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China data mixed ahead of UK unemployment

China data mixed

It was another lacklustre session for markets in Europe yesterday, with the FTSE 100 losing the most ground, as a fresh set of inflation figures generated further concern about the 'transitory' narrative, so beloved of central bankers.

While UK CPI came in above expectations, US PPI for June continued to break records coming in well above expectations at 7.3%, and it was only soothing words from Fed chair Jay Powell saying that the central bank remains a long way from seeing “substantial progress” when thinking about altering monetary policy, that kept yields from moving higher. 

These nagging concerns about inflation, transitory or otherwise have continued to dominate sentiment, while worries over the pace and persistence of rising prices, appear to be tempering optimism over the wider global recovery story.

Markets in the US had a more positive session, with the S&P 500 hitting another record high, while the Nasdaq 100 rolled over after trying and failing to push above the 15,000 level. While bond markets by and large appear to be buying the transitory narrative European stock markets, while still within touching distance of their own recent highs remain stuck in a bit of a range.

Asia markets have been preoccupied today with the latest China Q2 GDP numbers, as well as June retail sales and industrial production data. Concerns have been rising about the nature of the economic recovery in China after the PBOC cut bank reserve requirement ratios last Friday, by 50bps. Earlier this year there was surprise that China’s estimates for 2021 GDP growth were set at around 6%, with some arguing it was too optimistic and others saying it was too conservative, particularly since there have been little signs of a second wave.

The jury remains out on how well the Chinese economy is actually doing, with retail sales showing signs of gaining traction, although all of this year’s economic numbers have to be set in the context of an enormous skew, due to the shock of the pandemic lockdowns a year ago. In Q1 the Chinese economy grew by an adjusted 0.4%, a number that is surprising in terms of the strength seen at the end of Q4 which showed growth of 3.2%. On an annualised basis this was still a decent rebound of 18.3%, however it needs to be set in the context of a -6.8% decline in Q1 2020.

Today’s Q2 GDP numbers were expected to see an expansion of 1%, but came in better at 1.3%, even if the quarterly number was slightly lower at 7.9% Y/Y. More encouragingly June retail sales rose by 12.1%, well above expectations of 10.9%, but only marginally  down from May’s 12.4% gain. Industrial production was also expected to come in lower, and did, down from 8.8%, but only fell to  8.3%, better than the 7.9% consensus. All told the numbers were slightly weaker than expected but certainly not as much as might have been expected given last weeks rate cut by the PBOC.

Asia market reaction has been mixed, with markets here in Europe set to open lower, as we look to the latest UK unemployment numbers. Yesterday saw UK CPI in June hit a three year high at 2.5%, raising concerns that the Bank of England was underestimating the inflationary impulses currently bubbling under the surface of the UK economy. Nonetheless, like the Federal Reserve in the US, the MPC appears to be in no hurry to scale back the amount of stimulus it is putting into the UK economy.

Despite this the pound has been slowly gaining ground against the euro, while treading water against the US dollar, with the rise in Delta variant cases seeing a a pause to the reopening process until next week. This shouldn’t be reflected in the latest ILO unemployment numbers for May which are expected to show the number of people on furlough continuing to reduce as the economy continues its reopening process. Today’s May numbers look set to see UK unemployment remain unchanged at 4.7%.

While UK unemployment has remained low, slipping back to 4.7%, having been as high as 5.1% back in December, it remains clear that the government furlough scheme is continuing to disguise the underlying effects of the pandemic. While this means the very real effects on the UK labour market won’t start to be seen until the end of this quarter as the furlough scheme continues to wind down, we are starting to come to the point when businesses will have to make a decision to keep their furloughed staff, or let them go. For now, the outlook continues to remain positive despite the one-month delay to a full reopening.

The monthly jobless claims numbers are also reflecting this improving trend, falling back to 6.2% in May, a sharp fall from the 7.2% we saw in March. This trend of lower claims may slow in June after the delay to reopening until next week, while the uncertain outlook for travel may mean that the travel and leisure sector may well call time on its remaining staff that still remain on furlough.

In light of this, and the uncertain outlook for hospitality when it comes to the rules for reopening next week, we could well be near the bottom when it comes to the recent falls in unemployment, with the lack of clear guidance around reopening safely potentially being the final straw for some struggling businesses. While next week’s reopening is welcome, the ambiguity around the new Covid rules or guidance may make it difficult for a lot of businesses to return to pre-pandemic levels of activity in the short- to medium-term, potentially meaning that unemployment may not have much further to fall. Wages in May are expected to rise to 7.1%, from 5.6% in April.

The Bank of England has already indicated that it expects unemployment to go higher, but not by as much as they thought in February when their projections were for a peak of 7.7%. This was adjusted lower at the last inflation report, to 5.2% for this year, and then down to 4.7% in the second quarter of 2022. US weekly jobless claims are also due out and are expected to continue to fall back from 373,000 last week to 350,000.

EUR/USD – rebounded from the 1.1770 level, however we need to see a move back above the 1.1880 level to signal a return to the 1.1975 area. A move below 1.1700 reopens the 1.1612 area.

GBP/USD – has found support at the 1.3800 area the past two days, with stronger support at last week’s low at 1.3730. Resistance remains at the 1.3920 level and the highs this week. Above 1.3920 retargets the 1.4000 area.   

EUR/GBP – appears to be in a short squeeze after failing to break below 0.8500 yesterday. We could head back towards the 0.8600 area. Nonetheless it doesn’t change the fact that the bias remains for a move towards the 0.8480 area.

USD/JPY – after three days of gains off last week’s lows at 109.53 the US dollar slipped back from the 110.70 level. Support remains back at daily cloud support now at 109.50. A break above 110.70 targets the 111.20 area.

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