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US equity indices closed mixed, while European and APAC markets
were lower. US government bonds were higher on the day and
benchmark European government bonds closed mixed. IG was flat
across the iTraxx and CDX-NA credit indices, while high yield
closed modestly wider in both regions. The US dollar closed
slightly higher and oil, gold, silver, and copper were all
lower.
Americas
US equity markets closed mixed; Russell 2000 +1.3%, Nasdaq
+0.1%, S&P 500 -0.3%, and DJIA -0.6%.
10yr US govt bond closed -2bps/1.09% yield and 30yr bonds
-2bps/1.85% yield.
CDX-NAIG closed flat/51bps and CDX-NAHY +7bps/305bps, which is
-1bp and +1bp week-over-week, respectively.
DXY US dollar index closed +0.1%/90.24.
Gold closed -0.5%/$1,856 per ounce, silver -1.1%/$25.56 per
ounce, and copper -0.5%/$3.63 per pound.
Crude oil closed -1.6%/$52.27 per barrel.
On 20 January 2021, day 1 for the Biden Administration, the
Department of Interior issued an order putting a 60-day freeze on
new drilling permits on federal lands. While the immediacy of the
order may have surprised the market, such a move was widely
expected following a year in which the topic received a lot of
airtime in both the Democratic Primary and the Presidential
election. (IHS Markit Energy Advisory's Roger Diwan, Breanne
Dougherty, Lauren Droege, Sean Karst, and Yulia Ivanovskaya)
What exactly is in the order? Effective 20 January 2021, and
for the following 60 days, there can be no issuance of onshore or
offshore leases, amendments to a lease, lease extensions,
contracts, other agreements, or permits to drill on federal lands.
The order does not have any implications for existing operations
under a valid lease.
Offshore production is more exposed, but of limited scale.
Inclusive of offshore production, the share of US natural gas
produced on federal lands is only 6%. As production has grown in
Appalachia, and with the strong growth emerging in Haynesville, the
sector's reliance on offshore production has progressively
declined.
The onshore impact is even more limited, particularly for
natural gas. The share of US onshore natural gas production from
federal lands is a little more than 2%. Oil has a slightly larger
representation at just under 5% of total lower-48 onshore oil
production. That oil number has crept up over the past two years,
driven primarily by development on federal lands in the New Mexico
Permian.
A policy of permit bans on federal land had been telegraphed.
Operators anticipated a Biden policy change, and permitting on
federal lands in New Mexico reached record levels in 2020. The
number of permits granted for wells on federal land was 60% higher
in 2020 than in 2019 with EOG, Devon, and Occidental leading the
way. Chevron, ExxonMobil, ConocoPhillips, and other operators held
permitting close to prior-year levels.
The Ocean Wind offshore wind farm, located in the state of New
Jersey, has finalized the supply and service contracts with GE
Renewable Energy for its Haliade-X 12 MW turbines. The agreements
include a five-year service and warranty agreement for operational
support. The award follows on from the 2019 selection by developer
Ørsted for two of its offshore wind farms in the United States,
Ocean Wind, and Skipjack.The contracts include an option to utilize
the 13 MW variant. The 13 MW variant uses the same turbines but
with enhancements to its cooling system and other electrical
equipment modifications to allow for greater power output. Type
certificate for the Haliade-X 13 MW variant, trialed in the Port of
Rotterdam in 2019, was received from DNV GL in November 2020. (IHS
Markit Upstream Costs and Technology's Melvin Leong)
Adjusted for seasonal factors, the IHS Markit Flash U.S.
Composite PMI Output Index posted 58.0 in January, up from 55.3 in
December. The private sector seemed to regain growth momentum at
the start of 2021, as the pace of increase quickened to the
second-fastest since March 2015. (IHS Markit Economist Chris
Williamson)
The seasonally adjusted IHS Markit Flash U.S. Services PMI™
Business Activity Index registered 57.5 in January, up from 54.8 at
the end of 2020. The rise in output was often linked to another
monthly increase in customer demand. The rate of expansion was the
second-sharpest since March 2015 and steep overall.
Manufacturing firms signaled the sharpest improvement in
operating conditions on record in January, as highlighted by the
IHS Markit Flash U.S. Manufacturing Purchasing Managers' Index
(PMI) posting 59.1, up from 57.1 in December. Alongside stronger
expansions in output and new orders, the headline figure was driven
up by another substantial deterioration in vendor performance.
Meanwhile, significant supply chain delays, raw material
shortages and evidence of stockpiling at goods producers pushed
input prices up. The rate of cost inflation was the fastest since
April 2018, with firms raising output charges at the sharpest pace
since July 2008 in an effort to partially pass on higher cost
burdens to clients.
