European stocks underwent their third successive monthly decline yesterday, despite ending the month on a positive note, with the DAX falling 3.75%, while the FTSE 100 was down 3.75%, and posting its weakest monthly close since October last year.
US markets also finished lower for the third month in a row, despite a similarly positive finish yesterday, with the S&P 500 and Nasdaq 100 both losing more than 2% on concerns about future earnings growth and a possible economic slowdown at a time when rates are expected to remain higher for longer, even as US economic data continues to show little sign of slowing markedly.
It’s a different story altogether when it comes to the economic numbers in Europe, where yesterday we saw EU GDP in Q3 slide into contraction territory having seen little to no growth at all in Q1 and Q2.
Inflation across the entire euro area is also showing increasing signs of slowing sharply, calling into question the decision by the ECB to hike rates by 25bps in September in the face of warnings that they could well be overdoing it when it comes to raising rates.
Today’s focus shifts back to the US with the penultimate Federal Reserve rate meeting for 2023, as well as the latest ADP payrolls report for October, September job openings numbers, and the latest ISM manufacturing survey.
While the US labour market has held up well this year, we’ve seen this come against a backdrop of a global manufacturing recession. The last time the ISM manufacturing survey posted a positive reading above 50, was October last year, with expectations that we’ll see an unchanged reading of 49.
Prices paid is expected to edge higher to 45, from 43.8, while employment is set to slow from 51.2 to 50.9.
Before that we have the latest ADP employment for October which is expected to improve on the surprisingly weak 89k we saw in September, with 150k new positions.
Vacancies have been falling over the last few months and are expected to slow again given the rise in the participation rate seen in recent months, with today’s JOLTs numbers expected to slow from 9610k to 9400k.
Against such a resilient labour market attention will then shift to tonight’s Fed meeting.
Having overseen a pause in September the US Federal Reserve looks set to undertake a similar decision today, although they still have one more rate hike in their guidance for this year, which markets now appear to be pricing for December.
Fed chair Jay Powell, in comments made just before the blackout, appeared to indicate that a status quo hold is the most likely outcome at today’s meeting, with the key message continuing to be higher for longer. This is certainly being reflected in market pricing especially in the longer dated part of the treasury curve, as the yield curve continues to un-invert.
Most policymakers appear to be of the mind that more time is needed to assess the effects that previous rate hikes have had on the US economy which seems eminently sensible.
While the unemployment rate has remained stubbornly low, US consumption patterns have remained resilient while the US economy grew strongly in Q3, however there is this nagging doubt that it could be on the cusp of a sharp slowdown in Q4, and recent payrolls data has shown a large proportion of part time jobs being added.
With US mortgage rates already at 8% there comes a point when further rate increases could destabilise the housing market, as well as increase the pressure further when it comes to tightening financial conditions.
The pound will also be in focus today with the latest house price data from Nationwide expected to show further weakness in house prices in October, with a decline of -0.4% expected.
The latest UK manufacturing PMIs for October is expected to improve from 44.3 to 45.2.
EUR/USD – ran out of steam at the 1.0680 area and 50-day SMA, with support back at the lows of last week at 1.0520, with the next support at the recent lows at 1.0450. Resistance at the 1.0700 area and 50-day SMA.
GBP/USD – rallied to 1.2200 before slipping back with support at the lows of last week at the 1.2070 area last week. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.
EUR/GBP – squeezed up to 0.8755 in a classic bull trap before sliding sharply back. A move below 0.8680 and the 200-day SMA targets the 0.8620 area.
USD/JPY – rallied hard from the support at 148.75 and the lows from 2-weeks ago, and looks set to retest the highs from last year at 151.95, and the longer term target at 152.20.