Breakfast Bites - China's bond outlook cut to negative

Rise and shine everyone.

Big news coming out of China today. Moody’s has cut its outlook for Chinese sovereign bonds to negative from stable while retaining the long-term rating of A1. The reasons stated were:

The change to a negative outlook reflects rising evidence that financial support will be provided by the government and wider public sector to financially-stressed regional and local governments (RLGs) and State-Owned Enterprises (SOEs), posing broad downside risks to China's fiscal, economic and institutional strength.

China's Ministry of Finance expects the domestic economy to continue its positive trend in Q4, stating the property market downturn’s budget impact is manageable. They expressed disappointment over Moody's rating outlook cut

The Shanghai Composite and Hang Seng were both down heavily since morning and this was likely the reason. Bloomberg reports the credit rating change was leaked hours before the release.

Today’s macro data for the US includes JOLTS, ISM Services and S&P Global Services PMI.

US Equity Futures are trading lower this morning with mega-cap tech leading the way down. Yields lower with the US Dollar Index firmer. Gold pulled back to 2028 while oil continues to remain weak. Bitcoin pulling back after crossing 42k.

Asia and Australia

• Mainland China and Hang Seng closed lower as discussed. The Japanese Nikkei, South Korea’s Kospi and Australia closed lower as well. India continues to rally.

• Japan’s Tokyo CPI decelerated to 2.60 percent in November from 3.30 percent in October of 2023. Core consumer price index in Japan increased by 2.3% compared to the same month last year. This rise was slower than the 2.7% increase seen in October and was below the anticipated 2.4%. However, Tokyo's core inflation rate, which often predicts national price trends, exceeded the Bank of Japan's 2% target for the 18th straight month, indicating ongoing inflationary pressures.

• South Korea’s Headline inflation decelerated to 3.3% after 3 straight months of acceleration. Month-on-month inflation came in at -0.6%, the sharpest decline since Oct 2020. This is a welcome sign and could lead to the Bank of Korea reassessing their stance on easing, although after this release they warned that inflation could decelerate at a slower pace than expected. The BoK has been on hold since January 2023 at 3.5%.

• As expected, the Reserve Bank of Australia held rates steady today, releasing a dovish statement discussing inflation coming under control. The Australian Dollar slid after the release. Australian equities are also down today, but on mining and energy stocks leading the index lower.

• Services and Composite PMI readings came out for several Asian countries - China’s Caixin numbers came out higher than previous while Japan, Australia and India all came in lower.

Europe, Middle East, Africa

• Notable hawk, ECB's Schnabel from Germany suggested that further rate hikes might not be necessary; the latest inflation data has rendered another rate increase quite improbable. He warned that policymakers should not guide rates to remain steady through mid-2024 and they should be careful in making statements about something that is going to happen in six months. - Seems to be a confirmation of a hold from the ECB during the next rate decision meeting on 14 Dec.

• Sweden Central Bank (Riksbank) Gov Thedeen noted that the current rate path suggested a 40% chance of a rate hike at the next meeting.

• European Services and Composite PMIs showed positive progress, although most remain in contractionary territory except Spain.

The Americas

• US Factory Orders came in at -3.6% yesterday. This decline in October was the biggest monthly drop since April 2020, when orders at factories fell by 13.5% due to the spread of coronavirus lockdowns. Additionally, the October report revised September's numbers downward, such as the orders for nondefense capital goods excluding aircraft, showing that business spending in September was not as strong as initially thought.

• This week is the final week of the estimated open window period. Blackout period for US equities will begin around 11 Dec and run through 19 Jan.

• The JOLTS number is one to keep an eye on. Expectations are for the JOLTS to come in at 9.3million. This is still far too high compared to pre-pandemic levels. The last reading came in at 9.506m and pre-pandemic levels were hovering around 7.5-8million.

Chart of the Day:

Analysts continue to see an inventory glut across the semiconductor sector leading to lower pricing power and a weaker stance among the sector’s equities.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)