Last year was a banner year for the US existing home sales
market: annual sales totaled 5.64 million, up 5.6% from 2019 and
the highest annual number since 2006. All four regions saw higher
sales in 2020 than in 2019, with sales in the South and Midwest
soaring to levels last seen in 2007. (IHS Markit Economist Patrick
Newport)
The year ended on a pleasant note: sales rose 0.7% in December
to a 6.76-million-unit annual rate—the second-highest reading
in 14 years. Single-family sales increased 0.7% to a 6.03 million
rate—also the second highest in 14 years; condo/coop sales
climbed 1.4% to a 730,000 rate.
The inventory rundown continues. The year ended with a
record-low 890,000 single-family homes for sale. Our seasonally
adjusted single-family homes inventory estimate, 1.06 million, was
also an all-time low. Unsold inventory of single-family homes
amounted to a record-low 1.8-month supply at the current sales
pace; a 5.0-month supply was once considered normal.
Scarcity is driving home prices up. The median price of a
single-family home was up 13.5% from a year earlier; regionally,
the median price was up 21% in the Northeast, 15% in the West, 14%
in the Midwest, and 12% in the South.
The Mortgage Bankers Association's seasonally adjusted purchase
index is currently at levels last seen in 2008—suggesting that
home sales will stay strong in early 2021. Lawrence Yun, the
National Association of Realtors (NAR)'s chief economist, wrote:
"momentum is likely to carry into the new year, with more buyers
expected to enter the market."
Bottom line: The surge in home sales may be in its final
stages, but sales could remain elevated in early 2021. With
inventories still dropping, double-digit price gains in the median
price are likely to continue in early 2021.
Jensen Meat has joined the growing list of US meat companies
looking to tap into consumer demand for plant-based proteins. The
Southern California-based company, which normally specializes in
processing ground beef, is expanding its facilities and team to
manage co-packing opportunities for plant-based beef alternatives.
To accelerate production, Jensen has already broken ground on a new
processing plant, which will be completed by April 2021. The
company said the facility will allow it to pursue new partnerships,
providing opportunities to test new processes and increase national
production of plant-based products. Jensen's new plant, which will
include multiple capabilities for creating food service and retail
finished products, will also help drive costs down for smaller
companies. "With sixty years' experience, Jensen Meat has perfected
how to process and pack quality ground beef," said Abel Olivera,
CEO of Jensen Meat. "We now want to leverage our world-class
knowledge to create a cost-effective process for producing
plant-based products." Olivera said the goal is to create
cost-effective and innovative foods from alternative sources of
protein, adding that this would also play a part in reducing world
hunger. Beyond its new plant-based operations, Jensen Meat produces
ground beef products, which are sold through retail, foodservice,
and club store channels throughout the US. (IHS Markit Food and
Agricultural Commodities' Max Green)
Autonomous truck startup TuSimple has secured investment
funding from truckload carrier US Xpress Enterprises, although the
terms of the deal were not disclosed. The companies also announced
that they have begun testing autonomous technology on select lanes.
In addition, Eric Fuller, president and CEO of US Xpress, has
joined TuSimple's newly established executive advisory board. Cheng
Lu, CEO of TuSimple, said, "US Xpress has been a valuable partner
in the testing of our autonomous technology and Eric will continue
to provide expert guidance in helping drive the adoption of
autonomous trucks as a member of our Executive Advisory Board"
Autonomous trucks are gaining a great deal of traction in the
logistics industry because of a growing shortage of drivers and
improved efficiency. TuSimple focuses on developing Level 4
autonomous solutions for the logistics industry. The company
currently has about 40 vehicles in its test fleet and expects to
achieve fully autonomous operations in 2021. TuSimple has been
conducting trials with US Xpress since 2019 and these trials will
help it to gather important data required for bringing the
autonomous technology to market safely and reliably. Two months
ago, TuSimple raised USD350 million in a Series E funding round.
(IHS Markit Automotive Mobility's Surabhi Rajpal)
PPG Industries today reported fourth-quarter net income down 7%
year on year (YOY), to $272 million, on net sales up 2%, to $3.76
billion. Adjusted earnings, which exclude some impairment charges,
totaled $1.59/share, up 21% YOY and slightly ahead of analysts'
consensus estimate of $1.58/share, as reported by Refinitiv (New
York, New York). Sales volumes were down 1.5% YOY, but this was
offset by a 1.5% increase in selling prices, favorable exchange
rates, and acquisitions. (IHS Markit Chemical Advisory)
Performance coatings segment sales declined 1% YOY, to $2.2
billion, while segment income was down 3%, to $8 million. Volumes
fell 6% YOY, while selling prices were up 3%. The declines were
mostly due to a 30% drop in sales for aerospace coatings, and
smaller declines in protective and marine and automotive refinish
coatings. However, architectural coatings sales grew YOY, and
automotive refinish coatings sales increased on a sequential
basis.
