The EU seems rusted on to the ‘transitory’ inflation narrative.

From a draft of EU projections:

Japan finance minister Suzuki comments crossing news wires:

• Japan’s underlying fiscal position has become severe
• not considering reviewing future sales tax rates at present
• must tackle spending and revenue reform to win confidence in Japan’s fiscal management

Its not unusual to get this sort of commentary out of Japanese officials. It hasn’t stopped them pumping in more fiscal support when they deem necessary though (but perhaps they may have done even more if the fiscal position was even stronger?)

• Composite PMI 52.3 vs 52.4 prelim

Little change to the initial estimates as this just reaffirms that the euro area economy has lost some momentum to start the new year. This is largely due to heightened restrictions amid the omicron variant, with the services sector most impacted. Of note, manufacturing output was seen at the fastest pace since September and that helped to temper with the slowdown.

Meanwhile, price pressures accelerated once again and is holding just below the peak in November so that is a little disconcerting. Markit notes that:

“The eurozone economy has slowed further in January after seeing growth weaken in the final quarter of 2021. Businesses are reporting subdued demand and ongoing constraints in terms of both labour shortages and raw material supply issues resulting from the pandemic.

“The slowdown coincides with virus-fighting containment measures having been tightened to the highest since last May across the eurozone amid the surge in COVID-19 cases linked to Omicron.

“Spain has been the hardest hit, falling back into contraction, while Italy has seen business activity stall, in both cases linked to declining service sector output. France is meanwhile recording the weakest expansion since last April.

“Germany is bucking the slowdown trend, however, providing a welcome ray of light to suggest that the impact of Omicron will be both shorter and less severe than prior virus waves. Having been hit to a greater extent by Omicron late last year, service sector activity is already picking up again in Germany and manufacturing output is surging higher.

“A key concern is that inflationary pressures continue to build, with soaring energy prices likely to add further to upward price pressures in coming months. Households are already being squeezed and firms face further cost rises. Tensions in Ukraine also pose a further downside risk to the outlook, with any escalation of the situation likely to further dampen business confidence.”

The dollar is keeping steadier so far on the day, holding its ground after a more sluggish week in general. Equities continue to perform well although there is a bit of a drag in tech futures after Facebook/Meta’s disappointing earnings. But overall sentiment is still holding up with Dow futures keeping flattish thus far.

Treasury yields seem like they’ve met a bit of a stall with 2-year yields holding below 1.20% and 10-year yields below 1.90%. We’ll have to see how things develop in the economy and inflation debate before finding any further conviction it seems.

China’s official manufacturing PMI slipped to 50.1 vs 50.3 in January, a number highlighting only the slightest bit of growth.

The private survey from Caixin was worse falling to 49.1 from 50.9.

The Caixin reading is the lowest since the dawn of the pandemic:

China is struggling with rising covid cases in a number of cities. Today 54 local cases were reported with 20 of those in Beijing. Another 19 were reported in Hangzhou. Reports Friday revealed that a city just outside of Beijing of 1.2 million was under lockdown. Officials had previously been transparent about lockdowns but that one wasn’t disclosed.

The Beijing Olympics begin on Friday and Lunar New Year holidays begin Monday.

There are also signs that covid and the real estate slump is stressing the non-manufacturing sector as the official PMI fell to 51.1 from 52.7.

It’s entirely unclear how or when China will go from covid-zero to living with covid. For now, the strategy continues to be long quarantines for arrivals and heavy-handed suppression of cases.

• Prior +1.7%
• GDP (non-seasonally adjusted) +1.4% y/y
• Prior +2.5%
• GDP (working day adjusted) +1.4% y/y
• Prior +2.5%

Apologies as there is a bit of a delay on the post due to technical difficulties. The German economy contracted more than expected in Q4 last year, owing to the spread of omicron and restrictions associated. The new year has started off with more resilience though, so there is at least some optimism on that front.

It was all about the dollar as the market continues to digest the post-Fed sentiment in trading yesterday.

Things are much more quiet so far today but we could see the action ramp up once European traders enter the fray later and as we get towards the Wall Street open. Equities were more subdued in a back and forth session (again). It has been a week with plenty of pushing and pulling but buyers are still hanging on despite the setbacks.

For now, US futures are slightly higher but that belies any major optimism on the week.

We’ll be getting some Q4 GDP releases in Europe later today but they shouldn’t mean much with the market being more forward-looking when it comes to pandemic and inflation dynamics.

As such, the market focus will continue to reside on dollar sentiment and the risk mood before the weekend comes along.

0630 GMT – France Q4 preliminary GDP figures
0700 GMT – Germany December import price index
0800 GMT – Spain Q4 preliminary GDP figures
0800 GMT – Switzerland January KOF leading indicator index
0900 GMT – Eurozone December M3 money supply data
0900 GMT – Germany Q4 preliminary GDP figures

That’s all for the session ahead. I wish you all the best of days to come and good luck with your trading! Stay safe out there.

• Q3 was 2.3% annualized
• Personal consumption +3.3% vs +2.0% in Q3
• GDP deflator +7.0% vs +5.9% prior
• Core PCE +4.9% vs +4.6% prior
• GDP final sales +1.9% vs +0.1% in Q3

Details:

• Inventories added 4.9 pp to GDP
• Exports added 2.43 pp to GDP
• Imports cut 2.43 pp from GDP
• Home investment cut 0.03 pp from GDP
• Personal consumption added 2.25 pp GDP
• Gross private domestic investment added 5.15 pp
• Government spending cut 0.51 pp from GDP

This is a strong reading and the 2021 annual growth was the strongest since 1984. A good chunk of this is inventories but that’s going to be a tailwind all year long as companies move from just-in-time delivery to just-in-case inventories.

• The summary is very useful, it precedes the meeting minutes by many weeks (December meeting minutes are due on March 24!)

The Summary is also an easy read, worth checking out (link below).

As always, there is nothing to trigger any change in BOJ policy indicated:

Link to the full text is here:

Summary of Opinions at the Monetary Policy Meeting1,2on January 17 and 18, 2022