China Manufacturing Activities Remain in Contraction

Although risk appetite was lifted by BOJ's negative rate decision late last week, the boost appears short-lived as market optimism has been dampened by disappointing China data. The official manufacturing PMI dropped -0.2 point to 49.4 in January. This came in worse than expectations of 49.6. The non-manufacturing index added +0.1 point to 53.5 during the month. Related survey conducted by Caixin/Markit suggested that China's manufacturing PMI rose +0.2 point to 48.4 last month. While this has exceeded market expectations of 48, the reading indicated that the country's manufacturing activities remained in contraction. According to Caixin/Markit, sub-indexes "show a softer fall in new orders, which contributed the most to the improvement in the overall figure. Recent macroeconomic indicators show the economy is still in the process of bottoming out and efforts to trim excess capacity are just starting to show results. The pressure on economic growth remains intense in light of continued global volatility. The government needs to watch economic trends closely and proactively make fine adjustments to prevent a hard landing. It also needs to push ahead with existing reform measures to strengthen market confidence and to signal its intentions clearly".

For the week ahead, the focus would on RBA meeting, BOE meeting and US December payroll report. For the former, policymakers are almost certain to maintain the cash rate unchanged at 2%. On the global economic assessment, the RBA would likely reiterate its concerns over Chinese economic slowdown as well as ongoing weakness in oil prices. Recent changes in other central banks' stance might also be indicated. For instance, it might shed some light on BOJ's adoption of negative interest rates and ECB's indication on further easing in as soon as March. These events might diminish the chance of Fed's rate hike this quarter. Domestically, RBA would acknowledge the encouraging improvement in the employment market but continue to warn of weak inflation. BOE Policymaker would likely continue to vote 8-1 to keep the Bank rate at 0.5% with only Ian McCafferty dissenting give his view that inflation might overshoot the 2% target in the medium-term. Last week, BOE Governor Mark Carney noted that the conditions for an interest rate rise were not in place yet. This month's BOE meeting coincided with the release of the quarterly inflation report. In the US, the number of non-farm payrolls probably increased +192K in January, down from a +292K addition in the prior month. The unemployment rate should have stayed unchanged at 5%.

Commitments of Traders:

With the exception of gasoline, speculators were bullish over the energy complex in the week ended January 26. Net LENGTH for crude oil futures jumped +26 338 contracts from a week ago to 205 710 while net LENGTH for gasoline dropped -657 contracts to 75 129. Heating oil drifted back to net LENGTH of 4 635 contracts while net SHORT for natural gas declined -2 347 contracts to 177 067.

With the exception of palladium, speculators were mixed over the precious metal complex last week. Net LENGTH for gold futures rose +15 346 contracts to 59 040 while that for silver futures added +8 628 contracts to 37 586. For PGMs, net LENGTH for platinum increased +1 217 contracts to 21 500 while that for palladium dropped -1 023 contracts to 4 055.