Industrial coatings segment sales grew 7% YOY, to $1.6 billion,
while segment income was up 40%, to $282 million. Sales volumes
grew in the automotive OEM, industrial coatings, and packaging
coatings businesses. Automotive OEM sales growth differed by
region, with particularly large increases in China.
The company cut costs by about $115 million in full year 2020,
a result of restructuring programs put in place partly in response
to the pandemic. PPG generated about $2.1 billion in cash during
2020, McGarry says.
Renault has begun to offer subscription options in Brazil for
the Kwid, Stepway and Duster models. The plans will include options
for 12, 20, 24, or 36 months; the payment includes insurance,
documentation, scheduled maintenance, and 24-hour roadside
assistance, with financial insurance in the case of unemployment,
disability or death also available. At the end of the period, the
vehicle is returned. According to Automotive Business, the program
is called Renault On Demand and will be administered the financial
arm of the Renault-Nissan Alliance. The program evolved from a test
program in March 2020, which acquired about 200 customers. The
service is offered at most of Renault's dealerships in Brazil
already, Bruno Hohmann, commercial vice-president of Renault do
Brasil is cited as saying. The plans are offered on a variety of
models and at a variety of price points, depending on the model and
trim level, mileage allowed and time of the subscription. Hohmann
told Automotive Business that the company is not yet sure the
potential size of this opportunity, but believes that there is
opportunity after the pandemic. The availability of credit and
financing incentives were a help to the Brazilian market's
improvements immediately prior to the COVID-19 virus pandemic,
which resulted in 2020 light-vehicle sales falling by 26.7%
compared with 2019. However, the move by Renault also part of a
broader effort to explore mobility services in all markets,
including emerging markets. (IHS Markit AutoIntelligence's
Stephanie Brinley)
Europe/Middle East/Africa
European equity markets closed lower; Italy -1.5%, Spain -1.1%,
France -0.6%, UK -0.3%, and Germany -0.2%.
10yr European govt bonds closed mixed; Italy +5bps, Spain flat,
France -1bp, and UK/Germany -2bps.
iTraxx-Europe closed flat/49bps and iTraxx-Xover +4bps/254bps,
which is -2bps and -5bps week-over-week, respectively.
Brent crude closed -1.2%/$55.41 per barrel.
The Office for National Statistics (ONS) has reported that UK
retail sales (including fuel sales) in volume terms increased by
0.3% month on month (m/m) in December, standing 2.7% above their
pre-COVID-19 virus level in February 2020. (IHS Markit Economist
Raj Badiani)
In annual terms, they were 2.9% higher than in December 2019,
implying that they fell by a record 1.9% in the full year
2020.
The reporting period for the December publication covers 29
November 2020 to 2 January 2021. This captured initially a period
of eased restrictions early in December before tighter restrictions
on non-essential retail in England, Scotland, and Wales later in
the month.
This followed retail sales falling by 4.1% m/m in November
during a month-long shutdown.
The volume of retail sales in the three months to December was
0.4% lower when compared with the three months to September, the
first drop on this comparison since June 2020.
Clothing stores reported sales rising by 21.5% m/m during
December, rebounding from a large fall in November 2020 after shops
were closed because of the second lockdown.
Sales in food stores dropped by 3.4% m/m in December, partly
attributed to a technical correction from a 2.8% m/m gain in
November. Supermarkets during November benefited from the closure
of the hospitality industry and other non-essential retail sectors
across the UK.
Non-store retailing grew by 1.7% m/m in December, implying that
it was 45.2% higher than the February 2020 pre-COVID-19 virus
levels. It accounts for about one-third of all retail
spending.
Sales on the high street, or in physical shops, fell again
below their pre-lockdown levels. Specifically, spending in non-food
stores in December was 3.0% lower than February's level.
Fuel sales volumes edged down by 0.6% between November and
December and remained 24.1% below February's level because of
reduced travel as more people worked from home in November and
December.
The third national lockdown in place in England since 5 January
and tougher restrictions elsewhere in the UK have forced many
non-essential stores to close, which will trigger lower retail
spending in January. However, this is likely to be less acute than
during the first lockdown when all non-essential shops had to
close, and we are unlikely to see a repeat of the 18.1% m/m drop
witnessed in April 2020.
