ON DECK FOR FRIDAY, JANUARY 12
KEY POINTS:
- Oil soars after US, UK attacks on Houthis
- Bonds grossly overreact to US producer prices
- Soft lagging US core producer prices indicate weak pipeline price pressures...
- ...but passthrough to consumers continues while supply chain pressures return
- US earnings disappoint, dragging S&P futures lower
- Chinese CPI still isn’t deflation
- Chinese financing disappoints, exports picked up
- Markets largely ignored the UK’s lagging data dump
- Toronto’s awful traffic will only get worse, requiring workforce flexibility
Oil prices are up by about 3% this morning as Brent is back up at about $80 again and WTI sits at about $75. US and UK forces launched air and missile attacks on locations across western Yemen to knock out launch and drone storage sites being used to attack ships in the Red Sea. There will also probably be another spike in container freight rates and shipping costs on the back of these attacks as the Iran-backed Houthis threaten to escalate.
US Ts and Canadas were slightly cheapening across the curve and underperforming EGBs and gilts that are rallying, until producer prices landed and drove a violent move lower in US yields. That says more about how whippy and reactionary markets are particularly into a US long weekend than anything else imo. US equity futures were slipping until PPI, European cash markets are higher. The dollar is little changed while petro currencies are rallying including MXN and CAD that are among the morning’s star pupils.
The US updated producer prices that were flat excluding food and energy for a third straight month in December (consensus +0.2%). That drove a large drop in US bond yields, reversing the earlier rise that was driven by higher oil prices this morning. Excluding food, energy and trade services saw prices up 0.2% m/m and on consensus and so excluding trade services was the difference maker. It’s lagging data when shipping costs and supply chain pressures are rising again. Plus, passthrough of higher prices into consumption baskets is ongoing.
US financials are kicking off the US earnings season in earnest with a number of top names on the docket. It’s a weak start so far with a combination of names generally either disappointing on earnings, and/or earnings details like revenues, and/or guidance. Headline results are shown in chart 1 but the details to the figures that are being examined by equity analysts matter much more. This is modestly weighing on lower US equity futures as they underperform European gains.
A trio of Chinese macro readings arrived overnight:
- Chinese CPI landed at -0.3% y/y (-0.4% consensus). In month-over-month terms, CPI was up by 0.1% NSA which is slightly on the firmer side compared to like months of December in the past (chart 2). The media calls it deflation, economists generally wouldn’t say they are ticked that box. One reason is that much of the softness is base-effect driven through comparisons to a year ago. Much of it is narrowly based, with food prices down 3.7% y/y (non-food +0.5%) while service prices were up by 1% y/y again. Within food, categories like pork are still being based to the temporary surge of prices and year ago and previously. So the definition of deflation—a broad economy-wide decline in prices that is expected to persist and by more than just base effects and that changes behaviour—isn’t really being met.
- China’s exports picked up last month (chart 3). In dollar terms, they were up 2.3% y/y (1.5% consensus) and in yuan terms they were up 3.8%. Imports were also slightly better than expected at 0.2% y/y (-0.5% consensus) and in yuan terms 1.6% y/y (chart 4).
- Aggregate financing missed expectations and so did core domestic currency loans. Charts 5 and 6 show that the full-year financing flows were robust, but charts 7 and 8 show that growth in outstanding amounts remains weak. Domestic currency loan growth continues to decelerate, but total financing has picked up a bit and includes bonds, equities, short-term paper, other shadow products and a mixture of government and private financing.
The UK dumped several lagging releases for November this morning. They were mixed. Nobody much cared. GDP was a tick better than expected at 0.3% m/m. Industrial output was up 0.3% m/m and on consensus, but there were negative revisions. The services index was strong as it increased 0.4% m/m (0.2% consensus) with positive revisions. Construction output was soft.
There is nothing due out in Canada where the fireworks start on Monday with the BoC’s inflation expectations and then Tuesday’s CPI.
As an aside, pressures to get workers to commute into the office in a place like Toronto won’t like this one. Toronto just ranked worst in North America for traffic and third worst in the world. Enormous immigration is only going to make this worse on top of housing shortfalls. That means that the cost of commuting into the office is ginormous in this city. I’m delighted to finally see the consensus of the street’s economists waking up and ringing the alarm on excessive immigration as I’ve been arguing that for a long time now. The self-imposed problem in the office market relates to a combination of congestion in transportation networks combined with the decision to keep piling on office capacity in the downtown core while Toronto looks at massive property tax increases.
DISCLAIMER
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.