The pound had a pretty good day yesterday, as optimism grows that a UK-EU deal on trade could be within reach after some positive comments from Irish prime minister Micheal Martin.
While we’ve been here many times before, the prospect of an imminent deadline can help concentrate minds, and despite some push back over fear about getting carried away, the fact that there hasn’t been aggressive counter briefing to the prospect of progress suggests the talks are heading in the right direction. It also appears that politicians here, and in Europe, appear to be gearing up to set aside parliamentary time to scrutinise any deal in the days leading up to Christmas.
US markets also had a good day on the back of similar optimism over a new US stimulus aid plan, with another record high for the Nasdaq, and this optimism is set to get carried over into today’s European open.
Yesterday’s unemployment numbers painted a bleak picture for the UK economy, with redundancies surging at an even faster rate than they did in the aftermath of the financial crisis, with hospitality and retail bearing the brunt of the 370,000 job losses in the three months to October. Since February we’ve seen 819,000 fewer people in employment as a whole host of businesses give up on any prospect of an imminent return to normality.
Against this sort of backdrop, the last thing we need is headline inflation starting to creep up, however that is what we saw in the October numbers four weeks ago when higher food, clothing and used car prices led to the consume price index (CPI) jumping from 0.5% to 0.7%, and a three-month high, while core CPI rose to 1.5%. These are both expected to moderate slightly in the November numbers, with a slight decline to 0.6% on the headline rate, and 1.4% on core prices. There is certainly nothing here to worry the Bank of England when it announces its own decision tomorrow.
The latest UK flash purchasing managers' indices (PMIs) are also expected to paint a slightly better picture for the economy after the slowdown in November, with an improvement in both manufacturing and services, with manufacturing expected to remain fairly resilient at 56, due to an element of pre-Brexit stockpiling, while services is expected to rebound to 50.7, after the economic reopening as the November restrictions came off.
The announcement of extended lockdowns for the likes of Germany and the Netherlands earlier this week, along with an extension of some restrictions in France, augurs ill for the outlook for northern Europe’s largest economies over the next few weeks. Today’s flash PMI for manufacturing and services is expected to deepen that economic gloom, even as manufacturing continues to help offset the hit the services sector is taking. The prognosis was already looking bleak after the extended restrictions that were announced at the beginning of November, in both France and Germany, as the optimism of the summer recovery has given way to the pessimism of a long, dark winter.
In the most recent November PMIs, the numbers continued to paint a mixed picture for the German economy, with services slipping further into contraction territory at 46, from 49.5, while manufacturing remained resilient at 57.8, modestly down from 58.2, and close to levels last seen in March 2018. December is likely to be a similarly bleak story for services given that German chancellor Angela Merkel has more or less cancelled Christmas, by imposing a harder lockdown into next year. In France it’s been a similar picture, with services even weaker than in Germany, with a slide to 38.8 in November, and down sharply from the 46.5 in October. Expectations are for a slight improvement to 40 in France, however with another two weeks to go the final number could deteriorate further, while Germany is expected to have a reading of 44.
With restaurants and bars in France set to remain closed until next year, it is hard to see the case for any type of decent recovery any time soon, which means December is likely to see the fourth consecutive month of contraction. Despite the positive vaccine news lifting the mood from a market point of view, it is clear that there will be no similar uptick in economic activity until such times as restrictions start to get eased, perhaps sometime in the spring. On the plus side, manufacturing has been a strong performer for both Germany and France, helping to offset some of the slowdown in other parts of their economies
With the US Federal Reserve set to meet for the last time this year, and the US economy about to enter what could be a fairly dark period of lockdowns, and with rising infection rates, the US central bank will be keen to show that it is prepared to take further action if the need arises over the next few weeks. While we aren’t expecting any change in the headline rate today, or any new commitment to further quantitative easing (QE), the Fed can still give a distinct steer towards further policy action if the need arises, especially if weekly jobless claims continue to rise the way they did last week.
A weak US retail sales number for November could also act as another warning sign for the US economy. The US consumer generally tends to be fairly resilient around Thanksgiving, however we are only expecting a 0.1% gain in today’s data. A negative number could be just what the markets need to push US politicians across the line on an economic aid package. Chairman Powell has always been very insistent that further central bank support can be relied on to support the US economy, but he has also been insistent on the need for further fiscal support from those on Capitol Hill as well.
In the wake of the recent weaker US non-farm payrolls number, and the sharp jump in weekly jobless claims, there does appear to have been progress in this, with the discussions over a new economic aid package currently expected to yield some form of outcome by the end of this week. With a new stimulus or economic aid package essential due to the expiry of unemployment benefits under the Cares Act at the end of this year, the Fed looks set for a much closer working relationship with the new US administration with the appointment of Powell’s predecessor, Janet Yellen as US treasury secretary. One thing seems certain, they aren’t likely to talk the US dollar up, which means we could be in line for further US dollar weakness.
EUR/USD – feels like it wants to head higher, towards 1.2230, however while below the 1.2180 area, the risk is for continued range trading. Needs to stay above support at 1.2060/70 to maintain upward bias towards 1.2550. Only a move below 1.2020 negates the upside scenario
GBP/USD – remains well supported above the 50-day MA and 1.3130 area with the 1.3500 area the main obstacle to a move towards 1.3600 and eventually the 1.4000 level. A break below 1.3100 opens up a move towards 1.2850.
EUR/GBP – having failed above the 0.9200 area earlier this week the euro has slipped back and looks set for a return to the 0.8980 area, having failed at 0.9150 yesterday A move to 0.9300 and the September peaks remains a possibility while above 0.8980.
USD/JPY – still looks set for a move towards the 103.18 area, and November lows, while below the 104.70 area.