UK-wide footfall is notably lower after England endured its
second week of the fresh national lockdown. Specifically, retail
analyst Springboard reports that footfall in the week starting 10
January was 67.5% lower than in the same week in 2019, but it did
not reach the low levels recorded in the first or second week of
the first shutdown in March.
A testbed dubbed Smart Mobility Living Lab (SMLL) in London
(UK) that supports testing of connected and autonomous vehicles
(CAVs) is now open for business. SMLL will allow companies to study
an entire connected transport environment helping them to make
their products and services market-ready, reports Traffic
Technology Today. The facility provides a unique testing ground by
bringing together technology, public infrastructure and transport
experts. Linders, general manager of SMLL, said, "We have opened at
a time when the demand for transport innovation is intensifying.
The need for decarbonization, alongside initiatives including
increasing shared mobility, and new ways of moving goods about,
have brought the requirement for SMLL to the forefront of the
transport agenda. Despite the impact of COVID-19, because the
testbed is a live environment, it is genuinely 'open for business'
and we are confident we can deliver vehicle and technology trials
safely". SMLL claims to be the first CAV testbed in the UK to be
open for business and is designed to accelerate the
commercialization of market-ready future mobility solutions. Mobile
network operator O2 has provided 5G connectivity for the testbed.
The facility provides expertise to help with sensor technology
validation and working in support of major CAV projects Endeavour,
ServCity and Darwin. (IHS Markit Automotive Mobility's Surabhi
Rajpal)
Crown Estate Scotland has opened applications for the first
cycle of ScotWind leasing where registered developers can apply for
seabed rights to build commercial-scale offshore wind projects. The
opening of the application window follows the publication by Marine
Scotland of their Sectoral Marine Plan for Offshore Wind Energy
outlining the areas suitable for development. Also made available
to registered applicants are the final technical details of the
application requirements including provisions reflecting the
Sectoral Marine Plan. The ScotWind leasing round began in June
2020, where interest from investors and developers was solicited.
The application deadline closes on 31 March. (IHS Markit Upstream
Costs and Technology's Melvin Leong)
Ireland's Kerry Group is in talks to spin off its dairy
products operation into a joint venture with its main shareholder,
Kerry Co-op. Kerry Co-op is considering raising a EUR240 million
sale of shares in food giant to fund its participation in a EUR800
million joint venture with Kerry Group. The value of the venture
was initially estimated at EUR640 million, but it has recently been
revealed that an unnamed foreign player is also interested in
acquiring the business, which pushed the value of the deal to
EUR800 million. Kerry Co-op owns a 12.3% stake in Kerry Group,
which, based on the group's market capitalization of more than
EUR20 billion, is worth EUR2.46 billion. The sale of around 1.2%
stake would raise EUR240 million, according to The Irish Times. The
Co-op, whose shareholders are farmers that sell milk to Kerry
Group's processing plants, former suppliers, and parties that would
have acquired stock on a grey market, has been in talks for some
months on taking a controlling 60% stake in Kerry Group's
manufacturing facilities and brands. It is expected that only the
farmers currently supplying milk to Kerry Group will be
shareholders in the dairy joint venture. Kerry Group is also
looking to sell its chilled meats and convenience meals business,
which includes labels such as Denny and Galtee. It also has ranges
of frozen and chilled meals. This would see the group exit the
low-margin consumer foods business and free up funds for
acquisitions in its main fast-growing division, Taste &
Nutrition (T&N). (IHS Markit Food and Agricultural Commodities'
Jana Sutenko)
The headline flash IHS Markit Eurozone Composite PMI® fell from
49.1 in December to 47.5 in January, indicating a third successive
monthly decline in business activity and the steepest deterioration
since November. However, the last three months have seen the PMI
remain higher than during the initial months of the pandemic in the
spring of last year, suggesting that the economic impact of the
second wave of virus infections has so far been considerably less
severe than in the first wave. (IHS Markit Economist Chris
Williamson)
The worsening performance in January was broad based across the
eurozone, albeit with marked variations. Business activity growth
in Germany waned to the slowest since the recovery began in July,
but the sustained expansion contrasted with output falling at
quicker rates in France and the rest of the eurozone as a
whole.
The flash composite PMI for France fell from 49.5 in December
to 47.0, while the index for Germany merely slipped from 52.0 to
50.8.
The rest of the eurozone collectively meanwhile saw an even
steeper rate of contraction than France, with output falling for a
sixth straight month as the index dropped from 46.1 to 44.7.
