Colors, like features, follow the changes of the emotions. Pablo Picasso. 

Reactive policy sometimes feels like you are always waiting for the next surprise explosion with all the colors of glory red or black. The FOMC minutes yesterday extended the feel-good moment for risk takers as they saw the Fed reactive to financial conditions again – affecitionally called the Powell Put. Today the mood turns as the rally up from Christmas Eve looks like and over-reaction to this story. There was no resolution to the US/China trade talks. This despite comments from China that progress was made on intellectual property and technology. Also the link of the present US government shutdown to any deal timing is in doubat as Trump suggested he will skip Davos (and perhaps a Chian deal) if there is no border wall money. The US shutdown is beginning to show up in air ravel concerns and in the cash-flow of 800,000 government workers as they pay their mortgages. The USD is at 3-month lows and breaks two big levels with CNY below 6.80 and EUR over 1.15  The turnaround in mood was a reaction to the weaker data from China CPI/PPI to lower Japan LEI to weaker French manufacturing and weaker UK retail sales, throw in more worker layoffs in Europe from Ford and you get the picture. Not all the news was ugly with China or EM. 

1)  China will cut taxes on manufacturers for 2019 according to State TV. 

2)  Taiwan’s Premier Lai resigns along with cabinet after DPP losses in local election – as expected. This leaves some room for China flexibility post Xi Taiwan comments.

3)  Saudi issues $7.5bn of 10Y and 30Y debt with good demand despite oil prices and Khashoggi issues.  

The reactions of the market today to news is interesting and the contrast to the previous 5 trading days will be important. The FOMC minutes helped risk yesterday, will the ECB minutes do the same today? The EUR/USD chart maybe a good place for US traders to start as we wait for more Fed speakers and more interest rate sensitive data – like new home sales. Watching 1.1635 for a larger USD move. 

Question for the Day: Does the collapse in China auto sales matter? The news from China on auto sales was out yesterday and ignored. Today it comes back as one of the reasons for the mood reversal. The drop in industrial production in Europe from France and Germany is notable. The first drop in China car sales in 20 years off 19% to 2.26mn is part of this story, SUVs fell 18.9% to 965,772. Not all of the blame revolves around US/China trade talks. 

The hope for a rebound seems very much in doubt despite talk of more tax incentives. The implications for Europe and the US knock-on pain seems priced but still important. China overcapacity in manufacturing was part of the drive for supply-side reforms. They have worked but they are in reverse now and it’s going to hurt the rest of the world. 

What Happened?

• China December CPI 0% m/m, 1.9% y/y after -0.3% m/m, 2.2% y/y- less than 2.1% y/y expected – lowest since June 2018.  The Jan-Dec 2018 CPI rose 2.1% y/y. Food prices rose 2.5% y/y while non-food rose 1.7% y/y.
• China December PPI 0.9% y/y after 2.7% y/y – less than 1.6% y/y expected – lowest since Sep 2016.  The Jan-Dec 2018 PPI rose 3.5% y/y
• Japan November leading economic indicators 99.3 from 99.6 – weaker than 99.5 expected. The coincident index 103 from 104.9 – as expected. 

• French November industrial production -1.3% m/m, 1.2% y/y after +1.3% m/m – worse than 0% m/m expected. The manufacturing fell 1.4% m/m, -1.2% y/y. For 4Q output is off 0.9% for all industry and 1% q/q for manufacturing with 3.1% drop in transport, 0.1% fall in machinery and 0.8% drop in food products. Energy products fell 3.9% q/q. 
• Sweden November industrial production –0.4% m/m, 3.4% y/y after 2.7% m/m, 4.9% y/y – weaker than 3.7% y/y expected. New orders fell to -2.4% from +4% y/y. 
• Italy November retail sales 0.7% m/m, 1.6% y/y after 0.2% m/m, 1.6% y/y – better than 0.2% m/m expected. The 3M to November sales are flat but volume is up 0.2% q/q. By category electric appliances rose 11.7%, shoes/travel items rose 4.3%, computers up 4.2% while newspapers/magazines -2.5% and sporting equipment fell -0.8%. 

Market Recap:

Equities: The US S&P500 futures are off 0.45% after a 0.41% gain with 2600 resistance key. The Stoxx Europe 600 is off 0.35% recovering from larger opening losses. The MSCI Asia Pacific was mixed off 0.3%. 

