Outflows thus continued in China in December and this partly explains why the PBoC has taken further steps to limit outflows by forcing a stronger CNY in the early days of January using a sharp rise in offshore money market rates. There are signs of stabilisation in the CNY and CNH markets though. The overnight CNH money market rate came down to 14.05% from 61% on Friday.
US-China tensions strengthened further over the weekend when Taiwan president Tsai Ing- Wen stopped in Houston to meet senior Republicans on her way to a visit with allies in Latin America (see Reuters). While she refrained from meeting representatives from the incoming administration, it is still seen as a provocation from the Chinese point of view.
Further challenges on the geopolitical scene could come from North Korea this year. North Korea declared on Sunday that it could test-launch an interballistic missile at any time. The US Defense Secretary said on Sunday that North Korea's nuclear capabilities and missile programme constituted a ‘serious threat' and that it was prepared to shoot down a North Korean missile launch or test if it was seen to be threatening the US or its allies. With US-China relations deteriorating, China will likely be less willing to cooperate with the US in this area to contain the threat from North Korea.
UK Prime Minister Theresa May repeated in a televised interview over the weekend that immigration and border control are key areas in the Brexit negotiations with EU.
Author
Allan von Mehren
Danske Bank A/S
