Why is January worse than December and business activity is falling?

Financial and commodity markets analytics

Market Watch review. 25.01.2021

In today's release, we’ll cover the following topics:

  • Updated PMI data.
  • Bank of Japan forecasts and monetary policy.
  • New Zealand consumer inflation data.
  • US crude oil reserves.

The preliminary PMI indices for January published today show that the business environment remains positive in some countries, but the performance in almost all segments is worse than a month earlier.

First of all, this applies to services, which is not surprising in the light of the introduction of new, and the extension of existing restrictions, primarily in Europe. Thus, the January value of the PMI indicator in the service sector was 45.0 points, thereby continuing a series of negative months since September 2020. In general, in the euro area, the dynamics indicate a decline in business activity for the third month in a row and the sharpest drop since November of the previous year.

A significant decline in the index of business activity in the service sector occurred in the UK and Japan (38.0 and 45.7 points, accordingly).

The Bank of Japan maintained its monetary policy last week Thursday and updated its economic forecast for the next fiscal year, but warned of possible increased risks as the fight against the coronavirus threatens to undermine the fragile global economic recovery.

As expected, the Bank of Japan kept interest rates at -0.1% for short-term interest rates and about 0% for 10-year bond yields.

Also in the latest quarterly forecasts, the Bank of Japan raised its forecast for economic growth to 3.9% in 2021. The main hope of the Japanese regulator is that a huge package of government spending will soften the blow from the pandemic.

Against the background of such optimism, the Japanese stock market continues to grow, and the Japanese yen is consolidating around the 104th figure.

Consumer prices in New Zealand increased by 1.4% at the end of 2020, Statistics New Zealand reported last Friday. The main contribution to the annual index was made by data for the last quarter – prices rose by 0.5% compared to three months earlier, exceeding the forecast by 0.2%.

As we can see, inflation in New Zealand was stronger than economists expected, and this adds to the belief that interest rates will not have to be cut again. Investment banks are revising their forecasts one by one: Kiwibank has joined ANZ Bank New Zealand and Westpac Banking Corp., which have previously removed negative rates from their forecasts as the country's V-shaped recovery gathers momentum.

The New Zealand dollar is up more than a quarter of a percent on this news.

The data, delayed by two days due to the Martin Luther King holiday on Monday and the US presidential inauguration on Wednesday, did not meet analysts' expectations.

According to weekly data, crude oil reserves rose by more than 4 million barrels, breaking a five-week series of declines. This inventory level is about 9% higher than the five-year average at the same time of year.

The growth of oil reserves in the United States provoked a correction in the price of black gold. West Texas Intermediate (WTI) fell about 1.4%, while the North Sea benchmark Brent fell 1.1%.

Closely monitor the news background and be prepared for all the surprises of the market.


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