• China’s GDP growth slowest in 25 years Chinese data showed that GDP growth slowed to +6.9% yoy in 2015, from +7.3% yoy the previous year. The annual rate was the weakest in a quarter of a century, indicating slowing economic momentum for Asia’s largest economy. On top of that, retail sales, industrial production and fixed asset investment released at the same time, all slowed in December from the previous month. Of particular concern could be the slowdown in retail sales, which missed expectations of an acceleration and disappointed investors counting on consumer spending to have been the driver of growth. Market participants including us, expect the PBoC to add further stimulus to boost the economy and the government to accommodate by increasing spending, particularly on infrastructure investments. However, as China devalues the yuan and the economy slows, the risk of capital outflows intensifies. If the central bank cuts rates further, more capital could leave the economy, contributing to an even bigger loss in investment. Even though AUD and NZD, often used as proxies for China plays weakened on the news, if the strong possibility of further stimulus from the PBoC materializes, we could see these currencies recovering some of their recent losses.
• Today’s highlights: During the European day, the main event will be the UK CPI rate for December. The headline figure is forecast to have accelerated to 0.2% yoy from 0.1% yoy, while the core rate is expected to have remained unchanged from the previous month. As oil prices continued to tumble in December, we believe that the CPI rate is more likely to remain stuck at 0.1% yoy. The service-sector is still the only positive contributor to overall inflation, while energy, food and non-energy industrial goods continue to drag down the price index. Indeed, in the minutes of the latest BoE meeting, the MPC noted that the increase in inflation will be more gradual than previously expected, as a result of the renewed plunge in oil prices. Given that the lower oil prices have lowered the inflation outlook and having in mind the uncertainty surrounding the “Brexit” referendum, we believe it’s almost impossible for the BoE to raise interest rates before H2 2016. BoE seems to be in no hurry, despite the continued improvement in the labour market. As such, we remain bearish on the pound and a possible failure of inflation to accelerate could encourage the bears to pull the trigger one more time.
• From Germany, the ZEW survey for January is forecast to show a decline in both the current situation and the expectations indices. Following the improvement in the expectations index over the last two months, the increase in global risk sentiment by the turn of the year is expected to have driven the optimism of German businesses back down. This could put the common currency under renewed selling pressure.
• Eurozone’s final CPI rate for December is expected to confirm the preliminary reading as well and show that the bloc’s inflation rate failed to accelerate and instead grew at the same pace as in November. With the ECB policy meeting coming two days after the release, and expectations of the Bank staying on hold to assess the effectiveness of previous policy action, any surprises in the CPI data can have disproportionally large effects on EUR. Eurozone will also release its current account balance for November.
• In the US, we get only secondary importance data. The NAHB housing market index for January is forecast to remain unchanged and therefore, the market reaction on USD could be muted.
• We only have one speaker scheduled on Tuesday: Bank of England Governor Mark Carney speaks.