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Marketmind: China chill ahead of holiday retail readout

[January 17, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

Downbeat Wall St markets wondering if they've jumped the gun on interest rate cut speculation switched attention to China's spluttering economic engine and eyed a holiday retail readout.

World markets seemed to have returned this week to the 'glass half empty' view of 2024 that they started the year with - irked by edgy inflation updates, obstinate central bankers, a mixed start to the earnings season and worrying pockets of economic weakness.

Still murky geopolitical developments in the Red Sea and elsewhere and what that may mean for shipping and goods prices, the onset of U.S. election year and congressional budgetary wrangling have also helped sap bond and stock markets.

With global stocks now tracking losses for the year so far of some 1.5%, China's latest economic data dump did little to improve the mood on Wednesday.

In numbers seemingly leaked by Premier Li Qiang at Davos on Tuesday, China said its economy grew 5.2% in 2023 - below consensus forecasts and twinned with a retail sales miss for December and another mixed industrial picture.

The numbers upped the ante for further monetary and fiscal support, something that's knocked the yuan back to two-month lows against a resurgent dollar.

The benchmark Chinese stock index, which has now underperformed MSCI's all country index by a whopping 34% over the past year, dropped another 2% on Wednesday.

Alongside the ongoing property sector bust and exit of foreign capital due to political tensions, China has even bigger problems ahead.

The world's second biggest economy said its population fell for a second consecutive year in 2023 as a record low birth rate threatens profound long-term effects on the economy's growth potential.

Elsewhere on Tuesday, Britain joined Canada - and the United States - in reporting above-forecast headline inflation for December. While different cuts on the momentum of disflation more broadly made it difficult to overinterpret the latest surprises, they have doused early rate cut bets in both countries and hit their respective bond markets.

European Central Bank officials have been throwing cold water on easing talk all week.

Back on Wall St, the speculation about when the Federal Reserve will first cut rates this year continues to ebb and flow - even though market pricing remains pretty aggressive on the scale of easing ahead. Futures market continue to see a two thirds chance of a rate cut as soon as March and 150 basis points of cuts by year-end.

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Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., December 15, 2023. REUTERS/Brendan McDermid/File Photo

Fed Governor Christopher Waller said on Tuesday the U.S. is "within striking distance" of the Fed's 2% inflation goal, but the central bank should not rush to cut its rate cuts. New York Fed boss John Williams and Fed governor Michelle Bowman speak later.

Treasury markets seem more restive, with a backup in 10-year yields to the highest of the year so far and two-year yields bouncing back 16 bps in just two days to 4.28%.

With Bank of America's latest fund manager survey flagged a big pullback from longer-term bonds despite an overwhelming consensus lower yields in 2024, markets will keep close tabs on the near doubling to $2 trillion of new Treasury debt sales this year.

But, aided in part by China growth worries, oil prices provided better news for bond markets on Tuesday and crude slipped again to resume annual losses of more than 10%.

Wall St stock futures remained in the red after Tuesday's lower close for the S&P500, with a mixed readout on the fourth quarter from Morgan Stanley and Goldman Sachs yesterday that hit the former's stock by about 5%.

Boeing also slumped again by almost 8% to a two-month low after the Federal Aviation Administration extended the grounding of its 737 MAX 9 airplanes indefinitely.

December retail sales and regional U.S. banks top the diary today alongside the latest sweep of Fed speakers.

Key diary items that may provide direction to U.S. markets later on Wednesday:

* U.S. Corporate earnings: US Bancorp, Citizens Financial, Charles Schwab, Discover Financial, Kinder Morgan, Prologis

* U.S. Dec retail sales, industrial production, import and export prices. U.S. Jan NAHB housing market index, Canada Dec producer price index

* Federal Reserve issues Beige Book on economic conditions

* Federal Reserve Board Governor Michelle Bowman, New York Fed President John Williams and Fed Vice Chair for Supervision Michael Barr all speak

* World Economic Forum in Davos, European Central Bank chief Christine Lagarde speaks

* U.S. Treasury auctions 20-year bonds

(By Mike Dolan, editing by Ros Russell mike.dolan@thomsonreuters.com)

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