European markets picked up where they left off on Friday yesterday with another strong performance, after Fed officials dialled back fears of a 100bps rate rise next week.
Even though sentiment was more buoyant, with US markets also rebounding strongly, there was always that nagging doubt that any rebound was always one negative headline away from coming unstuck, as is so often the case when you get bear market rallies.
This caution turned out to be justified, as soon after Europe had closed, it was being reported that Apple was planning to slow hiring and spending heading into 2023 in a number of key areas. This followed on from a similar decision by Google owner Alphabet last week to do something similar with respect to hiring in the latter part of this year and into 2023.
These reports prompted US markets to slide back and close lower on the day, highlighting once again how fragile sentiment currently is ahead of next week, when we’ll get to hear the holy trinity of big tech announce their latest quarterly numbers, with Alphabet, Amazon, Apple, Microsoft and Meta all updating the markets.
As a result of yesterday’s late US sell off, markets in Europe look set for a lower open, with today’s focus set to be on the latest UK unemployment and wages numbers, along with EU CPI.
In March UK unemployment fell to its lowest level since 1974, at 3.7%. This edged higher in April to 3.8% and looks set to remain at this level in today’s May numbers, with the Office for National Statistics commenting that there were fewer unemployed people than job vacancies in the last set of numbers.
This tightness in the labour market doesn’t appear to be being reflected in upward pressure on wages as average weekly earnings including bonuses rose by 6.8% in April, falling from 7% in March. This is projected to fall further to 6.7% in this morning’s May numbers.
Without bonuses, the rise has been much more modest, remaining unchanged at 4.2%, although we are expecting a modest increase to 4.3%.
This is still well below the headline CPI rate of which is currently at 9.1%, and which is set to go even higher tomorrow, as well as the months ahead, although there will be some mitigation in the form of new fiscal help offered by the Chancellor of the Exchequer which should take some of the pressure off the cost of living starting in July, with the raising of National Insurance thresholds.
With the Bank of England coming under increasing pressure to hike rates more aggressively, any evidence of rising wages could see further rate rise bets increase, when the MPC next meets in August.
Alongside agitation in the public sector over below inflation wage rises, increasing wage growth pressures are unlikely to subside, which means the Bank of England may well have to look at raising rates by 50bps at the next meeting.
With the ECB expected to raise rates by 0.25% later this week, we’ll also be getting confirmation that EU June CPI rose to a new record high of 8.6% in June, which for a lot of countries in the EU, is well below what they are currently experiencing.
Under any other circumstances headline rates in the EU would be much higher, given that inflation in many countries across Europe is significantly north of 10%, and as high as 22% in Estonia. On a more encouraging note, core CPI has lagged and is expected to come in at 3.7%.
EUR/USD – yesterday’s rebound from the 0.9950 lows has seen the euro retest the 1.0200 area. We need to see a move above the 1.0220 area, to potentially retarget a squeeze back to the 1.0340/50 area.
GBP/USD – yesterday’s rebound has seen the pound rally through the 1.2000 level however we need to push through the 1.2040/50 area to stabilise and target the 50-day SMA. Support now comes in at the 1.1870 area, with the bias remaining towards the downside while below the 50-day SMA.
EUR/GBP – while we struggle to overcome the 0.8520/30 area the bias remains for further weakness towards the recent lows at the 0.8400 area. A move through 0.8530, and the 50-day MA argues for a move towards 0.8600.
USD/JPY – has slipped back for two days in a row after finding resistance at 139.40 last week. A break of 140.00 targets the 145.00 area. Support comes in at the 135.80 level, as well as the more solid support at the 134.80 area.