• Japan Nikkei off 1.29% to 20,163.80
• Korea Kospi off 0.07% to 2,063.28
• Hong Kong Hang Seng up 0.22% to 26,521.43
• China Shanghai Composite off 0.36% to 2,535.10
• Australia ASX up 0.27% to 5,853.90
• India NSE50 off 0.31% to 10,821.60
• UK FTSE so far off 0.2% to 6,894
• German DAX so far off 0.4% to 10,847
• French CAC40 so far off 0.8% to 4,774
• Italian FTSE so far off 0.2% to 19,139

Fixed Income: Weaker data and good auctions driving with help from FOMC minutes and speakers – focus in Europe is on equities reflecting weaker economics and ECB minutes – German 10Y Bund yields off 2bps to 0.20% again, French OATs off 3bps to 0.68%, UK Gilts off 1bps to 1.25% while periphery mixed as Italy up 2bps to 2.92% - Coalition immigration deal – Spain of 4bps to 1.46%, Portugal off 8bps to 1.71% and Greece off 1bps to 4.29%. 

• France AFT sold E4.855bn of 10Y 0.75% Nov 2028 OATs at 0.68% with 1.71 cover– also sold E1.88bn of 15Y 1.25% May 2034 OAT at 1.11% with 1.72 cover and E1.501bn of 30Y 2% May 2048 OAT at 1.6% with 1.72 cover
• US Bonds are bid into data and supply – 2Y off 3bps to 2.54%, 5Y off 3bps to 2.53%, 10Y off 3bps to 2.70% and 30Y off 1bps to 3.01%. 
• Japan JGBs rally on JPY and equities, good 30Y sale– 2Y flat at -0.15%, 5Y off 1bps to -0.14%, 10Y flat at 0.03% and 30Y off 1bps to 0.70%. The MOF sold Y563.6bn of 30Y 0.7% Dec 2048 #61 JGB at 0.715% with 4.02 cover - previously 0.794%
• Australian bonds rally modestly with focus on China PPI– 3Y off 1bps to 1.82%, 10Y off 1bps to 2.32%. 
• China bonds mixed despite weaker PPI watching CNY– 2Y up 1bps to 2.65%, 5Y up 1bps to 2.90% and 10Y up 1bps to 3.14%. 

Foreign Exchange: The US dollar index 94.89 up 0.1%. Range 94.64-94.98 with 94.50 looking important again. USD mixed in EM: INR up 0.15% to 70.39, KRW up 0.15% to 1115.60 while ZAR off 0.3% to 13.877 and RUB off 0.5% to 67.04

• EUR: 1.1535 off 0.1%. Range 1.1518-1.1570 with focus on 1.1480 base for 1.1635 tests. 
• JPY: 108.05 off 0.1%.Range 107.77-108.25 with 108 breaking opening 106.50 risks. EUR/JPY 124.70 off 0.2%. 
• GBP: 1.2740 off 0.4%.Range 1.2727-1.2801 with UK politics post Brexit vote the fear – 1.26-1.2850 still key. EUR/GBP up 0.3% to .9055 with .92 targets. 
• AUD: .7190 up 0.25%.Range .7146-.7191 with focus on China deal and commodities. NZD flat at .6790 with .6880 next key. 
• CAD: 1.3220 up 0.1%.Range 1.3201-1.3250 with focus on risk of US rates and oil vs. BOC bravado. 1.3050-1.3350 again? 
• CHF: .9770 up 0.25%.Range .9716-.9779 with .9680 key base. EUR/CHF 1.1270 up 0.25%. 
• CNY: 6.7845 off 0.4%.Range 6.7730-6.8220 with 6.71-6.74 next big support and 6.80 the pivot. All about trade hopes. 

Commodities: Oil off, Gold up, Copper flat at $2.6985. 

• Oil: $51.99 off 0.7%. Range $51.45-$52.23 with Brent off 0.6% to $61.07 with $60.44 lows.  US inventories, weaker EU data, still tracking OPEC output cuts with $50-$52.50 key for WTI. 
• Gold: $1294.60 up 0.2%. Range $1292.30-$1298 with $1300 then $1305 keys – watching USD and rates vs. equities. Silver up 0.2% to $15.77, Platinum up 0.6% to $830.50 and Palladium up 0.3% to $1273.30. 

Conclusions: Will bond auctions matter? There Japanese and French had no problem selling their bonds today – what about the US?  And will it matter to traders? The biggest story about 2019 is the divorce of equity views from bond views. Its fashionable now to call for a Fed on hold rather than one reacting to a recession risk for 2020. The shape of the US yield curve is back in play as an indicator for fear so expect this to be part of the reaction function for today’s sale. 

Economic Calendar:

• 0830 am Canada Nov new home prices 
• 0830 am US weekly jobless claims 231k p 225k e
• 0835 am Richmond Fed Barkin speech
• 1000 am US Nov new home sales (m/m) -8.9%p +2.9%e / 0.554mn p 0.569mn e
• 1000 am US Nov construction spending -0.1%p 0.2%e
• 1230 pm St. Louis Fed Bullard speech
• 1245 pm FOMC Chair Powell speech
• 0100 pm US 30Y bond $16bn sale
• 0100 pm Chicago Fed Evans speech
• 0700 pm FOMC Vice Chair Clarida speech