A rather strange thing happened yesterday after US CPI hit its highest levels since 2008 at 5% and core CPI hit its highest levels since 1992, at 3.8%.
US 10 year yields after initially spiking higher, dropped sharply to hit their lowest levels in three months, below 1.44%, as after a careful parsing of the inflation numbers investors decided to take the Federal Reserve’s word for it that all of the inflation pressure, we are currently seeing will be transitory.
With the Federal Reserve due to meet next week and currently in media blackout mode it will be very interesting to see in light of yesterday’s CPI numbers whether the big jump in prices prompts a wavering amongst some Fed policymakers next week.
There is certainly plenty of evidence when drilling down into the numbers that a good proportion of the price rises we are currently seeing are base effects and reversals of the price falls we saw over 12 months ago, but equally there is also increasing evidence of other more persistent factors helping to drive prices higher.
For now, investors appear to be dismissing these concerns and the decline in yields is helping to underpin stock markets once more with the S&P500 finally cracking another record high and posting a new record close, while the Nasdaq has also come back into fashion with its biggest daily gain this week.
While the main core US markets had a really solid session, the Russell 2000 slipped back as the meme stock rebound fell out of favour with big falls in the likes of GameStop, AMC and Clover Health.
Today’s European market open looks set to be a fairly positive affair, however while there has been little in the way of direction this week, the overall bias has been of a slow drift higher, with little signs of central banks feeling inclined to lean away from their currently loose monetary policy.
The main focus today is on the UK economy in the wake of this week’s comments from outgoing Bank of England chief economist Andrew Haldane who said that the economic rebound was going “gangbusters”, and that the Bank of England needs to start looking at turning off the stimulus tap.
This morning’s latest economic data could well add extra fuel to that argument, with the UK economy enjoying a decent end to Q1, with an expansion of 2.1%, as the economy picked up steam ahead of the relaxation of restrictions at the end of March.
During the first quarter the economy contracted -1.5%, however with the further easing of restrictions on April 12th optimism is high that April GDP is likely to see another decent monthly expansion, as Q2 gets off to a flier, with a 2.4% expansion expected, and top of the 2.1% in March. The strong PMI numbers in April further supports this view, with May expected to be equally as strong.
With the further relaxation of restrictions that were announced in April, optimism is rising that the decent performance that we’ve seen in the manufacturing sector over the last three months can be sustained into Q2.
In March manufacturing activity showed further strength, rising 2.1%, and well ahead of expectations, while construction output jumped sharply by 5.8%.
Industrial production also had a good month, rising 1.8%, as a weak performance in January was put to one side.
According to a recent survey from the CBI, manufacturing output in the three months to May grew at the fastest rate since December 2018, with order books at the best levels since December 2017.
This gives an idea of the direction of travel when it comes to the direction of economic activity as the UK economy continues its reopening process, with expectations of another 1.2% rise in both metrics later today.
EURUSD – still trading in a tight range, with the 1.2200 area a tough nut to crack. We have support at last Friday's 1.2104 low. While above 1.2100 the risk remains for a move back to the May highs at 1.2266, which is the next resistance level. A move below 1.2100 opens up the 1.2050 area. The highs this year at 1.2345 remain a key level and barrier.
GBPUSD – found support at the 1.4070/80 area yesterday keeping the bias for a move higher through the 1.4200 area, with broader resistance at 1.4240. A move through the 1.4240 area targets the 2018 peaks at 1.4375.
EURGBP – still finding the 0.8640 area a tough but to crack, failing again there yesterday. While below this resistance level the bias remains to the downside and a retest of the 0.8560 area. A break below 0.8550 opens up the recent lows at 0.8480.
USDJPY – slipped back from the 109.70/80 area yesterday with support at the 109.10 area as well as the 50-day MA. A move below 109.10/20 opens up a return to the 108.60 area.