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China GDP bounces back, as Asia markets drift

China's economy roars back

A 9.8% surge in US retail sales in March, and a post-pandemic low of 576,000 in weekly jobless claims, propelled US markets to fresh record highs yesterday, while at the same time bond markets saw yields fall sharply, with the US 10-year sliding over 7bps to a one-month low. Markets in Europe also got caught up in the exuberance with the EurStoxx 50, and the Stoxx 600 posting new record highs.

The slide in yields was particularly puzzling given that for the past three months yields have been rising due to concerns about higher prices and a strong economic recovery, both of which we are currently seeing. That can only mean one of two things, either that the recovery is in the price, or that markets think this could be as good as it gets. The latter point doesn’t seem all that likely from a data point of view, given that the April non-farm payrolls could well be even stronger than March’s 916,000, in which case what we are seeing here is a temporary leg lower before yields start rising again. Of course, there could have been a third reason and it’s no more complicated than the market was already positioned for such an outcome and thus had nowhere else to go but in the opposite direction, a classic case of buy the rumour and sell the fact. Time will tell whether that assumption is correct, but for now the US dollar continues to look a little on the soft side.

Markets in Asia appear to be ending the week on a largely positive note with the main focus on this morning’s Q1 China GDP numbers, which showed the economy expanded by 18.3% year on year, and 0.6% on a quarterly basis. These are fairly decent numbers; however, they need to be put into the context of the contraction in the Chinese economy a year ago when the country was locked down through February, and March. Despite this caveat it is still an impressive performance, with the Chinese consumer looking particularly strong. This looks set to translate into a positive European open, with all eyes on the FTSE 100 and whether it can crack above the 7,000 level.

There was some consternation earlier this year when Chinese authorities set out their 2021 GDP target at around 6%, with some arguing that it was a little too optimistic. If anything given the challenges faced by the global economy, relative to China’s strong rebound, one could argue it’s a little on the conservative side, especially in view of the strength of some of the recent data so far this year, and the absence of a second wave in China.

Retail sales have finally started to show signs of gaining traction, with Monday’s March trade numbers showing that internal demand was picking up. We’ve already seen from the January and February numbers that there has been a slow and steady recovery in sentiment in what has been a cautious recovery for Chinese consumers.

Today’s March retail sales showed an increase of 34.2% year on year; well above expectations, however, it needs to be remembered that a year ago the same numbers fell -15.7% in the aftermath of the February lockdown of the entire economy. As a result, this morning’s numbers have shown an enormous skew. Even so they are still pretty decent. Industrial production was also strong for the same reason, rising 14.1%. The only other data of note today is the final EU CPI numbers for March which are expected to show that headline inflation jumped to 1.3%, while core prices remained steady at 0.9%.

EUR/USD – continues to look supported above the 1.1930 area, and while above the risk is for a move through 1.2000, and possible even higher towards 1.2150. Below 1.1930 opens up the 1.1860 area and the lows this week.

GBP/USD – four days of gains this week but while below the 1.3830 area the risk remains for a move back to the recent lows at 1.3670. We need to move through the 1.3830 area to signal the potential for a base and a move back towards 1.4000.

EUR/GBP – while below the 0.8730 area the bias remains towards the downside. We still have decent support above the 0.8620 area. A move below 0.8620 and the 0.8600 area retargets 0.8540.   

USD/JPY – has continued to slide back, honing in on the 108.20 level, with the potential for further weakness on a break below 108.00. As long as we hold above 108.20 the uptrend from the January lows remains intact.

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