China manufacturing data moderates

Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi,

China’s official manufacturing PMI for January moderated to 51.3 against consensus estimate of 51.6,. (December 51.9).

The slower expansion in the manufacturing sector partially reflects the impact of the re-emergence of Covid-19 cases in some of China’s northern provinces and tighter containment measures.

Among the sub-indices, production dropped to 53.5 from 54.2, and new orders fell to 52.3 from 53.6. Employment also edged down to 48.2 from 49.6, with expectations of transportation and quarantine difficulties prompting some workers to return home a bit earlier than usual for the Chinese Lunar New Year holiday.

PBoC policy walk back

The People’s Bank of China denied reports last week that it would raise the standing lending facility rate.

The reports came after the PBoC net injected liquidity into the banking system on Friday as repo rates surged. As of Friday, R007 (3.19%) was already fixed close to the 7d SLF rate (3.20%), which is widely considered to be the ceiling of China’s interest rate corridor.

Moreover, the R001 fixing (4.15%) has already priced through the ceiling (overnight SLF rate currently stands at 3.05%).

Taking all of this together, and the Lunar New Year holiday approaching, I don’t think the PBoC has any intention of driving up borrowing costs further or causing more volatility in the money market.

The central bank’s moves late last week suggest that it’s becoming cautious about the market’s overreaction to liquidity tightness.

Silver higher; Spot & Futures Partially Decoupled

Silver closed at 27.00 on Friday and opened at 28.00/10 today. It then traded up to a handful of prints at 29.00. The futures market was so overwhelmed that it froze up a few times.

The effort appears aimed at futures for delivery, resulting in exponentially higher EFPs (greater contango) with the market then countering by selling spot and buying futures to move deliveries out into the future.

This is not dissimilar from the dislocation between gold spot and futures last spring. We are not there yet, but EFPs moved from 3/8 to 20/30 in the morning. Implied was closer to 30 during most of the move. This means that spot and futures have partially decoupled.

Gold followed on the move higher like last week to around USD1864, but was quickly driven back lower.