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Risk Sentiment Thaws on Chinese Recovery Efforts

Risk-sensitive assets are seeing a modest sentiment boost this morning as Chinese authorities move to stem the bleeding in stock markets, with top officials reportedly preparing to brief President Xi Jinping on their efforts. Onshore share indices moved higher overnight after the government imposed new restrictions on short-sellers, the state-owned Central Huijin Investment Ltd. said it would add more exchange-traded funds to its holdings, and the China Securities Regulatory Commission pledged “greater efforts” in encouraging buying from institutional investors. US equity futures are setting up for a stronger open, ten-year Treasury yields are inching lower after a circa-28 basis point rise in the prior two trading sessions, and the dollar is pulling back from yesterday’s peak.

More evidence of an acceleration in the US economy landed yesterday. The Institute for Supply Management’s services sector index leapt 2.9 points to 53.4 last month, marking its biggest advance in a year, while the prices-paid subindex surged 7.3 points, the most since 2012.

Credit conditions showed signs of improvement. The Federal Reserve’s Senior Loan Officer Survey showed 14.5 percent of banks reported tightening standards for commercial and industrial loans to large and medium sized firms in January, down from 33.9 percent three months ago – suggesting that the easing in financial conditions that began in late October is driving a recovery in the flow of money through the real economy.

Share of banks reporting tightening lending standards for firms, %

Economic surprise indices – which measure the gap between consensus expectations and realized data – show the US breaking from the pack once again, outperforming other major economies in both relative and absolute terms. The ongoing improvement in data and sentiment could, of course, prove to be a false dawn, but Fed Chair Jerome Powell’s cautious approach during last week’s press conference and Sunday’s ‘60 Minutes’ interview looks well-justified.

Citigroup Economic Surprise indices

In its latest decision, the Reserve Bank of Australia surprised markets by maintaining a hawkish bias, taking a stance that stands in stark contrast with most of its developed-economy peers. Policymakers held rates steady as expected, but noted still-present price risks in the accompanying statement: “While recent data indicate that inflation is easing, it remains high,” officials said, “It will be some time yet before inflation is sustainably in the target range… A further increase in interest rates cannot be ruled out”. Yields and the Australian dollar initially moved higher as dovish positions were wiped out, but ultimately reverted lower on continued dollar outperformance.

Ahead today: There are no first- or even second-tier data releases on the agenda, but market volatility could resume as a flock of Federal Reserve officials add to the noise level surrounding the central bank’s next steps. Cleveland’s Loretta Mester (hawk), Minneapolis’ Neel Kashkari (hawk) and Boston’s Susan Collins (centrist) are all scheduled to speak.

Bank of Canada Governor Tiff Macklem is scheduled to deliver a speech on the “effectiveness and the limitations of monetary policy” to an audience in Montreal at 13:00 Eastern time this afternoon. The Canadian dollar has been pummeled by tightening financial conditions over the last week – with some of the developed world’s highest debt burdens, Canadian companies and households are particularly exposed to rising interest rates – but losses have been fairly restrained thus far.

With the central bank expected to begin easing within months, the risk of a “melt-up” in borrowing and spending is real, and markets will closely scrutinize Macklem’s comments for insight into how he plans to manage the communications challenge ahead. Somewhat perversely, both hawkish and dovish stances carry the potential for gains in the loonie: more inflation-fighting talk might narrow rate differentials in the currency’s favour, while a focus on downside risks could reinvigorate “animal spirits” across the economy.

Please note: I will be on vacation from the 9th to the 19th, and the Morning Market Brief will resume on the 20th. Apologies for any inconvenience.


Still Ahead

THURSDAY

The Bank of Mexico is overwhelmingly expected to stay on hold for a seventh straight decision, maintaining its benchmark rate at 11.25 percent. With January data out earlier in the day likely to show core inflation continuing its downward trajectory, officials could follow their developed-country counterparts in preparing markets for a slow and gradual easing cycle starting around the March meeting. The Federal Reserve’s shift into neutral should give policymakers some breathing room, but the all-clear for rate cuts hasn’t yet been sounded. (14:00 EDT)

FRIDAY

A big disappointment in Canada’s January Labour Force Survey could have a significant impact on monetary policy expectations – and on the Canadian dollar. Markets lowered odds on a March rate cut after November and December gross domestic product estimates surprised to the upside in late January, but the jury is out on whether the economy is truly generating the kind of recovery that translates into increased demand for workers. A negative print could bring easing bets back into vogue and unravel the loonie’s recent gains. (08:30 EDT)

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