European markets underwent another lacklustre session yesterday drifting into the red after US CPI followed the PPI numbers earlier in the week, coming in a little bit hotter than expected, pushing yields sharply higher.
US markets also finished the day lower for the same reason as uncertainty about the extent of further rate hikes resurfaced and markets started to price in the prospect of another rate hike at the next Fed meeting in 3-weeks’ time.
Yields had started to retreat this week, partly due to some haven buying due to the shocking events in Israel over the weekend, but also due to several Fed officials saying that US rate policy could be restrictive enough already and that rates may not need to rise much further.
At the moment we appear to be in no-man's land when it comes to the prospect of further rate hikes with a still resilient US economy, and rate policy that is struggling to return inflation to target.
The reality is that the path to 2% may take much longer to achieve than originally thought and markets are slowly starting to realise the direction of travel may well not be in a straight line.
This uncertainty has been borne out by this morning’s Chinese inflation and trade data for September, which once again showed that the Chinese economy continues to struggle.
Earlier this week there were reports that the Chinese government was about to embark on a $137bn stimulus package which helped give markets a bit of a lift, followed by reports yesterday that the Chinese sovereign wealth fund has been buying shares in some of the country’s largest banks appeared to show that Chinese authorities were trying to boost confidence in the financial sector.
The Chinese economy could certainly do with some help if today’s September economic numbers are any guide.
In recent months there has been little indication that the Chinese economy is close to achieving a significant pick-up in economic activity. The sharp slowdown in the recent Caixin manufacturing and services PMIs appears to suggest that confidence remains low, and that the modest improvement seen in August may well have been a one-off. Imports have fallen for every month this year highlighting the challenges facing the Chinese government in stimulating domestic demand.
With the woes in its property sector far from resolved, and youth unemployment well above 20% there appears to be little sign that will see an economic pickup any time soon. Not only has domestic demand been weak, but global demand for Chinese goods has slowed sharply since April with declines in exports every month since then.
This weakness has been reflected in price pressures in the Chinese economy with the economy slipping into deflation in July, although we have seen a modest uptick in headline CPI since then to 0%.
This morning’s CPI inflation numbers for September slipped back to 0% from 0.1%, while PPI came in at -2.5%, a modest uptick from -3%
On trade exports for September declined by -6.2%, a modest improvement from -8.8%, while imports declined -6.2%, again a modest improvement on the -7.3% seen in August.
European markets look set to open lower on the back of this morning’s weak Asia session and disappointing Chinese economic data.
EUR/USD – failed at trend line resistance from the July highs at 1.0640, yesterday, drifting back towards the lows of the week. A break of 1.0650 targets the 1.0740 area. The main support remains at last week’s lows at 1.0450, as well as the 1.0400 area which is 50% retracement of the 0.9535/1.1275 up move.
GBP/USD – failed at the 1.2340 area drifting back sharply, undermining the potential for a move to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.
EUR/GBP – rebounded off trend line support from the August lows, now at 0.8615 and which is currently intersecting just above at the 50 and 200-day SMA. Resistance at the 200-day SMA at 0.8720 area.
USD/JPY – looks set for a retest of the highs last week at 150.16, with a break of 150.30 targeting a move towards 152.20. Below 147 30 signals the top is in and a possible move towards 145.00.
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