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Europe set to open unchanged, China exports surge

containers at a port

Friday’s US payrolls report was the best of all worlds for equity markets not too hot and not too cold, with the Federal Reserve set to start the tapering of its $120b a month asset purchase program later this month.

531k new jobs were added to the US labour market in October, while we also saw a decent upgrade to September from 194k to 312k, sending the S&P500 briefly trading north of the 4,700 level, and a new record high, with more record highs for the Dow, Nasdaq and Russell 2000.

The unemployment rate fell to 4.6%, from 4.8% while the participation rate remained unchanged at 61.6%. By any measure these numbers are positive and with wages also rising, jobs growth as we head into year-end should accelerate. This already appears to be being borne out in the continuing claims numbers which are only 400k above where they were pre-pandemic.

While inflation remains a clear and present concern, bond yields fell across the board last week with 2-year yields posting their biggest weekly decline in over a year, while 10-year yields fell back for the second week in a row.

Last week's push back by the RBA, Federal Reserve and Bank of England on the prospect of an imminent increase in interest rates also served to prompt a sharp rebound in bond prices, and a slide in yields. Of course, with the latest US CPI numbers set to come in at their highest levels since 1990 later this week, there are plenty of reasons to be concerned that central banks are being way too complacent that the various problems being experienced around the world in terms of surging energy prices and supply chain disruptions might become more persistent in terms of pushing up prices.

In some respects, the word “transitory” has almost become meaningless, with central bankers assigning different interpretations to it relative to the incoming data.

This week’s main focus will still be on the risks that rising prices may do to the recovery as we head into year end with the latest US PPI and CPI numbers for October set to show further increases, on Tuesday and Wednesday.

Asia markets have got the week off to a quiet start this week, with the latest China trade data for October giving a mixed insight into the world’s second biggest economy.

The last couple of months have proved to be fairly resilient ones for China trade, despite disruption at Chinese ports, and the various lockdown restrictions that had affected a lot of the country over the course of Q3. Recent weakness in retail sales numbers has shown that demand in the Chinese economy has been slowing in recent months, although exports growth has been robust.

A lot of the improvements in the numbers have been as a direct consequence of the disruptions to global supply chains as retailers bring forward their pre-Christmas order spend in order to ensure delivery in time for the Thanksgiving, Black Friday, and Christmas periods.

In September Chinese exports rose by 28.1%, a three month high and well above expectations of 21.5%. This trend continued last month, with exports rising 27.1% once again well in excess of expectations of 22.8%.

While imports, slowed in September, almost halving from the September levels of 33.1% to 17.6%, largely due to the various power cuts and production shutdowns of China’s heavy industries during that month, we’ve seen a modest recovery to 20.6% in October, helped by strong coal imports, although not by as much as was expected.

The main recovery in exports has been in the area of machines and electrical goods, and with slowing domestic demand, due to China’s insistence on a zero Covid policy, it’s welcome news that demand in the US and Europe has remained resilient, keeping Chinese factories humming along nicely.  

EUR/USD – slid back towards the 1.1500 area last week, making a marginal new low, but was unable to break below it. A break below 1.1500 targets the 1.1400 level. A move through 1.1630 retargets the 50-day MA at 1.1680.

GBP/USD – fell back towards the September lows at 1.3410 but was unable to break below them. A break below 1.3400 is needed to signal a move towards 1.3160. We need to see a push back above 1.3600 to stabilise and reopen a test of the 1 3720 area.  

EUR/GBP – unable to push above the 200-day MA last week, running out of steam just below 0.8600, and slipped back with support back at the 0.8520 area. A break below 0.8520 opens up the 0.8470 area.   

USD/JPY – continues to range trade with resistance at the November 2017 peaks at 114.75, a break of which opens the 116.00 area. The 113.20 area remains key support, followed by the 112.40 area. 

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