Chinese trade volumes record high, market awaits inflation data

Chinese trade surplus shrank from 27,1 bln USD in Oct. to 22,9 bln USD in November but nevertheless  exceeded market expectations by 0,9 bln USD. The 6-months average rose to the highest level since April’09. More importantly, volumes of both exports and imports were the highest on record, confirming a solid pace of the Chinese expansion.

The trade balance figures were only an introduction to the much more anticipated package including inflation. Accelerating inflation is obviously a concern as it begs for a tighter monetary policy which in turn creates risks for what now seems to be a major engine of the global recovery. If inflation had indeed accelerated to 4,7% as expected, the monetary policy would have been far behind on the tightening schedule. An acceleration in tightening would be a major risk for bulls on commodities and a serious risk for equity markets as well. It should be dollar positive (not least because of the peg) but the implications for currency markets would be probably limited in scale and timing.

EURUSD – Fitch downgrades Ireland

Fitch rating agency slashed Irish rating to BBB+, 2 notches lower than the S&P’s A rating and 5 notched lower than Moody’s Aa2 rating. The move was generally anticipated and thus the reaction was limited. Moody’s agency will likely follow Fitch with a multi notch cut soon and this fact is priced in as well.

Focus on other regions (US labor market last week, Chinese inflation this week) offered Europe some breath and limited volatility on the EURUSD. The pair is still below the upper line of the declining channel so the technical picture remains unchanged. 

US labor market – claims offer optimistic picture

Initial claims fell to 421k last week, dragging the 4-weeks average to 427,5k – the lowest since the early August 2008. The data suggest the conditions on the labor market might be better than indicated by the recent payrolls report for November. There was only a minor reaction to the release but one needs to keep in mind that the US short term market rates already increased earlier in the week (we wrote about it yesterday).    

Events to watch – US data and Chinese package

While there is a couple of macro figures in the US today (trade balance at 8.30 ET, 14.30 CET, consensus -43,8 bln USD, UM index 9.55 ET, 15.55 CET, consensus 72,5 pts.), the focus has already shifted to China. The package including CPI (consensus 4,7%), PPI (5,2%), output (13%) and retail sales (18,8%) will be released at 9 PM ET (3.00 CET on Saturday). The data and a following policy action will determine the moods at the beginning of the next week..

Przemysław Kwiecień PhD, Chief Economist

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