Chinese Yuan Breaks Pivotal 7.3 Level: Jan. 3, 2025

The dichotomy of fortunes is back on display today with US stocks recovering from yesterday’s bearish reversal while Chinese equities falter further. America’s exceptionalism is also exhibited in rates and currency markets, with the Chinese yuan depreciating past the critical 7.3 level against the greenback and the nation’s 10-year government bond trading beneath 1.6%, its lightest level in history. Meanwhile, manufacturing conditions are stabilizing stateside, with new orders and production momentum gaining while backlogs contract. The goods-producing sector is set to recover back into expansion territory once the Trump administration sets up shop in Washington, but the possibility of a vacant House Speakership is rising, with Mike Johnson (R-LA) facing an increasingly narrow path to reelection. Continued discords may delay important developments from Capitol Hill, including the certification of President Trump’s victory last November.

Dichotomy of Fortunes

A widening gap of economic prospects between Washington and Beijing is leading to bifurcated performance across equity, fixed-income and currency markets. Indeed, stock market buoyancy stateside is being met with caution in the Far East powerhouse. Similarly, stronger growth expectations have lifted yields in the world’s largest economy, while sluggish activity projections have submerged them in the world’s second-largest economy. Finally, even the government and central bank’s efforts to bolster the Chinese economy have failed so far, with the Chinese yuan depreciating past the pivotal 7.3 level against the greenback. 

US Manufacturing Downturn Eases

The manufacturing sector contracted for the ninth consecutive month in December, but the pace of the decline continued to moderate, according to the Institute for Supply Management’s (ISM) Purchasing Managers’ Index. Nevertheless, it was the 25th contraction out of the past 26 months. December’s ISM of 49.3 was better than the 48 forecasted by analysts and up from 48.4 in the preceding month but below the contraction/expansion threshold of 50. Last month, the metric strengthened from 46.5 in October. December’s headline result was dragged down by the employment index sinking from 48 to 45.3, with survey respondents’ companies continuing to reduce headcounts through layoffs, attrition and hiring freezes. Analysts anticipated little change from November. Conversely, the new orders gauge climbed from 50.4 to 52.5 and the prices benchmark hit 52.5 compared to 50.3 in the prior period and the forecast of 51.7.

Washington Faces Another Cliffhanger

After narrowly averting a government shutdown last month, another cliffhanger is stewing in Washington, D.C., today amidst uncertainty concerning the House Speaker. This afternoon’s vote to reelect Mike Johnson’s (R-La) as Speaker of the House is expected to be narrow, considering the GOP has a razor thin majority in the lower chamber. The composition of 219 Republicans and 215 Democrats in the House offers Johnson a slim path, considering he needs nearly the full backing of his party to reclaim the gavel with a simple majority of 218 votes while Democrats are expected to cast votes for Hakeem Jeffries (D-NY). Furthermore, GOP house member Thomas Massie has already said he’s a no vote and some Republicans who are upset with Johnson because he worked with Democrats to pass a continuing resolution last month to avoid a government shutdown may also oppose his bid for the gavel. A vacant speakership impedes swearing in new members, enacting a rules package and certifying President Trump’s victory in the 2024 election.

Singapore Shoppers Tighten Purse Strings

Singapore’s four-month streak of increasing retail sales ended last month, with consumers spending 0.7% less year over year (y/y) compared to the 2.4% growth rate in October. On a month over month basis, (m/m) sales contracted 2.8% after climbing 0.3% in the preceding period. For the y/y result, sales plunged 1.4% when excluding automobiles. Among categories, computer and telecommunications collapsed 11% and apparel and footwear dropped 3.8%. Mini-marts and convenience store cashier activity was down 8.6%. Food and beverages, however, bucked the trending, with spending up 3.9%, matching the result for October.

Equities Stage Relief Rally

US markets are tilted to the upside as stocks benefit from a relief rally while the greenback and Treasurys hover near their respective flatlines. All major, domestic equity benchmarks are gaining with the Nasdaq 100, Russell 2000, S&P 500 and Dow Jones Industrial indices up by 0.9%, 0.7%, 0.7% and 0.4%. Sectoral breadth is positive with all eleven segments pointing north and led by utilities, technology and real estate; they’re advancing by 1.3%, 1% and 0.8%. Treasurys and the greenback are nearly unchanged with the 2- and 10-year maturities changing hands at 4.25% and 4.57% while the Dollar Index trades at 109.13. The US currency is appreciating relative to the yuan and Canadian tender but is depreciating versus the euro, pound sterling, franc, yen and its Aussie counterpart. Commodities are mostly higher with crude oil, silver, copper and lumber up 0.9%, 0.8%, 0.8% and 0.1%, but gold is down 0.6%. WTI is trading at $73.74 per barrel, near a three-month high, on the back of colder weather and dwindling inventories stateside.

Investors Brace for a Busy Week

IBKR ForecastTraders and investors alike are looking forward to next week, which will be the first in three that isn’t shortened by holidays. The focus won’t just be on Capitol Hill developments and Beijing-Washington relations considering that the economic calendar is jam-packed with the following US schedule:

• Monday: Factory orders
• Tuesday: ISM-services and job openings
• Wednesday: ADP employment
• Thursday: small business optimism, challenger job cuts and unemployment claims
• Friday: the big Friday jobs report, which will be followed by consumer sentiment

Other significant releases from global peers include EU inflation and retail sales, Chinese inflation and lending, and Canadian building permits and jobs. The backdrop will also include plenty of Fed speak, which may tilt expectations for monetary policy, as well as updates from Washington, which can generate Trump bumps in markets despite the GOP’s proposed policies benefitting both corporate America and Main Street in the general sense. Finally, hedging economic indicator releases has become much easier following the launch of the IBKR ForecastTrader.

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