European markets got off to a broadly negative start to the month yesterday, except for the FTSE100, which managed to finish the session higher, due to a decent performance from the basic resource sector on optimism over the China reopening story.
US markets similarly got off to a poor start, with a further acceleration in yields helping to push US stocks close to key support levels.
The catalyst for yesterday’s rise in yields was two-fold, an unexpected rise in German CPI to 9.3%, while ISM manufacturing prices paid unexpectedly jumped more than expected in February, thus reinforcing the higher rates for longer narrative that is starting to make investors increasingly nervous.
One of the main reasons for recent stock market resilience has been a belief that we are close to peak rates, and that soon after we could start to see an easing. The latter part of that is becoming increasingly less likely with both the S&P500 and Nasdaq 100 testing but holding above their respective 200-day SMA’s.
This continued upward pressure on yields, along with continued pressure on these key support levels looks set to see European markets open slightly lower this morning.
With US 2-year yields and German 2-year yields hitting their highest levels since the financial crisis, at 4.9% and 3.2% respectively, the euro and US dollar made solid gains yesterday, while the pound sunk like a stone, after Bank of England governor Andrew Bailey inexplicably suggested that the markets shouldn’t take for granted that rates in the UK would rise much further.
With so much of UK inflation being of the imported type this seemed a rather odd thing to say, especially for a central bank whose inflation fighting credibility is increasingly being questioned, and where headline CPI is still head and shoulders above that of its European counterparts, and still over 10%.
Later this morning we get the February flash EU CPI numbers, and here we could see an upside surprise. Much was made of the fact that EU headline inflation saw a sharp drop from 9.2% in December to 8.6% in January, with many taking the view that we could well continue to see sharp declines in the headline numbers over the course of the coming months.
While an encouraging development, along with the sharp declines also being seen in headline PPI, any hopes of that continuing appear to have receded after this week’s flash CPI numbers from France, Spain and Germany, for February all of which saw surprise increases in the headline rate of inflation, driven by sharp increases in food prices.
The recent declines in headline inflation also aren’t being reflected in core prices, and as far as wages are concerned these are still rising.
When the January CPI numbers were released, core CPI went up to a record high of 5.3%, and if this week’s resilience in headline inflation is any guide, is likely to remain high for some time to come.
This is already prompting calls for more aggressive tightening after the expected 50bps rate hike which is due later this month with markets already pricing in a higher terminal rate of 4%.
Today’s flash EU CPI numbers for February are likely to be used as further evidence of the need for the ECB to be more aggressive when it comes to its guidance later this month. Expectations are for headline inflation to fall further to 8.3%, however this feels wrong given the evidence we’ve seen already this week, where all three of France, Spain and Germany saw headline CPI rise from its January levels.
If anything, we’ll be lucky to see a fall, and could even see a modest increase from 8.6%, while core prices could push even higher from their current 5.3%.
US weekly jobless claims are expected to come in at 196k, a slight increase from the previous week’s 192k.
EUR/USD – seen further gains yesterday after the Monday bullish day reversal off support at the 1.0530 area. We need to push through the 50-day SMA at 1.0730 to open up 1.0820. While below 1.0730, the bias remains for a test of the January lows at 1.0480/85.
GBP/USD – support remains at the lows this week at the 200-day SMA at 1.1920/30. A break of 1.1900 retargets the 1.1830 area. The 50-day SMA at 1.2150 remains key resistance, and which needs to break to retarget the 1.2300 area.
EUR/GBP – rebounded off the 100-day SMA at 0.8750 and has tested trend line resistance at 0.8900 from the January peaks. Above 0.8900 targets 0.8980.
USD/JPY – ran into resistance at the 200-day SMA at 136.90/00 earlier this week, slipping back to the 135.20 area. We also have interim support at 133.60. A break above 137.00 could see a move to 138.20.