8 June, 2016
At the beginning of this year concerns rose that the Chinese economy was starting to slow quite sharply as Chinese authorities sharply revalued the yuan in an attempt to make their exports more competitive and in the process prompting concern about a sharp deflationary shock to the rest of the global economy.
While these concerns have abated somewhat there was always the counter narrative that the US economy appeared to be ticking along nicely in a manner that prompted the US Federal Reserve to push rates up by 25 basis points at the end of last year.
Since then the picture has become somewhat cloudier with the US economy posting a disappointing Q1,and while historically that hasn’t normally been seen as a problem the data so far for Q2 points to rising evidence of a similarly lacklustre quarter, which is raising concern given that over the past few years Q2 has generally been a fairly strong quarter for the US economy.
This doesn’t appear to be the case this time if recent economic data is any guide, and the sharp slowdown in hiring in last week’s payrolls data has reinforced those concerns.
With recent Chinese data also showing signs of weakness after a decent end to Q1, there is a worry that both the US and Chinese economies are hitting a soft patch in Q2 at a time when central bank arsenals are starting to look a little depleted.
Recent Chinese PMI data for May would appear to suggest that the post March dip seen in the April numbers didn’t translate into a rebound. In fact the May data showed continued weakness in both manufacturing and services.
The April trade data reinforced this economic weakness just over a month ago as both imports and exports declined, and this looks to have continued in May. Chinese exports declined again in May, this time by 4.1%, much worse than the 1.8% decline in April, while imports also fell by 0.4%. That was an improvement on the 10.8% decline in April but nonetheless doesn’t paint an encouraging picture in terms of domestic consumption.
With both the US and Chinese economies showing signs of faltering the recent US dollar weakness that has been driving commodity prices higher could soon find itself running into an even longer extended demand deficit.
This slowdown in the world’s two largest economies is part of the reason why the World Bank sharply downgraded its global growth forecast for 2016 yesterday from 2.9% to 2.4%, while also slashing its forecast for the US from 2.7% to 1.8%, though it did leave its China forecast unchanged at 6.7%.
The report went on to add that the risks to its forecasts were heavily tilted to the downside, with uncertainty in Brazil, the UK referendum and a premature US rate rise top of its risk list.
In the UK the latest manufacturing and industrial production data looks set to point to a stagnating manufacturing sector at best. The recent manufacturing PMI data pointed to a contraction in April so if the ONS data points to no change in April that at least would be a slight improvement, particularly given how manufacturing globally is struggling right now.
Equity markets have managed to remain fairly resilient thus far in the wake of these concerns, with the S&P500 within 1% of its all-time highs posted just over a year ago, as investor’s price in the prospect of a weaker US dollar on the back of a looser US central bank.
At the beginning of this year investors were having to contend with the potential of at least 4 rate rises, a number which now looks highly unlikely and where even the possibility of two is looking increasingly remote.
EURUSD – while above the 200 day MA at 1.1100, and trend line support from the December lows the bias remains for a move back towards the 1.1400 level and towards 1.1600.
GBPUSD – yesterday’s move up to 1.4660 appears to be keeping the volatility fairy happy which means that we continue to remain stuck in the broader range between resistance at 1.4700 and the recent May lows at 1.4330. Unsurprisingly there is a reluctance to push it strongly one way or the other.
EURGBP – the euro managed to poke its head above the 0.7900 level briefly this week before slipping back towards 0.7760. The big resistance remains at the May highs and 200 week MA at 0.7930. A fall back below 0.7720 retargets the 0.7640 area.
USDJPY – the US dollar has managed to find some support at the 106.30 area but really needs to push back through the 108.50 area to stabilise, otherwise it remains looks vulnerable to a retest of the 105.50 lows.
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