However, like France, the decline remained less severe than in
November
Eurozone factory output expanded for a seventh consecutive
month in January thanks to sustained growth of new orders, exports
and backlogs of work. Although the overall pace of factory output
growth slowed to the lowest in seven months, it remained among the
highest seen over the past three years. Strong manufacturing output
growth in Germany contrasted with a renewed fall in production in
France and a comparatively subdued rise in the rest of the
eurozone.
January also saw employment across the eurozone fall for an
eleventh consecutive month, albeit with modest increases in
employment seen in both France and Germany helping to ease the
overall rate of decline to the lowest recorded since the pandemic
began. Modest job losses were again reported in both manufacturing
and services.
Business expectations about output in the coming 12 months
pulled back from December's recent peak, largely linked to worries
about the persistence of the pandemic's impact on demand, though
remained the second-highest since May 2018. While sentiment about
future prospects cooled slightly in the service sector, optimism
among manufacturers improved to a three-year high.
Average rates charged for goods and services meanwhile fell for
an eleventh successive month, dropping at the sharpest rate since
September. Although manufacturing prices rose, albeit only modestly
and at a reduced rate, prices levied for services fell at the
steepest rate since June, reflecting slumping demand.
Individual EU member states are reportedly threatening
potential legal action against Pfizer (US)/BioNTech (Germany) over
alleged manufacturing and logistical delays involved in
distributing the COVID-19 vaccine Comirnaty (tozinameran). Senior
officials in Italy and Poland have reportedly indicated the
possibility of legal action amid claims that lower-than-expected
volumes received in January risk disrupting carefully planned
immunization schedules. Reports suggest that a small number of
other unnamed EU states are also considering potential legal
remedies, although only Italy and Poland have come forward to say
that they are actively studying the possibility to date. Italy's
attorney general was tasked with assessing the possibility earlier
this week. On 22 January, Polish government spokesperson Piotr
Muller was quoted by Reuters as saying that the Polish government
could launch legal action against Pfizer/BioNTech in February
unless a full shipment of all scheduled doses of Comirnaty is
received. These threats to bring the matter before the courts would
certainly be contested robustly by manufacturers, and Pfizer and
BioNTech are likely to be able to mount a strong legal defense
based on the terms of advanced purchase agreement (APA) contracts
negotiated by the European Commission. One of the central legal
points of contention is likely to be over whether APA contracts are
based on the delivery of doses or vials. A new six-dose-per-vial
label for Comirnaty approved by EU regulators on 10 January led to
Italian officials alleging that the contract is for vials, not
doses. This is disputed by Pfizer/BioNTech. Nevertheless, even the
threat of legal action could have secondary benefits for EU states.
It is potentially a useful public relations tool as governments try
to convince the general public that blame for delays lies with
manufacturers. It may also help dissuade manufacturers against
altering future delivery schedules to the most litigious countries.
The threat to resort to legal action appears to be confined to
Italy and Poland at the time of writing. However, it illustrates
that there are rising tensions between vaccine manufacturers and
governments over the reliability of vaccine delivery schedules.
(IHS Markit Life Sciences' Eóin Ryan)
Porsche is looking to expand its investment and interests in
the area of digital startups, according to a company statement. The
company will continue to work with its established partner in the
field, media business Axel Springer, to increase investments in
their joint venture (JV) APX. This will fund new and existing
portfolio companies with a new cash investment of EUR55 million
(USD66.8 million). The substantially increased funding allows APX
to expand its investment model. The new capital will increase the
number of yearly initial investments in ambitious pre-seed startups
with digital business models which means that 'APX' will be in on
the ground floor on companies that have huge growth potential and
whose technology could form part of Porsche's digital platforms in
the future. While the total investment amount per startup remains
uncapped, APX will focus particularly on the earliest stages,
deploying up to EUR500,000 in portfolio startups even before a
Series A (the usual first investment round in a startup in
Germany). APX has invested in more than 70 startups since launching
in early 2018, and its ambition is to create a portfolio of close
to 200 companies by 2022, which makes APX one of Europe's most
active early-stage investors. (IHS Markit AutoIntelligence's Tim
Urquhart)
The French government said on 16 January that it would
incorporate provisions from the European Commission-proposed
Digital Services Act (DSA) in its upcoming legislation, introducing
content moderation obligations for social media companies and fines
for non-compliance. The Commission presented the DSA and the
Digital Markets Act (DMA) in December 2020 to update rules on
digital services, including tightened regulatory oversight of "big
tech" platforms. (IHS Markit Country Risk's Petya Barzilska)
The DSA and DMA imply increased compliance costs for service
providers and online platforms. Although the new legislation will
predominantly affect "big tech" companies such as Facebook, Google,
and Amazon, which are defined as "gatekeepers" in the DMA, all
hosting service providers and online platforms face increased
compliance costs.
