European markets got off to a weak start yesterday as investors trod lightly ahead of today’s US CPI release for November.
US markets on the other hand saw a more positive session, finishing the session higher, pulling back some of the losses seen last week, with the gains evenly spread across the piste. Asia markets have also edged higher after Hong Kong announced a further easing of covid restrictions.
These gains look set to see markets in Europe open slightly higher later this morning.
Bond yields also edged higher, as did the US dollar on what looks like a little bit of pre-CPI position adjusting.
Yesterday’s UK GDP numbers pointed to an economy that is facing challenges on multiple fronts despite a strong rebound in construction and services output in October, which helped offset some of the weakness in September.
Nonetheless on a rolling 3-month basis the economy still contracted by -0.3%, with the resilience in construction offering somewhat of a silver lining. The UK labour market is also showing remarkable resilience in the short term; however, this could well change in the coming months even as we look to a labour market where economic inactivity is at record highs, well above 20%, or over 2.5m.
The ongoing strike action could well have significant second round effects in the New Year, particularly in hospitality where it could be the last straw for a lot of struggling businesses, which rely on Christmas trade to tide them over the quieter months of January and February.
We could already be starting to see the first evidence of higher unemployment after we edged slightly higher in September to 3.6%, and while it remains close to 48-year lows, we could see it edge higher again in October to 3.7%.
Wage growth including bonuses is expected to edge higher in October to 6.1%, after coming in unchanged in September at 6%. Without bonuses wages are expected to rise to 5.9%, up from 5.7%, which is only just keeping pace with core prices.
If wages come in hotter than this the Bank of England might feel compelled to tighten policy slightly more aggressively in addition to the 50bps rate hike already expected this Thursday, although its unlikely to be a unanimous decision.
It’s also another big day for the peak inflation narrative that has seen the US dollar slide back from its peaks earlier this year, as we get set for the latest US CPI number for November. The slide in the US dollar was accelerated in the wake of the October CPI numbers which came in well below forecasts, although last week’s stronger than expected PPI numbers have tempered some of that expectation, along with the recent unexpected rise in wage growth to 5.1%.
Nonetheless, expectations for November CPI are for a further slowdown to 7.3% from 7.7%, while core prices are expected to slip back to 6% from 6.3% This is where the rubber will hit the road with any indication that inflation is proving much stickier than expected, likely to prompt a spike in yields and a rebound in the US dollar.
It is important to remember that however today’s numbers come out they are unlikely to alter the calculus for a rate hike of 50bps tomorrow. They will however offer important clues as to what next year might bring. If inflation continues to slow, the choices for January could well see 25bps become a base case scenario, while a stronger number is likely to see 50bps become a base case scenario.
EUR/USD – still finding a top just below the 1.0600 area. A move above 1.0620 targets the potential for a move towards 1.0800. Below 1.0400 targets the 1.0340 area and 200-day SMA.
GBP/USD – still finding the air above 1.2300 a little thin. Currently have support around the 200-day SMA at 1.2110. A concerted move through the highs last week at 1.2320 targets the 1.2750 area. A move through the 1.2040 area could see further weakness towards the 1.1985 area on a move below the 200-day SMA.
EUR/GBP – pushed briefly back towards the 0.8620 yesterday, with short term support just above the 200-day SMA and the 0.8540 area. Below 0.8530 targets 0.8480. Above 0.8675 targets 0.8720.
USD/JPY – finding support above the 200-day SMA at 135.00 with resistance at the highs last week just shy of the 138.00 area last week, keeping bias towards the downside. A break below 200-day SMA retargets the lows at 133.60.