While the August trade numbers for China were slightly better than expected, despite disruption at Chinese ports and the various lockdown restrictions that affected a lot of the country at the time, it’s still clear that demand in the Chinese economy has been slowing in recent months.
On the exports front we did see a pickup in demand from the July numbers of 19.3% to 25.6% in August, driven by a rise in demand out of the US and EU, which appeared to be driven by retailers bringing forward their pre-Christmas order spend over concerns about supply chain disruption. This trend appears to have continued in September with exports rising 28.1%, well above expectations of 21.5%
Imports proved to be more resilient in August rising 33.1%, however these numbers also need to be set in the context of base effects from a year ago. As we look back into September, and the various power cuts and production shutdowns of China’s heavy industries during the month we have seen a significant slowdown to 17.6%, which was well below expectations of 20.9%.
Yesterday UK unemployment fell back further in the three months to August to 4.5%, and while the labour market appears to be recovering, the economy as a whole does appear to be slowing a little in Q3.
Are we getting any closer to peak US CPI?
If energy prices are any guide, then the answer is no, and there is increasing nervousness amongst central bankers about this very notion. While a rise in food and energy prices isn’t reflected in the Fed's preferred measure of inflation, the PCE Deflator, it is still causing sleepless nights for most central bankers as they look at how they can dial back on their stimulus programs, at the same time as trying to keep their respective economies ticking over.
In August US CPI fell back from 5.4% in July to 5.3%, while core prices fell from 4.3% to 4%. No further changes are expected to either number, however given the continued resilience in energy prices, and the disruption caused by Hurricane Ida that may be more of a hope than an expectation.
Tonight’s Fed minutes should give us an insight into the FOMC’s thinking from the nature of its statement, which was neutral, and the contrast to Powell’s press conference, post decision, which was anything but.
In its statement the Fed stated that “if progress continues broadly as expected, the Committee judges a moderation in the pace of asset purchases may soon be warranted”. Nobody really expected this to mean November, but from the tone of Powell’s press conference later this appeared to be what the FOMC wanted us to think, despite there only being one payrolls report between now and the November meeting.
While a taper seems pretty much nailed on now, speculation has now shifted to the timing of the first interest rate increase.
This is especially important given that the number of FOMC members who saw the potential for a rate rise in 2022 increased from 7 in June, to 9, meaning the committee are evenly split, however that is likely to change if the data evolves as expected, which means that a rate hike for 2022 is likely to become a majority view by the end of this year, which is a big shift in thinking from earlier this year.
Since that meeting a lot of water has passed under the bridge, we’ve seen further sharp rises in the costs of energy, as well as further supply chain disruption feeding into headline inflation, and we’ve also seen a pretty disappointing payrolls report, that could influence thinking next month.
It is clear the Federal Reserve is much more concerned about higher levels of inflation than they were a few months ago, and this week’s minutes should give us an indication of how high this level of concern is. Bond markets aren’t waiting to find out with the yield curve steepening and short-term rates also rising sharply as well.
EURUSD – still looking soft with a move below 1.1520 opening the risk of a move towards 1.1450. Last week’s high at 1.1640/50 is resistance with 1.1760 behind that, and while below here the bias appears to suggest further weakness.
GBPUSD – interim support at 1.3540 holding for now with resistance at the 1.3670 area, with a break higher needed to signal a move towards 1.3750. below 1.3540 signals a move towards the 1.3400 area.
EURGBP – support currently at the 0.8470 area, with a break below targeting the August lows at 0.8450. We have resistance at the 0.8520 area, with a break above 0.8530 signalling a move back to 0.8570.
USDJPY – the 2018 peaks at 114.75 remain the next target, while above the 112.40 level. Back below 112.40 signals a return to the 110.00 level.
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