Chinese stocks edge up after new stimulus efforts

Chinese stocks were up on Monday after more details about stimulus efforts. The finance ministry pledged to “significantly increase” debt to boost the economy but declined to say by how much. China's CPI unexpectedly eased, and PPI moved further into deflationary territory. Beijing also announced a new round of war games near Taiwan, saying it was a warning to ‘separatist acts of Taiwan independence.  

Rip and tear – China stocks have stabilised a bit after the sharp pullback that followed the rip higher last week.  

US Columbus Day

It’s the US Columbus Day holiday, but the stock market is open. The S&P closed above 5,800 for the first time on Friday, and the Dow also came off a record high after jumping 400 points. Futures this morning are flat. European stock markets were mixed at the open, with DAX higher by around half a percent and the CAC down marginally. The FTSE 100 nudged slightly to the upside, but there is no great China trade today in the wake of the stimulus announcement, which appears to be generally being seen as a bit of a disappointment.  

UK Inflation

In the latest bit of pre-Budget theatre, Prime Minister Starmer will vow today to “rip out bureaucracy” to make the UK a more attractive investment. The 10-year gilt yield is up a fraction at 4.222%, a tad below the highs hit last week as we discussed a possible bond market reaction to more borrowing.  Red tape is one thing – you can argue for less or more; the question is one of effectiveness – how effective is the legislation? Does it do the right thing? Will it be administered and deliver the right outcomes? However, the Labour government risks making the UK more uninvestable with a series of anti-business moves and tax hikes.

Looking ahead, the latest UK employment and wage is due tomorrow. The Bank of England has mooted a more aggressive cutting cycle, but a lot will depend on wages, which along with services inflation have been notably sticky. However, wage growth did slow in the three months to July, sliding to 5.1% and 5.4% in the three months to May.  The figure, including bonuses, was 4.0%, down from 4.5%, and is expected to decline further to 3.8%.  

Then, on Wednesday, the latest inflation report for September will be in focus. Inflation in the UK held steady at 2.2% in August, close to the Bank of England’s 2% target. However, services inflation rose to a rather hot 5.6% from 5.2%, indicating the persistence of underlying drivers of price pressures. Core inflation rose to 3.6% from 3.3% in July, also.

Cable is holding at $1.3040, a previous line of support drawn off the July 17th swing high. Bears look to have lost the momentum.  

Europe Central Bank looking increasingly likely to cut rate again  

In Europe, all eyes are on the European Central Bank decision later in the week. It is looking increasingly likely to cut rates again — for the third time this year. Policymakers have been making it quite clear — French central bank chief Francois Villeroy de Galhau said a cut is likely and would not be the last.  Bundesbank Chief Joachim Nagel, one of the most hawkish members of the Governing Council, said he’s willing to talk about an interest-rate cut. ECB President Christine Lagarde has made it pretty plain that a cut is the most likely outcome amid weakening economic growth and a sharp fall in inflationary pressures. Assuming a cut is coming, the market will be most concerned about the guidance for future cuts and whether the ECB gives a signal that it feels it needs to catch up a bit. But we should not assume a cut is a given – in September, the ECB was pretty confident that a gradual pace of easing would be fine. It lowered inflation and growth forecasts and stuck to this line – has all that much changed since then? A cut would signal a willingness to favour growth over any lingering inflation concerns.

EURUSD has run to 1.09, where it hit 50% retracement support. Remember, the ECB staff projections in September have already factored in lower inflation and growth, so whilst they are very likely to cut, they could have a hawkish surprise in store in terms of the guidance, etc. Long term I don’t think that would last but it could produce some retracement higher for the pair. And we could still see that the ECB holding fire – dovish hold or hawkish cut- seem to be the two most likely scenarios. They are not ready to throw the towel in yet. 

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