China's credit impulse fell in November

Some expect monetary policy to be tightened next year

Chart of the Day

China’s credit impulse has surged this year, as officials opened the credit taps to help combat the hit from the pandemic. In November, however, the credit impulse dropped back for the first time since January. While only a small fall, many economists are predicting that credit is likely to expand at a slower pace going forward, as officials concentrate on tightening policy to limit the risks in the financial system now that GDP is back above its pre-virus level. That could limit future gains in global commodity markets, although it seems unlikely that the credit impulse will collapse.

Macro

German export and import growth both dropped back in October, as the second waves of the virus started to be felt. Both remain far below last year’s levels.

In the US, job opening and quit rates are essentially back to normal levels. That isn’t as surprising as it sounds, given that the remaining unemployment is heavily concentrated in certain service sectors like retail. Many sectors - like professional services, manufacturing - have escaped relatively unscathed.

The central banks of Canada and Brazil both left their policy rates unchanged yesterday, at 0.25% and 2.0% respectively. In inflation-adjusted terms, Brazil’s is much lower than Canada’s. We saw yesterday that inflation in China has dropped by 3%-points in the last three months, which has pushed up the real rate there to over 4%.

Markets

The EIA crude inventories report showed a surprise 15.2 million surge in oil inventories in the US, due to a big rise in net imports. An inventories build is highly unusual for this time of year.

Oil markets shrugged off the news, with WTI only edging down. Gasoline prices rose by 1.6%, despite a further fall in gasoline demand in the report, and a rise in inventories. In other words, traders are looking past this current bout of weakness.

Despite the ongoing fiscal talks, equity markets are beginning to show some signs of weakness, with the Nasdaq dropping by almost 2% and the S&P 500 1%.

The VVIX, or the volatility of the VIX index, suggests we could be in for some shaky times ahead. VVIX jumped sharply yesterday, suggesting VIX could soon follow.

Many traders are concerned about the risks from the large volume of call options outstanding. The previous spike in call volumes coincided with the June spike in the VIX shown above.

The better news perhaps is that real interest rates remain favorable. The 5- and 10-year TIPS yields ticked up yesterday but remain lower than for most of the past month, thereby supporting high-growth equities in particular.

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