E Mixed Messages

We all know the problem, without a traffic light, rules about who goes first become a game of chicken. There are mixed signals and mixed messages in our driving markets today. Hope on better trade deals, hope for more easy money meet the reality of deflationary risks. The downdraft in risk in Asia reverses in Europe. There are mixed messages in the data and the headlines. Markets are preparing for more US data as well after the weaker US retail sales left many rethinking the Goldilocks story for markets. Growth steady and inflation tame is not what the tape is providing. China is a case in point. The largest increase in new bank loans in China on record, and a larger than expected drop in CPI and PPI don’t mix well. Next week the retail sales, industrial production and unemployment will be watched against the large rise in money supply to make clear whether Beijing has done enough.  Many are trying to dissect the China seasonal noise of the new-year and the usual front-loading of lending in January against the government efforts to stoke up the economy. The real driver of the mood overnight is more about the fate of the US/China trade talks – where President Xi stepped in and where Mnuchin noted they were “productive” suggesting that there is still hope for a deal and delay mixture in the month ahead. The other headlines from Asia – weaker Singapore 4Q GDP on the revision, weak Japan industrial production confirmed, and lower NZ PMI – all led to the risk-off swing. The flip in Europe rests on trade talk hopes, better UK retail sales, and a view that even with auto sales weaker, Germany is over the worst of its slowdown. Whether this is true will depend on the data ahead and for that we must wait. The mixed market messages make clear that the JPY is the safe-haven to watch today as the failure over 111 opens 110 and lower should the US not continue the fragile hopes for more US trade deals and stable US government. Trump speaks at 10 to likely enact emergency measures for the wall.    

Question for the Day: Does the China money supply offset the PPI? The connection between easy money and asset prices works everywhere but with some lag as confidence from the action into the real economy – i.e. forward guidance – matters as well. The US and EU versions of low rates and QE drove up bonds, equities and home prices from 2009 – with the role of the banks critical. The China version of such easy money and QE hasn’t yet been felt.  Perpetual bonds are just starting, while the PBOC has delivered 4 RRR cuts, rates are still over 2% - making real rates positive still. The leap up in the January total social finance merits watching. The connection of M2 or CNY Bank loans to China home loans isn’t so obvious.

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