More Stimulus for China

Daily Analysis - 22/12/2015

PBOC Expected to Provide More Easing Measures


After a meeting by the Government’s Central Economic Work Conference, Chinese policymakers have concluded that the country requires further fiscal and monetary stimulus. The top monetary policy chiefs have stated that more flexibility is required from a monetary standpoint accompanied by more forceful fiscal stimulus to avoid stagnation in the coming year.

German Producer Prices Slump

German PPI registered the sharpest annual drop in almost six years in November, pulled lower by the decline in energy prices. The producer price index fell -2.50% year over year in November, which was substantially worse than the -2.30% contraction recorded in the previous month. Producer prices have been falling steadily since August 2013. The data indicates that there is hardly any upward pressure on consumer prices from the production side. Energy prices once again had the largest imapct on producer prices according to the Federal Statistical Office. Energy prices alone plunged -7.10% in November from a year ago, largely due to cheaper prices of petroleum products that slumped by -14.70%. On a monthly basis, producer prices dropped -0.20% in November, continuing the previous month's further decline of -0.40%.  The German DAX 30 remains under pressure as concerns about the outlook linger alongside worrisome fundamentals.


Turkish Consumer Pessimism on the Rise

The Turkish Statistical Institute said in a report on Monday that Turkey’s consumer confidence index declined notably in December. After a dramatic higher move in November, the index fell to 73.6 in December from 77.2 during the prior month. Worries about employment seemed to have been the predominant cause behind the most recent drop. General economic confidence also dropped by nearly 6.00% percent in December according to the report, likely reflecting the shaky political situation. The fundamentals of the economy mirror the political dynamics as Turkey finds itself increasingly isolated and on the hunt for allies in the region especially after the altercation with Russia.  The USDTRY pair showed no reaction to the latest news, with the dollar not barely gaining in strength versus the lira. The pair opened the session at $2.9095, slipping modestly to a $2.9068 close as the pair trends sideways.


Further Loosening in China Anticipated

China's annual Central Economic Work Conference ended on Monday with wide agreement amongst policymakers that the nation’s monetary policy measures need to be increasingly flexible and likely require a wider budget deficit to accommodate the economy. Slowing expansion has raise the specter of increased stimulus measures either through further interest rate adjustments, reserve ratio requirements, or fiscal stimulus. The Chinese Government has concluded that the best choice moving forward is raising the country's fiscal deficit ratio gradually and destocking its housing industry. Despite all the efforts from the PBOC and the current level of fiscal stimulus, China has not yet shown any meaningful signs of a growth revival. Having already cut interest rates six times since late 2014, the Central Bank might be looking additional rate cuts and a possible expansion of quantitative easing in the coming year.


Gold Gains

Gold prices have managed to continue to rebound from levels near multi-year lows as general softness in the dollar and a lack of significant economic data leave few catalysts for substantial directional momentum. XAUUSD continued its recent bullish move on Monday, as uncertainty about how the Federal Reserve will move with its interest rates normalization schedule next year weighs on the outlook and the dollar.  The main driver of gold prices over the near-term will remain the dollar as lessened uncertainty about the policy outlook combined with near zero inflation globally reduce the appeal of gold as a hedge against central banking and monetary printing.  Gold prices reached as high as $1081.65 on Monday before retreating modestly. Although taking a breather at the moment, analysts anticipate the dollar will continue to drag gold lower next year, pushing it to even lower as a result of future potential tightening measures.


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