The DSA and DMA are unlikely to be adopted in the two-year
outlook given several areas of contention. Stakeholder
consultations and other formal EU policy-making mechanisms are
likely to produce legislative amendments before a final draft is
put to a vote in the European Parliament and the European
Council.
Fragmented EU regulation affecting digital activities is likely
to persist in the two-year outlook. Should the DSA and DMA be
adopted, the package is likely to enable a more uniform regulatory
framework across the EU.
Skatteverket, Sweden's Tax Agency, has called on the country's
government to delay planned company car tax changes, reports Dagens
Industri. According to the report, the government wants to make the
changes by 1 July 2021. However, Skatteverket has suggested that
this should be postponed until 1 January 2022 to avoid differing
evaluation regulations during the same tax year. The Swedish
government is currently reviewing changes to the taxation on
company car taxes which BIL Sweden, the local importers
association, has said will make them less beneficial versus
privately owned vehicles. The report in Dagens Industri suggests
that this would affect hybrid vehicles, which would be subject to
an increase in taxation of around 70%. However, after already
reducing the benefit for plug-in hybrids and battery electric
vehicles (BEVs) at the beginning of the year, BIL Sweden fears that
more changes could lead to a fall back in the demand for such
vehicles after a strong performance during 2020 of around 10%. The
report notes that around 30% of the market was made up of such
vehicles in 2020, of which 75% were company cars. (IHS Markit
AutoIntelligence's Ian Fletcher)
The Turkish central bank kept its one-week repo interest rate
unchanged at its January policy meeting. Although inflation
continued to accelerate in the latest, December report, the
stabilization of the lira in recent weeks allowed the Bank to end
its sharp tightening cycle, which lasted just two months. The bank
reiterated the intention that it would maintain restrictive
monetary policy for "an extended period", suggesting a reduction of
interest rates should not be expected before mid-year, at the
earliest. (IHS Markit Economist Andrew Birch)
At the regularly scheduled, 21 January meeting of the Monetary
Policy Committee of the Central Bank of the Republic of Turkey
(TCMB), the main policy rate (the one-week repo rate) was held
unchanged, at 17.0%.
The Committee had previously raised the repo rate by 475 basis
points and 200 basis points at the November and December meetings,
respectively. Under Governor Naci Aǧbal, who was appointed to his
position in early November 2020, the TCMB has pivoted to much more
defensive monetary policy.
IHS Markit had anticipated one more rate rise in January due to
the further acceleration of inflation in December, which was
broadly believed to have underreported actual price increases at
the end of the year. However, since 28 December, the Turkish lira
had stabilized against the US dollar, allowing the TCMB to end the
tightening cycle.
Of some concern, early, weekly data reflected a re-erosion of
foreign currency reserves corresponding with the stabilization of
the lira in early January. This decline of reserves suggest that
the Bank may once again be spending down its reserves to support
the lira, thus paving the way to bring an end to the interest-rate
tightening cycle.
The week prior to the January interest-rate decision, President
Recept Tayyip Erdoǧan had once again gone public with a call for
the TCMB to lower interest rates due to rising costs for Turkish
businesses. The subsequent decision by the Bank to indeed end its
tightening cycle has allowed an opportunity to pass to further
rebuild its independence and authority from political
influence.
Nevertheless, Aǧbal has publicly committed to maintaining tight
monetary policy throughout 2021 in order to combat elevated
inflation and move annual price growth closer to the TCMB's
medium-term target of 5%. In the January press release alongside
the interest-rate decision, the Monetary Policy Committee also
stated that tight monetary policy would be maintained for "an
extended period until strong indicators point to a permanent fall
of inflation and price stability".
The South African Reserve Bank (SARB) left its policy rate, the
repo rate, unchanged at 3.5% during the January meeting of its
monetary policy committee (MPC), which ended yesterday (21
January). The MPC's decision was in line with market expectations.
(IHS Markit Economist Thea Fourie)
The SARB's expectations are for inflation to remain within the
inflation target range of 3-6% in the medium term. The SARB expects
headline inflation to average 4.0% in 2021 (up from a forecast of
3.9% previously) and 4.5% in 2022 (up from 4.4% previously). In the
short term, the SARB expects a small narrowing of the output gap
while global production and oil prices, as well as local food
prices, are expected to rise.
The risk to the inflation outlook remains balanced,
nonetheless, the SARB states. Local food prices are likely to
remain contained from the second quarter onwards, while a temporary
reduction in medical insurance price inflation is expected this
year. "A more appreciated nominal exchange rate in recent months is
expected, however, to moderate some inflationary pressure," the MPC
states.
