China PMI Wobbles Due To Lockdowns, PBoC Remains In Focus

China Manufacturing PMI Moderates

China’s official manufacturing for January moderated to 51.3 (cons: 51.6, December 51.9). The slower expansion in the manufacturing sector partially reflects the impact of the re-emergence of covid cases in some of China’s northern provinces and tighter containment measures.

Among the sub-indices, production dropped to 53.5 from 54.2, and new orders fell to 52.3 from 53.6. Employment also edged down to 48.2 from 49.6, with expectations of transportation and quarantine difficulties prompting some workers to return home a bit earlier than usual for the Chinese New Year holiday.

PBoC Policy Walk Back 

The People’s Bank of China denied reports last week that it would raise the standing lending facility rate. The reports came after the PBoC net injected liquidity into the banking system on Friday as repo rates surged. As of Friday, R007 (3.19%) was already fixed close to the 7d SLF rate (3.20%), which is widely considered to be the ceiling of China’s interest rate corridor. Moreover, the R001 fixing (4.15%) has already priced through the ceiling (overnight SLF rate currently stands at 3.05%).

Taking all of this together, and the Chinese New Year holiday approaching, I don’t think the PBoC has any intention of driving up borrowing costs further or causing more volatility in the money market. The central bank’s moves late last week suggest to me that it’s becoming cautious about the market’s overreaction to liquidity tightness. 

Silver Higher; Spot & Futures Partially Decoupled

closed at 27.00 on Friday and opened at 28.00/10 today. It then traded up to a handful of prints at 29.00. The futures market was so overwhelmed that it froze up a few times. The effort appears aimed at futures for delivery, resulting in exponentially higher EFPs (greater contango) with the market then countering by selling spot and buying futures to move deliveries out into the future. This is not dissimilar from the dislocation between gold spot and futures last spring. We are not there yet, but EFPs moved from 3/8 to 20/30 in the morning. Implied was closer to 30 during most of the move. This means that spot and futures have partially decoupled.

followed on the move higher like last week to around $1864, but was quickly driven back lower. EFPs for gold also ran up from 1.5/2.5 on Friday’s close to 4/6 at the time of the move

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