The last two days have seen markets in Europe struggle for direction albeit with a slightly negative bias, though much of this could merely be down to some concerns over China’s future Covid policy, as well as some month end profit taking, after several weeks of strong gains.
US markets have also struggled, probably for similar reasons, but also perhaps with one eye on this week’s payrolls report and today’s speech from Fed chair Jay Powell.
Today the main focus is set to be on today’s flash CPI from the EU, which could set the scene as to whether we get 50bps or 75bps when the ECB meets in just over two weeks’ time.
There is increasing evidence that we might be getting close to peak inflation if the direction of travel of commodity prices over the past few months is any guide.
While we’ve seen precious little evidence of that thus far in Europe with headline CPI jumping to 10.6% in October, up from 10% in September, we are now starting to see it in some of the PPI numbers, as well as the November flash CPI numbers from Spain and Germany yesterday.
In both Germany and Italy in the past few days we’ve seen big drops in the month-on-month October numbers of -4.2% and -4.3% respectively, which in turn have dragged the year on year numbers sharply lower as well.
Given that PPI tends to be a leading indicator for headline CPI, then there is a chance, if what’s happening in the US is any guide, that we could well start to see prices fall back, if the weather doesn’t get too cold in the coming weeks.
It is therefore supremely ironic that as we soon start to see early signs that inflation may be peaking, that central bankers on both sides of the Atlantic start to lean even more heavily to convince the markets that we should prepare for more aggressive action on rates in the coming months, whether it be Bullard at the Federal Reserve, or President Christine Lagarde at the ECB, with Fed chairman Jay Powell set to speak later on today, and likely to come across in a similar fashion.
Both have been at pains to signal a higher-than-expected terminal rate should be expected. Unfortunately for them the market doesn’t appear to be listening, and when you think about it why should they?
For most of last year and the first three months of this year, these same central bankers were assuring us that inflation was transitory despite plenty of evidence in the underlying data to the contrary.
Now they are telling us that they don’t think that inflation has peaked, and that it could go higher. While they could well be right, the data now doesn’t appear to support that assertion, as we start to see sharp falls in headline PPI, in Italy as well as Germany and headline CPI also looks as if it’s starting to rise at slower rate. Its therefore not surprising that having been so wrong on inflation being transitory, markets are reluctant to believe these same central bankers now.
Today’s EU flash CPI number is expected to come in at 10.4%, a slight fall from 10.6% with core prices set to remain steady at 5%, with any semblance of a weaker number set to seal the deal on a 50bps rate move, as opposed to a 75bps hike.
We’ll also get an early read on the US labour market with the latest November ADP jobs report which is expected to see 196k jobs added, slightly down from the 239k seen in October, as we look towards Friday’s non-farm payrolls report.
US Q3 GDP is expected to be adjusted slightly higher to 2.8%, from 2.6%, with core PCE on a quarter on quarter basis coming in at 4.5%.
EUR/USD – tested support at 1.0320 yesterday before rebounding after pushing as high as 1.0497 earlier this week and slipping back. We need to see a close above the 1.0400 area and 200-day SMA area, to signal further gains. If we slip back below 1.0320, we could see a move back towards 1.0180.
GBP/USD – the failure to push up through the 200-day SMA at 1.2190 earlier this week has seen the pound slip back. We need to take out 1.2200 to target the 1.2500 area. Support now back at the 1.1870 area.
EUR/GBP – ran out of steam at the 0.8675 area and has slipped back. We could squeeze back to the 0.8730 area and 50-day SMA. We have support at the 0.8570 area.
USD/JPY – key support remains back at the 137.50 area. A break below here targets a move towards 135.00. Appears to have resistance at the 139.60 area which has capped gains over the last 4 days. We also have resistance at the highs of last week at 142.50.