China's credit impulse may signal end of USD weakening

Important implications for other assets as well

Chart of the Day

China’s credit impulse, which essentially plots new credit relative to GDP, appears to have peaked, as it dropped back in December. This could be a sign that many of the most profitable trades from the past six months are coming to an end. For example, when the credit impulse turns down, the US Dollar Index normally strengthens (the right-hand axis above is inverted), in contrast to its recent weakening trend. Similarly, commodity price growth normally stalls, and global GDP growth generally slows as well. That said, since GDP is still so depressed in many economies due to the pandemic, it’s feasible the effect of slower credit growth in China will be more than offset by growth rebounds elsewhere this year.

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In the US, inflation picked up in December, mainly due to higher energy inflation.

The ISM surveys point to much higher inflation to come - this isn’t a big secret, because the steep falls in prices last year will push up inflation mechanically this spring. But it would still raise eyebrows if inflation rose above 3% as this chart suggests.

The small rise in mortgage rates last week appears to have prompted those who have not yet refinanced to try to do so quickly, with applications jumping by 20% in just a week.

In the eurozone, industrial production continued to recover in November and is now only 0.7% lower than a year ago.


After one-way traffic in H2 2020, yield differentials have moved back in favor of the US so far this year, which could also be a sign the appreciation of the CNY versus the USD has run its course.

That said, US yields have been declining again in the past few days. The 10-year even fell 8 bp in Italy yesterday, despite a renewed political crisis as one of the ruling parties withdrew from the government.

The copper/gold ratio has also edged down, though the gap between that ratio and bond yields remains wide.

Surging commodity prices are putting upward pressure on the Baltic Dry Index, a measure of shipping rates - this specific index reflects ships that carry certain raw materials. Freight rates for ships carrying containers into the US have surged by even more.

Despite higher oil prices, the EIA energy report showed production remained depressed at the start of 2021.

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