From economic perspective, December NBS PMI remained at a robust level. The production index dropped slightly but remained at the second highest level of the year, new order index hit one year high, inventory level stayed low, employment and distribution indicators edged down. Production price continued to rise and inventory replenishment cycle continued under the influence of steady demand and shrinking supply.
Looking at the December medium data, real estate sales declined, other indicators were relatively stable, but the price of the producer continued to rise sharply. In November, major economic data was in line with expectation. Value added of Industry increased 6.2% YoY. Fixed asset investments increased 8.3% YoY, among which, real estate investments growth slid slightly to 5.7%, infrastructure investments increased 13.7%, growth rate for manufacturing investments rebounded to 8.4%, social consumer goods retail sales increased 10.8% YoY. November real estate sales area increased 8% YoY, new construction area increased 3% YoY, and land space purchased increased 6% YoY, real estate data slid slightly. November M2 increased 11.4% YoY, new RMB loan totaled RMB 0.79 trillion and new social financing totaled RMB 1.74 trillion, better than expectation.
Inflation was in line with expectation in November as CPI increased 2.3% YoY.
Policy wise, Fed hiked interest rates in December as expected but delivered a slight shock to the market with projection of three more moves in 2017, as opposed to previous indication of two. Fed Chair Janet Yellen didn’t stand firm on the dovish stance and reduced the support for the "high-pressure" economy. Dollar index rose sharply in this month, and the central parity rate of RMB against the U.S. dollar fell to its lowest level in more than 8 years. PBoC didn’t have any rate cuts, and guidance rate for 7-day reverse repo remained unchanged at 2.25%, 14-day reverse repo remained unchanged at 2.40% and 28-day reverse repo remained unchanged at 2.55%. Throughout the month, we have seen increasing interest rate with interbank overnight and 7-day repo rate weighted average at 2.31% and 3.03% respectively.
As for the bond market, 10-year CDB and 10-year Treasury bond yield increased 39bps and 6bps respectively for the month. CDB short-term yield climbed faster than long-term yield and the yield curve flattened. In this month, 3-5 year credit bonds underperformed CDB bond of the same duration; LGFV bonds underperformed medium-term notes; AAA rated names performed better than AA rated names.
From the portfolio management perspective, the portfolio position remained mostly the same and we kept the duration of the fund unchanged.
Looking into January, RMB depreciation pressure is expected to mount substantially and together with the pressure from the funding constrains before the Spring Festival, the short-term liquidity will remain tense. In addition to RMB depreciation pressure, the control of asset bubble, control of financial leverage and rising inflation level will also restrict the flexibility of monetary policy. Monetary policy is expected to be tight, and we do not expect to see cut on interest rate or bank required reserve ratio. Fiscal policy is to support the demand, instead of as a strong stimulus. Inflation side, December CPI may fluctuate around 2.2%.
Rates bond side, short-term economic indicators are stable, inflation is strong and inflation expectation rises. At the same time, Fed hiked interest rates in December and had a more hawkish tone. RMB depreciation pressure will further increase and together with the pressure from the funding constrains before the Spring Festival, the short-term liquidity will remain tense. In the medium term, overseas markets still have great uncertainty and the implementation of Trump’s proposed policies may again affect global risk preference and reflation expectations. For next year's economic fundamentals, the contribution from real estate to the economy may be weaker, and economic may mainly rely on the infrastructure, with its intensity dependent on the level of financial expenditure. On the whole, there is still downward pressure on the economic growth next year but the picking up of nominal growth rate is negative to the bond market. Our suggestion now is to pay close attention to economic fundamentals and RMB exchange rate and watch closely before any operation. Credit bonds side, credit spreads rebound but are still at historic lows even after previous correction and the relative value is still not enough. Monetary policy is essentially tense and the funding rate may remain high in the short run, which is bad for the credit bonds. Our recommendation is to wait patiently for a better investment opportunity for credit bonds at this moment. In addition, credit events occurred rather frequently recently, we should pay attention to credit risk by following more closely on our portfolio holdings.
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