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European January PMI surveys failed to really inspire trading. A disappointing outcome for the French services PMI – releases ahead of German and aggregate EMU data – caused a spike higher in German Bunds, but lack of follow-through buying rapidly pulled German bonds back to opening levels. The EMU composite PMI improved marginally from 47.6 to 47.9, broadly in line with expectations (48). A sectoral breakdown showed a less dire situation in the export-oriented manufacturing sector (46.4 from 44.4 vs 44.7 forecast) while the malaise in the domestic services sector again became a little worse (48.4 from 48.8 vs 49 forecast). The composite PMI points to (mild) recession since June 2023 though this month’s figure is the best since July 2023, suggesting a bottoming out process. The manufacturing PMI recorded the best level since March 2023, but remains sub-50 for an 18th consecutive month now. The services PMI is going nowhere (47.8-48.8 range) for 6 months now. Details strengthened the feeling of a moderating downturn at the start of the new year, but price pressures intensified. The overall contraction of new orders was the smallest recorded since last June, helping stabilise employment levels and lift business optimism about the year ahead to an eight-month high. Companies still relied on backlogs of work to help sustain current operating levels though. Disruptions to shipping in the Red Sea caused supply chains to lengthen for the first time in a year, but manufacturing input costs still fell on average. Service sector cost growth accelerated in January, contributing to the steepest overall rise in prices charged for goods and services since last May. The latter sharply contrasts with markets pricing aggressive rate cuts by the ECB; a view which we expect to be shared by ECB President Lagarde at tomorrow’s press conference. Daily changes on the German yield curve range between -3.5 bps and -4 bps across the curve. US Treasury yields slip slightly more (up to 5 bps). EUR/USD advances (1.0930), but that’s mainly because of the bullish sentiment on stock markets. European bourses arise by up to 2% for EuroStoxx50 with US gauges opening up to 0.75% higher. Chinese stimulus (see below) and strong Q4 corporate earnings are at play. Sterling attacked EUR/GBP 0.8550 support on Gilt underperformance, but the move failed. UK PMI’s showed the recovery in private sector output gaining momentum, but the Red Sea crisis hit manufacturing supply chains and pushed up input costs. The latter adds to evidence (together with sticky inflation) that the BoE isn’t in the position to even start contemplating rate cuts yet. US PMI’s – just released – beat consensus, boosting the goldilocks feeling. Output grew at the fastest pace for seven months while prices charged rose at the slowest rate since May 2020. US Treasuries and EUR/USD lose some ground in a first reaction.

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Chinese assets roar today. Bourses ended between 1.25-1.8% higher in China and even added 3.50% in Hong Kong. USD/CNY eases to 7.15 compared to 7.20 two days ago. The rally follows a Bloomberg report that Chinese authorities are considering the creation of a state-baked stabilization fund to prop up a slumping stock market. Policymakers are seeking to mobilize some CNY 2tn, or $278bn. That news was followed by additional monetary easing. PBOC governor Pan this morning said the central bank will cut the reserve requirement ratio for banks within two weeks while hinting at more support to come. The cut would amount to 50 bps, unleashing about CNY 1tn of extra liquidity in the market. Both the size as well as the fact that Pan pre-announced the rate cut is very unusual and suggests there’s a growing sense of urgency with policymakers to help the economy and property market to stabilize as well as to stem the market rout. Because even as Chinese assets bounce back today, the likes of the CSI 300 index are still down 45% from the post-pandemic high while the yuan is trading less than 3% above a 15y low.

January bond sales hit a new record in Europe today. Total sales already grew to €300bn. Apart from corporations, the huge offering is concentrated in the SSA debt segment. The likes of Italy and Spain each raised €15bn in their first syndicated sale of the year. Belgium already amassed a lofty €7bn two weeks ago while the EU just yesterday tapped €8bn. January is typically a busy month but this time additional factors are at play. Borrowers across the spectrum seek to profit from big investor demand who want to lock in higher rates now before major central banks starts cutting rates. The end-2023 yield correction is providing countries and companies alike an excellent moment to enter the market. Borrowers are also trying to get ahead of (geo)political events, including US presidential elections.

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