Despite managing to post a second successive day of gains European stocks still finished lower for the third month in succession, having been unable to reverse all of the heavy losses seen at the beginning of the week.
For now the downtrend that has been in place since the middle of the summer shows no signs of reversing, and while the euro continues to look as if it might head higher and through the 1.2000 level, it is hard to see how European stocks can break out of their summer malaise and start to head back towards their recent peaks.
US stocks on the other hand appear rather more resilient, though they have been helped this week by some decent economic numbers, from a nice upward revision to Q2 GDP, a bumper ADP payrolls report for August and a decent Chicago PMI which does appear to have helped put a short term floor under the US dollar. In spite of this the greenback still posted its sixth successive monthly decline in a row, against a basket of currencies.
On the positive side in the past couple of days the US dollar has started to show some signs that it may be looking to carve out a floor for itself, and in this regard this afternoon’s US non-farm payrolls numbers could add the extra fuel needed to help inspire a recovery after months of declines, which in the process could well help start to pull the euro back lower, and thus take the pressure off the European Central Bank, where it has been reported that officials are increasingly concerned that the gains of recent weeks could dampen inflation and make European exports much more expensive.
A decent payrolls number today would be the icing on the cake in a week that has seen some positive signs that the US economy may be in better shape that was previously thought prior to Jackson Hole.
Today’s US employment report is expected to see 180k jobs added in August, down from July’s 209k, however this week’s bumper ADP report has seen some estimates for today revised higher. It is also notable that the June and July non-farm payrolls reports both surprised to the upside on estimates of 180k, with numbers in excess of 200k, so it wouldn’t be unexpected to see the August report also post a number north of 200k given how strong this week’s ADP number turned out to be.
Of more importance will be how strong the wages numbers come in, given an unemployment rate of 4.3%. Annual hourly wage growth is currently 2.5%, a little on the weak side for an economy supposedly at full employment so a strong number here could increase the odds of another rate rise this year, most likely in December.
Before the US jobs numbers we also get sight of a host of manufacturing PMI numbers from across Japan and China, as well as Europe and the UK
Starting with China and Japan we’ve seen some decent numbers in recent months, and it would appear that momentum in August has been maintained, with the latest Japan manufacturing numbers coming in at 52.2, slightly down from July, while in China the Caixin manufacturing numbers improved to 51.6, its highest level in six months, up from 51.1.
Back in Europe economic momentum is expected to be maintained in Spain, Italy, France and Germany with manufacturing PMI’s all estimated to improve to 54.4, 55.3, 55.8 and 59.4 respectively.
In the UK the independent surveys around the manufacturing sector have been universally positive in recent months, unlike the official ONS numbers which have been uniformly negative. This divergence is expected to continue today with manufacturing PMI in August expected to slip back slightly to a still respectable 55 from 55.1.
EURUSD – found support at the 1.1820 level yesterday before rebounding but needs to get back above 1.1950 to retarget the highs at 1.2070. A fall below 1.1820 retargets the 1.1600 area.
GBPUSD – fell back to the 1.2850 area yesterday before rebounding, keeping alive the prospect of a move back towards the 1.3040 area. Longer term support remains at last week’s low at 1.2770 but we need to push through 1.2980 to keep the momentum intact.
EURGBP – finding support at the 0.9180 for the time being but feels as if we could well head back lower. While below the 0.9250 area the risk is for a move down through 0.9180 towards the 0.9040 level.
USDJPY – we still have solid support down near the 108.20 area for now and April lows and this is currently containing the downside. Rebounds need to get back above the 111.00 area, otherwise we remain at risk of a move towards the 106.80 area.
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