Cooling down inflation and China reopening support market sentiment

A further reopening of the Chinese economy buoyed market sentiment at the start of the new trading week as European markets opened higher as we entered the first day of the week. The move came after US stocks rose on Friday amid signs that inflation may be cooling after the December jobs report and an economic activity survey showed that inflation may be cooling. This indicates that the Federal Reserve is having the effect that it is intended to have through rising interest rates.

The major averages have notched their first big rally in the new trading year, so stock futures gained some ground early on Monday. The Dow and S&P ended Friday's session with weekly gains, as the Dow and S&P recorded their best week since November. The Dow and S&P capped their best day since Nov. 30, while the Nasdaq ended its best session since Dec. 29 on Friday.

The overnight moves in Asian markets also followed Friday's first major market rally of 2023, which saw the Dow surge 700 points, or 2.13%, while the S&P 500 and Nasdaq Composite added 2.28% and 2.56%, respectively.

The key market movers

In the US, non-farm payrolls came in slightly higher than expected on Friday, although wages increased slower than expected. This, along with data indicating that the services sector contracted, provided an indication that the central bank was on course to meet its goal of raising interest rates.

It is evident that the labour market is softening in light of Friday's payroll report and reports of layoffs across various industries. However, there is still work to be done on the economy. There is a belief that employment conditions will continue to moderate, as part of the report indicates. Despite this, we believe that there is still sticky labour demand in the services industry that is likely to persist for some time to come.

In China, Beijing dropped pandemic border controls on Sunday, opening up its perimeter that had been all but closed since the start of the COVID-19 pandemic. Due to the country's importance as a regional growth engine and as a key market for European exporters, this is likely to result in an upsurge in the country's economic activity, which would have a wider effect on the global economy.

In response to this, most Asian currencies shot up on Monday, with the Chinese yuan hitting a four-month high in the wake of China reopening its international borders, as well as hopes for less hawkish rhetoric on the part of the Federal Reserve that also weighed on the dollar and supported regional currencies.

There will be a great deal of economic data available this week. The Consumer Price Index for December will be released on Thursday, followed by big banks' earnings on Friday. Data on consumer credit and the New York Fed Survey of Consumer Expectations are due on Monday. Raphael Bostic, the Atlanta Fed president, will also offer commentary on Wall Street.

As for German industrial production in November, it improved from the revised decline of 0.4% the prior month by 0.2%. However, a survey by the German Economic Institute released on Monday indicates, however, that four out of ten German companies expect business to shrink by 2023.

Even though it was not as likely for a gas shortage to occur during the winter of 2022/23 as it was in the summer of 2022, energy prices have also retreated since then. It is imperative to note that they remain at a high level, as production interruptions remain a possibility. A report on the unemployment rate for November in the Eurozone is expected later today.