Deteriorating China
The World First office is probably one of many brimming with festive spirit this morning following the Christmas party last night; similar happiness and joy is not being felt on currency markets this morning.
Chinese data continues to concern us this morning, as it has done for the best part of the past couple of years. A private survey of the Chinese economy has once again called the official data into doubt by highlighting a ‘disturbing’ deterioration in the country’s economic fundamentals with a particular onus seen on very weak manufacturing growth and very limited transformation from an industrial, manufacturing economy to one that thrives on service sector growth.
As we have referenced in our “4 things that drove markets in 2015 and 3 to watch in 2016” piece that is available here, this story and conversion within the Chinese economy, alongside the world taking the new medicine that a newly tightening Fed is prescribing will be the most interesting dynamic of 2016.
Yuan weaker for 10th day
The continued divergence between CNY and CNH, the onshore and offshore prices in Chinese yuan, shows that money is still flowing out of China. It also means that money that would typically flow into China via Hong Kong is not and this is in turn tightening financial conditions; exactly what the Chinese authorities do not want. It is little surprise therefore that the People’s Bank of China has guided the reference rate, the daily pin of the yuan to the USD, to ever weaker levels for the past 10 consecutive days.
Sales boost GBP
Yesterday’s sterling performance was decent enough although it struggled, like all other G10 currencies, against the US dollar. UK retail sales rose in November by a healthy 1.7% month-on-month figure. October’s High St figures saw consumers take a breather, as has been the trend for many years so a bounce back was hardly a surprise. Given September’s number was boosted by strong spending around the Rugby World Cup and warm weather and there was no surprise in seeing a natural pause before we all hit the shops in a vain attempt to remember what our significant others really wanted.
Retail sales may slip in the coming months; the changes in fuel prices has boosted spending but soon will normalise as – regardless of how cheap it is to fill up the tank – there is a natural limit to how much driving one can do. We would be very cautious to warn against calls for a continued pick-up in consumer spending in the UK in the face of uncertain wage dynamics.
Sterling may be in focus again today as the EU summit at which David Cameron is attempting to gain clarifications on the reforms that he wishes to secure. In the lead-up to the summit a fair few new polls have been released on voting preference around the EU referendum with the result increasingly uncertain.
The Day Ahead
Much like the sleep-deprived and hungover minds lolling around the office today, the data calendar is quite, quite dead today and, following this past week’s excitement, is probably looking forward to the weekend.