Rumors China will boost its deficit spending

February 25, 2016

Rumors China will boost its deficit spending for an additional 1% in GDP saw oil and equity prices surge higher, to the detriment of Treasuries. The S&P bounced back into the green after a better than 1% decline earlier and closed up by 0.44%, while WTI crude closed higher and is now trading near $32.00 again.

BoC Schembri: A resilient financial system could withstand a housing shock. He noted that public authorities have “taken appropriate measures to mitigate it.” And the vulnerability should stabilize as the economy improves, household incomes rise and interest rates normalize. He noted that the vulnerability associated with elevated household debt has been on the rise over the past decade. That debt has become more concentrated in highly leveraged households. Hence, the bank’s assessment hinges on both the magnitude of that debt and its distribution. Overall, there is nothing really new here, as the BoC continues to express confidence in the stability of the financial system and for a gradual, orderly resolution to currently elevated levels of household debt. In other words, based on their outlook, household debt is not going to hamper their ability to keep rates at currently lean levels for an extended period or to cut rates.

US New home sales fell 9.2% in January to a 494k rate from a 544k clip in December. February last year set a new high back to February ’08 and compares to a low of 270k in Feb. ’11. The headline was weaker than the median forecast of 520k. Sales climbed in the Northeast (3.4%) and South (1.8%), but fell in the Midwest (-5.9%) and West (-32.1%). The median sales price fell 4.5% to $278,800 from $295,800 (was $288,900).

US Markit services PMI fell 3.4 points to 49.8 in the flash February print, after dipping to 53.2 in January from 54.3 in December. Indeed, the index has been slipping since hitting 56.1 in November. This is the lowest reading since October 2013 while it was 57.1 a year ago. The employment component dipped to 54.2 from 54.3. The flash composite index slid to 50.1 in February from January’s 53.2, and is also the weakest print since October 2013. The headline drop into contractionary territory is bad news for the services sector, which has been a stalwart for the health of the overall economy and will exacerbate the erosion in equities and risk-off trades today.

Main Macro Events Today

UK GDP: YoY fourth quarter Gross Domestic Product from is out today. This is the second release and no change is expected from the previously published 1.9% number.

Eurozone CPI: no change is expected on today’s January YoY Consumer Price Index release from 0.4% change in December.

US January durable goods orders: expected to grow 2.0%. Shipments expected at 0.5%. Inventories expected to grow 0.1%. I/S ratio expected at 1.68, steady from December. Forecast risk: downward, as there was a decrease in Boeing orders in January.

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