South African GDP is expected to grow by 3.6% in 2021 (up from
a forecast of 3.5% previously) and by 2.4% in 2022. The SARB
considers the risk to the domestic growth outlook as balanced.
Output will benefit from stronger global growth, COVID-19 vaccine
distribution, low cost of capital, and high global commodity
prices. "However, new waves of the Covid-19 virus are likely to
periodically weigh on economic activity both globally and locally,"
the SARB warns. Electricity disruptions, weak investment, and
uncertainty about the vaccine rollout program are expected to be
drags on South Africa's growth performance in the near term.
The unchanged monetary policy stance by the SARB during January
is in line with IHS Markit's expectation. We are of the view that
the SARB's policy rate will remain unchanged until end-2021.
South African GDP growth vulnerabilities combined with a slight
uptick in headline inflation from the second quarter onwards
underline the expectation. The low base year of comparison,
tightening of the output gap, and higher fuel costs are likely to
increase headline inflation over the period.
Asia-Pacific
APAC equity markets closed lower; Hong Kong -1.6%, India -1.5%,
South Korea -0.6%, Mainland China/Japan -0.4%, and Australia
-0.3%.
The People's Bank of China (PBOC) on 20 January issued draft
regulations for non-bank payment service providers for public
feedback until 19 February. (IHS Markit Economist Yating Xu)
The draft rules are designed to diversify regulatory measures
with a focus on strengthening financial regulation and preventing
systemic financial risks, according to a statement from the PBOC.
They also clearly define the scope of the market and the standards
for determining market dominance, and are aimed at strengthening
anti-monopoly measures in the payment field and maintaining fair
competition and market order, according to Caixin.
In the draft guidelines, the PBOC for the first time has
defined what constitutes a monopoly for third-party payment
companies; i.e., any non-bank payment provider with a share of 50%
and above of the electronic payments market, or two providers with
a combined two-thirds share of the market, or three providers
controlling 75% of the market.
The release of the proposed regulations are the latest step in
the government's campaign to control financial risks and crack down
on anti-competitive practices in the financial technology (fintech)
and platform sector. The annual Central Economic Working Conference
held in December 2020 listed curbing market monopolies and
preventing the disorderly expansion of capital as among the
government's top priorities for 2021. Also, the State
Administration for Market Regulation (SAMR) released antitrust
regulations for the platform economy in November 2020. Besides
financial markets, other applications of the platform economy, such
as online education, could face similar scrutiny this year.
Once the rules governing non-banking payment services are
approved, the government will gain more authority to fight
monopolies by dominant players. Mainland China's biggest
third-party payment providers, Alipay and WeChat Pay, could face
antitrust investigations and forced divestiture under the new
rules. According to Caixin, private firms Alipay and WeChat Pay
together control over 90% of China's third-party payment market
while state-owned China UnionPay still remains a small player in
the market.
China is to ease regulatory controls further on contract
manufacturing in the automotive sector to encourage companies
without production permits to enter the industry. The action
follows a statement on 26 May last year by the then minister of the
Ministry of Industry and Information Technology (MIIT), Miao Wei,
that controls on contract manufacturing in the new energy vehicle
(NEV) sector would be eased. The minister said that his department
would carry out "[an] orderly [easing of] control of contract
manufacturing for new energy vehicles". Chinese regulators have
taken an open attitude towards contract-manufacturing deals between
automakers and startup companies. The NEV sector, in particular,
will benefit from such an approach as the eased regulatory
environment will continue to encourage new players into the sector.
Over the past few months, deals have been struck between
conventional carmakers and technology companies over EV
manufacturing. Companies involved in contract manufacturing these
days are tempted more by the vast business opportunities that such
partnerships could unlock than the cost efficiency of contract
manufacturing. (IHS Markit AutoIntelligence's Abby Chun Tu)
Japan's CPI fell by 0.1% month on month (m/m) on a seasonally
adjusted basis in December 2020 and by 1.2% year on year (y/y), the
largest contraction since April 2010. The CPI for full-year 2020
finished at the same level as in 2019. The December 2020 CPI
excluding fresh food (core CPI) and the CPI excluding fresh food
and energy (core-core CPI) held at the November level, but the y/y
contractions widened to -1.0% y/y and -0.4% y/y, respectively. (IHS
Markit Economist Harumi Taguchi)
Although the faster drop in the CPI was due to weaker fresh
food prices, the main factors behind the decline were lower energy
prices (partially due to slack demand because of warmer
temperatures) and the negative effects of the government's travel
subsidies. Accommodation fees declined by 33.5% y/y.
