Overnight China posted the latest CPI report, and the reading came in at 2.3%. Economists were expecting 2.2%, compared with 2.1% in July.
The PPI report was 4.1%, and the consensus estimate was 4%. We should keep in mind the July reading was 4.6%. The jump in CPI is encouraging to see as it suggests demand is rising, but the slide in PPI could be an indicator that CPI will cool in the months to come as weaker producer prices might get passed on to the consumer.
We also heard from Japan overnight, and in the second-quarter the economy grew by 3% on an annual basis - dealers were expecting a reading of 2.6%. The solid growth report prompted buying of Japanese equities.
China stocks were lower overnight as the trade concerns hang over the markets, and the data that was released over the weekend only puts further strain on the trading relationship between Beijing and Washington DC. It was revealed that China’s trade surplus with the US grew to a record level in July – this will add weight to President Trump’s argument that there is a trading imbalance between the two nations. In Mr Trump’s eye, China is taking advantage of the US, and it is up to him to redress the situation.
There is increased speculation we could see the US imposing tariffs on $200 billion worth of Chinese goods, and there might be another $267 billion lined up too. The trade numbers from Beijing are likely to have struck a nerve with Mr Trump, and given that he thinks the US are winning the trade spat on account of the recent weakness in the Chinese stock market, he is likely to stick to his protectionist line. Beijing said they would retaliate should the US impose fresh tariffs, and traders are fearful they might weaken the yuan or target US firms operating in China.
Tim Cook, the CEO of Apple, warned President Trump that if he continues down the route of protectionism, it could hurt the company’s profits. The tech sector has been the standout performer of the US market this year, but it has come under pressure recently on account of the update last week from Washington DC that tighter regulation would be required for the industry, and in particular social media stocks like Facebook and Twitter.
Despite the heightened the trade tensions, the US economy still managed to produce solid economic indicators last week. The ISM manufacturing report hit a 14-year high and the ISM non-manufacturing report was healthy too. The August non-farm payrolls report showed that 201,000 jobs were added, and the unemployment rate held steady at 3.9%.The most impressive component of the report was the average earnings, which ticked up to 2.9% on an annual basis.
The Federal Reserve have hiked rates twice this year, and there is increased speculation we could see two more rate hikes in 2018. That pushed the US dollar higher on Friday and that in turn will make matters worse for struggling emerging market (EM) economies. Turkey and Argentina are at the forefront of the EM crisis, the Indian Rupee posted record lows recently and the South African economy just entered recession. The greenback hit a 14-month high last month and, should we see the market look to retest those highs, we could see a further unravelling of EM currencies.
The pound will remain in focus this week as uncertainty hangs over Brexit. At the back end of last week there was a sense of optimism as the EU’s Michel Barnier is said to have softened his stance in relation to the Irish border and traders took this as a sign that a deal is more likely to be reached. Boris Johnson issued a scathing attack on Prime Minister May’s ‘Chequers plan’, and the Conservative in-fighting could be problematic for the negotiations. At 9.30am (UK time), the UK will release a string of economic indicators: monthly GDP; construction output; manufacturing output and industrial output.
Politics on the Continent are also enduring tough times. The Sweden Democrats (SD) are tipped to increase their share of the vote in the general election. The SD ran on a stricter immigration policy and want Sweden to leave the EU. The election is unlikely to rock the financial markets, but growing euroscepticism can’t be ignored.
Giovanni Tria, Italy’s economy minister, predicts that the nation’s borrowing costs will dip once the government starts to implement policies that are aimed at boosting economic growth. Some of the government’s more radical policies will be held back for some time as a way to avoid rocking the boat. Given the size of Italy’s national debt, the administration in Rome can’t afford a sudden spike in bond yields.
EUR/USD – despite the decent bounce back between mid and late August, the market remains in the wider downward trend that began in April, and while it stays below the 1.1750 level, its outlook could remain bearish. 1.1510 might act as support and a break below that mark could bring 1.1300 into play. If 1.1750 is cleared, 1.1850 could be targeted.
GBP/USD – has been in a downtrend since April, and if the bearish move continues it could target 1.2590. A move higher might run into resistance in the 1.3000 region – 50-day moving average. A break above the 1.3000 area, could bring 1.3222 – 100-day moving average into play.
EUR/GBP – the key week and day reversal that we saw in late August could point to further losses and support might come into play at 0.8900 or 0.8832 – 200-day moving average. If the wider uptrend continues it could target 0.9100 or 0.9160.
USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 112.15. Support might be found at 109.79 – the 200-day moving average.
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