European markets saw a much more positive session yesterday, although the FTSE 100 lagged a little due to underperformance in the basic resource sector.
The positive session was aided somewhat by a slide in bond yields, which pulled real yields back into negative territory, with the bounce in bond prices prompting some to bet that yields may well have seen a short-term top. This comes across as a somewhat premature conclusion, given the direction of travel when it comes to PPI, with German factory gate prices hitting a new record high in March of 30.9%, as revealed yesterday. In recent months these numbers have tended to be leading indicators for CPI inflation data, so from that point of view inflation would appear to have further room to run.
Yesterday’s Fed Beige Book also pointed to a US economy that was starting to see negative impacts from rising prices, which could be early evidence that we might be starting to see the first seeds of possible demand destruction, although inflationary pressures were still expected to continue for a few more months. Aside from that, manufacturing activity was solid across districts, while office occupancy and retail activity increased, so it remains a mixed picture.
US markets had an altogether more challenging session, with the Nasdaq 100 getting clobbered on the back of Tuesday’s big subscriber miss from Netflix, which saw the shares finish the day 35% lower and raised concerns that other high value areas of the market could suffer a similar fate if their earnings numbers fall short in the coming days. The Dow, on the other hand finished the day strongly higher.
Today’s European open looks set to be a mixed one, as we look ahead to comments from the central bank holy trinity of Fed chair Jay Powell, ECB president Christine Lagarde and Bank of England governor Andrew Bailey, who are all due to speak in Washington DC. Lagarde’s comments will be closely scrutinised after yesterday’s comments from Latvian governing council member Martin Kazaks said that a rate rise in July was possible, and that tightening measures needn’t have to wait for evidence of wages growth. Those comments were in contrast to the tone of Lagarde’s ECB press conference earlier this month, so it will be notable if she doesn’t push back on them.
EU final CPI for March is expected to be confirmed at a record high of 7.5% later this morning, with the latest flash CPI for April due at the end of next week, and which could hit 8%.
Sterling traders will be looking for clues from Bank of England governor Andrew Bailey on the central bank's intentions at its May meeting, when some form of rate hike is expected, although the extent of any move remains uncertain, whether it be 25bps or 50bps. Traders would still be well advised to exercise some caution with respect to any comments Bailey might make, given that in previous instances Bank of England guidance has been about as reliable as a chocolate teapot.
US data due out today includes weekly jobless claims, which are expected to fall bac to 177,000 from 185,000, while the latest April Philadelphia Fed survey is expected to fall to 21.7 from 27.4.
EUR/USD – broke above the 1.0830 area yesterday, potentially opening the prospect of a move towards 1.0930. Below 1.0750 targets a move towards the March 2020 lows at 1.0635.
GBP/USD – saw a move back towards 1.3070 yesterday but need to move above 1.3150 to stabilise and target a move towards 1.3300. A break below 1.2950 argues for a move towards 1.2800.
EUR/GBP – squeezed back to 0.8336 yesterday before slipping back. Bias remains for a move lower towards the 0.8200 area and March lows, while below 0.8330.
USD/JPY – made a new 20 year high at 129.40 before slipping back. We could slip back towards the 125.80 area in the short term, as profit taking kicks in. The main support lies all the way back down near the 124.70/80 area, but while above that the bias is for further upside, towards 130.00 as well as the 2002 peaks at 135.00.