The CPI is likely to remain below the year-earlier level over
the short term, although recent lower temperatures and an uptrend
for oil prices will lift fresh food and energy prices. Despite
accelerating deflation, the Bank of Japan (BoJ) is unlikely to
introduce further monetary easing. While the BoJ is reviewing
measures under the current framework, the weakness driven by energy
prices and the effects of travel subsidies is in line with the
bank's price outlook.
The BoJ expects the CPI to start rising moderately as it
believes that price cuts aimed at stimulating demand have not been
observed widely to date. That said, a weak recovery because of the
negative effects of COVID-19, declines in wages, large output gaps,
and low growth expectations could increase downward pressure on
prices, which could persist.
Exports have continued to surge despite the strengthening of
the South Korean won, while consumer demand remains muted because
of the coronavirus disease 2019 (COVID-19) pandemic restrictions.
(IHS Markit Economist Dan Ryan)
Exports have been on an uptrend for months; December was no
exception, registering a 10% gain over November. Monthly exports
were nearly at the 50-billion-dollar level, which was last seen in
2018.
Imports have also been rising, but are now similar to levels
seen in 2019. These are lower than typical 2018 levels, reflecting
lower demand because of depressed consumer spending.
Inflation remains negligible. The Consumer Price Index (CPI),
core CPI, and Producer Price Index (PPI) showed small changes month
on month and year on year.
Prices, however, have been volatile on a monthly basis. This
reflects the uneven effect of the pandemic-induced lockdowns and
the uneven recoveries in different sectors.
There has been no change to the official policy rate.
Short-term and long-term rates, however, have risen slightly,
suggesting optimism regarding the upcoming economic recovery.
The won has been strengthening for months - at first a rebound
from the excessive pessimism of the pandemic, but now reflecting
the large external surpluses. The currency is expected to stabilize
now and could correct to slightly weaker levels in the
post-pandemic phase when imports rise in mid-2021.
Foreign reserves have increased substantially in recent months.
This results from the Bank of Korea intervening in the forex market
to slow the appreciation of the won.
The industrial production index has been rising, albeit
erratically, since the nadir of the pandemic. However, it
understates actual manufacturing output and is therefore lagging
behind exports that have been surging for months.
Retail sales, both nominal and real, remain depressed. This
will continue until the pandemic has ended and service-sector firms
no longer face lockdowns.
Like many countries, the labor force was lower than a year
earlier because of discouraged unemployed workers dropping out of
the labor market. However, the decline - a half-percentage point -
is relatively small and the labor force has in fact been increasing
in recent months.
The recent rising labor force had included a rising number of
unemployed. However, the market began to improve in November, with
the number of employed increasing and unemployed falling
marginally.
The trend of the past several months continues, with the export
sector driving growth. This necessarily pulls in imports of raw and
semi-finished materials, but still leaves a sizeable trade surplus
because of a lack of demand for consumer goods.
Renault Samsung has said that it will receive applications for
voluntary retirement from all employees on permanent payroll,
except for those hired after March 2019, reports the Korea JoongAng
Daily. Retirement will be effective from 28 February. Those who
retire will receive an average of KRW180 million (USD163,537) per
person on top of their severance pay, which will include special
bonuses, KRW10 million in education expenses for each child they
have, insurance fees, and car purchase discounts, among other
things. This is the first time in eight years that the automaker
has offered voluntary retirement to employees at all levels, not
just the executive level. In 2012, around 900 employees left the
company in the aftermath of the global financial crisis as the
automaker recorded a KRW215-billion operating loss in 2011 and a
KRW172.1-billion operating loss in 2012, highlights the report.
This latest labor-force reduction is the second this year. Earlier
this month, Renault Samsung announced that it would reduce the
number of executives and their salaries as it entered emergency
management owing to the COVID-19 virus pandemic. The automaker
plans to cut the number of executives by 40% to 30 and their pay by
20% starting from January. Renault Samsung is currently struggling
and reported an operating loss for the first time in eight years in
2020 as its global sales plunged 34.5% year on year (y/y) to
116,166 units, according to data released by the automaker. (IHS
Markit AutoIntelligence's Jamal Amir)
JGC has signed a FEED contract for a hydrogen related project
planned by Sumitomo Corporation in Gladstone, Australia. This
project is part of a broader program that aims to build local
hydrogen production and consumption in Gladstone by producing
hydrogen from electrolysis of water using electricity from Solar PV
(photovoltaics) as the main power source. The hydrogen production
plant initially plans to produce 250-300 tons of hydrogen annually,
with plans to scale up production. (IHS Markit Upstream Costs and
Technology's Dag Kristiansen)
Posted 22 January 2021 by Chris Fenske, Head of Fixed Income Research, Americas
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