One of the biggest non-surprises of the Monday morning open was the fact that the PBoC (Peoples Bank of China) allowed their currency, the renminbi to weaken at the official fix this morning. As I mentioned last week, following the Japanese central bank’s move into negative interest rates, one of the key ramifications that would need to be studied would be China’s reaction. The weakening of the renminbi was modest to almost negligible, but considering that this is the first day in 6 where the fix has been weakened is probably significant. Still, it’s too early to tell what it all means, it’s just noteworthy.
We got some fairly important US data last Friday, growth: there was consumer spending and wage growth data. It wasn’t the best! Consumer spending was slower, business investment was lower and the strong dollar is clearly having an impact on exports, while recent negative risk sentiment is likely to weigh on the US consumer. Still it’s important to note that this was the first estimate of GDP for Q4 2015, these initial releases are notoriously unreliable. It would surprise no one if there are revisions which greatly change the number in the coming months. One thing is clear though, economists are now less positive about the US economy and have both increased the likelihood of recession (albeit from 15% to 20%) and lowered the possibility of rate hikes in 2016. The only surprising thing was that the dollar appeared to rally strongly in the wake of the data release, although that could have been due to the “buy the rumour, sell the fact” effect. I think it would be far too early to get excited about this weak data. As pointed out by a top economist, employment growth as shown by non-farm payrolls was at its strongest 3 month average over the last quarter of 2015, and domestic demand remains solid. It will take more than this to erode all of the positives in the US economy at the moment. Perhaps if we see a more sustained period of bad data coming out of China we might start to concern ourselves about the impact on the US economy, but we also need to bear in mind that a weaker renminbi and lower energy prices will be a positive boost to US consumer disposable incomes. For now, I suspect the Federal Reserve will continue to focus on labour market data, more to come on that a bit later.
Elsewhere, over the weekend, the Nigerian government has apparently been exploring borrowing as much as $3.5bn from the World Bank to help fund the massive budget deficit brought on by collapsed oil revenues. While a lot of corporates are holding back on their demand for dollars, hoping that the naira will recover and USD/NGN will once again move below 300, I am not so sure. The naira has now traded for almost a month above this level, we should never underestimate the psychological impact of getting used to new headline numbers. I think we’re all getting used to trading above 300 now, for better or worse.
This, containing the first Friday of the month, is the week of the non-farm payrolls report. On Friday, the US data release will be the first telling us about labour market activity in United States in 2016. For all the gloom and doom, economists are still forecasting 190,000 new jobs created. Certainly it’s a decline from the running 3 month average of 280,000, but still a decent number. It’s a fairly low bar to be honest, but given all of the weather related issues in the last few weeks it might not be too far away from the mark. We also look forward to an interest rate decision in the UK, ISM and productivity data in the US and speeches from ECB President Draghi. Lots to see!
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