China Growth Lowest Since 1990

Daily Analysis - 20/01/2017

2016 Gross Domestic Product Expansion Remains Within Range Targeted by Policymakers


Chinese economic activity tapered further during 2016 as evidenced by the latest reading of gross domestic product for the calendar year.  Nevertheless, the pace of expansion remains well within the 6.50 %to 7.00% desired by politicians despite weakening industrial production and shakier fixed asset investment growth.

Chinese Economy Downshifts

The rapid devaluation of the Yuan combined with expansive loan growth and stimulus were unable to accelerate growth throughout 2016 as evidenced by the latest gross domestic product print.  According to National Bureau of Statistics, growth for the year was recorded at 6.70% despite the economy growing at a 6.80% annualized pace during the fourth quarter as government spending and lending helped offset the slowdown in trade.

However, other metrics released overnight were not necessarily as optimistic about the outlook.  Industrial production grew by a more tepid 6.00% year over year compared to the 6.20% reported a month earlier while fixed asset investment expansion also decelerated during the same period to 8.10%.

Since the announcement, the Yuan is trading mostly flat against the US dollar as markets quiet ahead of the Trump inauguration address.


US Oil Stockpiles Surprisingly Rise

Amid expectations that US onshore oil inventories would decline slightly, the latest figures reported by the Energy Information Administration for the week ended January 13th showed that stockpiles surprisingly rose by 2.347 million barrels.

This latest inventory build adds to the prior week’s 4.097 million barrel gain while raising fears that US shale is roaring back to life, potentially offsetting any measures implemented by OPEC to cut excess supply.  Although US production fell modestly to 8.944 million barrels last week, the trend remains broadly to the upside as is following the rig count higher over time, suggesting that additional rigs being brought online in the coming weeks could presage a jump in output.

After three straight sessions of losses, Brent is modestly higher on the session, climbing to just below $54.50 per barrel.


ECB Remains Inflation Dependent

Although the decision to leave interest rates on hold at record lows was widely expected by market participants, the European Central Bank once again highlighted its ability to expand or narrow asset purchases depending on how inflation evolved.

While inflation growth reported earlier in the week was confirmed at 1.10% on an annualized basis through the end of December, ECB President Mario Draghi was quick to highlight the downside risks to the measure.  In his remarks, Draghi stressed that he saw “no convincing upward trend in underlying inflation,” suggesting that despite the most recent headline gains, the upside pressure may not be sustainable.  Further to the point, his comments suggested that the Governing Council did not discussed adjusting purchasing despite putting its ability to adjust the measure on display.

The mention of the risks sent the Euro tumbling, with EURUSD briefly falling below 1.0600 before recovering.


Yellen Unconcerned by Current Economic Trajectory

In prepared remarks delivered to the Stanford Institute for Economic Policy and Research, Federal Reserve President Janet Yellen once again touted her more hawkish outlook while reiterating that she believes the US economy is not overheating.  She still largely believes that multiple rate hikes will be carried out throughout the 2017 calendar year, potentially undoing some of the losses in the US dollar brought upon by Donald Trump’s latest comments.

At present, she expects interest rates to reach 3.00% by 2019 considering the projected rate of policy tightening, however, she did not ignore the obvious risks and uncertainties that could adjust the Fed’s approach to rates.

After recovering from earlier losses on Thursday, gold prices are back under pressure as market volumes taper ahead of the afternoon address from President-elect Donald Trump.


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