• Efforts to pass the next relief bill will continue this week; US data highlight is ISM manufacturing PMI
• Vaccination disparity continues, but it’s good to see the numbers in Europe continue to rise; eurozone final manufacturing January PMI readings improved modestly; Italian political drama should end this week
• Japan final January manufacturing PMI rose a tick from the preliminary to stand at 49.8; China’s Caixin manufacturing PMI came in lower than expected; India unexpectedly boosted fiscal stimulus, raising fears of fiscal populism; silver is now in the spotlight

Eurozone final manufacturing January PMI readings improved modestly. Headline eurozone PMI rose a tick to 54.8 as both Germany and France improved a tick to 57.1 and 51.6, respectively. Of note, Italy improved to 55.1 from 52.8 in December, while Spain worsened to 49.3 from 51.0 in December. Final services and composite PMI readings will be reported Wednesday. Elsewhere, German retail sales plunged -9.6% m/m vs. -2.0% expected and a revised 1.1% gain (was 1.9%) in November. Eurozone retail sales will be reported Thursday and are expected to rise 2.0% m/m vs. -6.1% in November.  While France and Spain both reported stronger than expected sales data last week, the German reading is likely to overwhelm them and so there are downside risks to the eurozone reading. Taken in tandem with the lagging vaccination programs across most member countries, the economic data confirm our view that the eurozone economy will likely continue to underperform the US in H1 2021.

Italian political drama should end this week. Weekend talks yielded no breakthroughs but will continue today. Lower house speaker Fico has until Tuesday to report back to President Mattarella, who will then decide whether to give Conte or perhaps someone else a mandate to form a government. Reports suggest Renzi does not want fresh elections and would back former ECB President Draghi for Prime Minister, while other reports suggest Renzi will rejoin the ruling coalition if Conte replaces Finance Minister Gualtieri, who is well-respected by the markets. Markets are pricing in a workable solution, as 10-year BTP yields are trading near 0.61% and the spread to Germany has narrowed to 113 bp, both the lowest since January 19.

ASIA

Japan final January manufacturing PMI rose a tick from the preliminary to stand at 49.8. Final services and composite PMI readings will be reported Wednesday. January vehicle sales rose 6.8% y/y vs. 7.4% in December. Reports suggest Prime Minister Suga will extend the state of emergency in eleven prefectures by a month beyond the scheduled deadline February 7. While virus numbers have turned lower, the government said they remain worryingly high. The lower house approved some measures to improve enforcement of restrictions, including fines for bars and restaurants that do not close early as required.

China’s Caixin manufacturing PMI came in lower than expected. The reading came in at 51.5 for January vs. 52.6 expected and 53.0 in December.  The reading above 50 suggests that the recovery continues, but it seems to be losing some momentum, probably due to sagging external demand as the Caixin reading is weighted a bit more toward export-oriented firms. Over the weekend, China reported weak official PMI readings.  Manufacturing fell to 51.3 vs. 51.6 expected and 51.9 in December, while non-manufacturing fell to 52.4 vs. 55.0 expected and 55.7 in December.  As a result, the composite fell to 52.8 from 55.1 in December, the lowest since February. Caixin services and composite readings will be reported Wednesday and there are clear downside risks to the consensus 55.5.

While we remain confident in China’s recovery, further softening of the data will be concerning. We suspect talk of normalizing policy will quiet down for the time being. Of note, the PBOC injected net liquidity of around $15 bln today, which saw the interbank 1-day repo rate slide 55 bp to 2.78%. We expect further liquidity injections ahead of the Lunar New Year holiday February 11-17 as the PBOC works to address the worst cash squeeze in several years.

India unexpectedly boosted fiscal stimulus, raising fears of fiscal populism. The government expanded the target deficit from -3.5% to -9.5% of GDP, which of course will result in a huge increase in borrowing. The trade-offs are clear here: spending will surely accelerate the recovery but will put India on the radar for a re-rating of its fundamentals and credibility. On top of this, the central bank might still cut rates further from the current 4.0% level, perhaps as soon as this week’s meeting. The NIFTY index closed 3.5% higher while local bonds were up some 15 bp in the back end. We will be keeping a close eye on how foreign investor inflows behave, especially in the fixed income market as insurance increases.

COMMODITIES AND ALTERNATIVE INVESTMENTS

Silver is now in the spotlight. Redditers are trying to replicate the GameStop strategy in the precious metal, under the assumption that banks have a huge short position that can be targeted. Note, however, data suggests funds have been net-long for some time. There is also a big difference in market depth. The vault value of silver just in London, for example, is estimated at nearly $50 bln, not to mention ETFs, futures, and other vehicles. This compares to GameStop’s market cap of under $1.5 bln earlier this year. This looks like more of a herd-momentum trade than a short squeeze.