US markets once again posted new record highs last night, on reports that US lawmakers were looking at pushing through a tax deal which would see the US corporate tax rate cut to 21% next year, as well as the top tax rate cut to 37%.
Whether this happens or not remains an open question given that US politicians need to coalesce the two separate bills into one bill that they can all agree on and then pass on to the President to sign off on.
Last nights defeat of Republican Roy Moore in Alabama also complicates the arithmetic in the Senate with respect to getting any sort of tax reform signed off, as the Democrats gain an extra body in any future vote.
European markets had a decent day yesterday but last night’s new US records aren’t expected to translate through to this morning’s open in Europe where the underlying sentiment is likely to be caution ahead of todays Fed meeting and tomorrow’s Swiss National Bank, Bank of England and European Central Bank rate meetings.
A few weeks ago we were assured by Bank of England officials that inflation was likely to peak at about 3% and come down thereafter, so it was particularly disappointing that the latest UK inflation data showed that prices in November rose by 3.1%, their highest level in five years. This small increase in CPI is also likely to be a little awkward for Bank of England governor Mark Carney as he will now have to write a letter to the Chancellor of the Exchequer explaining why the central bank has missed its inflation target by more than 1%, this time to the upside.
The rise in CPI is particularly unwelcome just before Christmas for a consumer that has become increasingly squeezed, and despite assurances to the contrary from a number of commentators that prices have probably peaked, there is a concern that they may well be mistaken and we could see further unwelcome rises.
Putting to one side the sharp rise in oil prices over the past few weeks, we’ve also seen gas prices rise sharply as well due to the explosion in Austria at one of Europe’s key gas hubs. In addition to that input prices edged up by more than expected in November, which combined with last week’s PMI surveys which showed that firms hiked prices at their fastest rate since 2008, could underpin prices well into next year. The costs of last year’s premature rate cut and dovish forward guidance by the Bank of England continue to make themselves felt even now, over 12 months after the fact.
The hope now is that wages data starts to make inroads into filling some of that gap, and there is growing evidence this may well be starting to happen. In some of the more recent data we’ve started to see increasing evidence that wages at the lower end of the income scale are rising at rates faster than inflation, as the effects of increases in the minimum and living wage help pull up wages at the bottom of the pay scale.
In London wages have risen in excess of 4.5% while elsewhere in the country we’ve seen rises of up to 3.6%, for up to 150k workers. This should help pull up wages higher up the income scale, which in turn should now start to show up in the rolling 3 month average earnings numbers for October, which are expected to show an increase to 2.5% from 2.2%.
This would then narrow the gap down to -0.5% and half of what it was in the middle of the summer.
The latest unemployment numbers for the three month period of October are expected to see another decline in the headline rate from 4.3% to a new 42 year low of 4.2%.
It’s also a key day for Federal Reserve watchers with the US central bank likely to pull the trigger on its third 0.25% rate rise this year. It will also be Janet Yellen’s final meeting as Federal Reserve Chair as she departs with a formidable legacy of not only kick starting the rate hiking cycle, but also starting the ball rolling on the balance sheet reduction program.
She may have only served one term as Fed Chair but she has certainly made her mark and here replacement Jerome Powell will have some formidable shoes to fill.
As far as surprises are concerned we aren’t expecting to see any, however the tone of the press conference and the direction of the dot plots for those FOMC members currently in place are likely to be closely scrutinised for clues as to whether US policymakers feel inclined to tighten up market expectations around the number of rises we can expect in 2018.
Yesterday’s PPI numbers were slightly hotter than expected and if today’s US CPI numbers are similarly spikey we could well start to see market expectations shift about the number of potential rate rises next year. Expectations are for an increase to 2.2% in November, with energy prices likely to play a part in that rise.
It is also important to remember that next year’s voting members will be a bit of an unknown quantity for the March meeting with three new governors still set to be appointed along with a new vice chairperson.
EURUSD – currently struggling to move above the 1.1820 level. A move below the 1.1700 area retargets the November lows at 1.1570.
GBPUSD – the risk of a move towards trend line support from the March lows at 1.3200 remains a possibility while below the highs this week at 1.3420. A move through 1.3420 retargets the 1.3500 area and the highs at 1.3660. Below 1.3200 retargets the 1.3050 area.
EURGBP – currently has a short term top just below the 0.8870 area, and while below here the risk remains for a return to the 0.8740 area, A move through the 0.8880 level and 50 day MA retargets the 0.8980 area.
USDJPY – having moved up through the 113.20 area we could now see a return to the recent highs just above the 114.00 level. A move back below 113.20 would negate this and argue for a return towards 112.50 and then the 111.60 area.
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