European markets managed to complete a strongly positive session yesterday, despite a US CPI print for April which came in slightly hotter than expected but was still nonetheless weaker than March.
The initial market reaction to the 8.3% CPI print saw stocks slide back and the US dollar tick higher, before reversing course and quickly turning around as markets in Europe finished the day strongly higher.
US markets also moved higher, although it was notable that the Nasdaq 100 lagged and never made it into positive territory. This failure to move higher acted as a wider drag, and after Europe had closed, US markets soon gave up any gains to slide sharply lower, led by the tech sector.
While there was disappointment that inflation didn’t fall as much as expected, the initial move higher in yields didn’t last long, with the US 10-year yield unable to sustain a move above 3% and closing lower for the third day in a row. This failure would appear to suggest concern that bond markets are becoming less worried about inflation, than they are about a slowdown in the wider economy.
In any case, what these wild market moves are telling us is that investors have very little idea of whether we’re near a short-term base, or whether we’ve got further to fall.
As a result of yesterday’s sharp turnaround in the US, and a weaker Asia session, European markets look set to open sharply lower.
At the end of last year, the UK economy showed a Q4 expansion of 1.3%, and while we can expect to see a modest slowdown in today’s preliminary Q1 GDP numbers, it’s still expected to be a fairly healthy 1%, although most of that is expected to be front loaded into the first part of the quarter, with March likely to be the weakest month.
Index of services is expected to make up most of the expansion, coming in at 0.9%, however if the Bank of England is to be believed this quarter could be as good as it gets this year for the UK economy. Business investment is also expected to improve to 1.9% from 1% in Q4.
On the monthly GDP numbers, we’ve seen a 0.8% expansion in January, and a 0.1% expansion in February. March could well see a contraction, although estimates are for stagnation at 0%, which is still likely to drag the quarterly number down.
This pattern of a weak end to the quarter is illustrated quite well in the recent retail sales and consumer confidence numbers, which fell back sharply in February and March.
Year on year to March, retail sales growth slumped from 7.2% to 0.9%, as consumer confidence slid to its lowest levels since October 2020.
On a more positive note, manufacturing and construction have held up much better in Q1, although like everyone else they are also facing huge increases in their costs.
Following on from yesterday’s US CPI numbers we could get further clues about whether we’ve seen peak inflation from today’s US PPI numbers for April.
Last month PPI jumped to 11.2%, from 10.3%, and we would need to see this fall back sharply to help with this narrative, given how often it is viewed as a leading indicator. Expectations are for a decline to 10.7%, while core PPI is expected to fall from 9.2% to 8.9%.
Weekly jobless claims are expected to fall back from 200k to 192k.
EUR/USD – trend line support at 1.0470 continues to hold for now. A move below argues for a move towards the 2017 lows at 1.0340. To stabilise we need to get back above the 1.0650 level to signal a move back towards 1.0820.
GBP/USD – continues to slip lower falling below 1.2250, with the risk that we now head towards the 1.2000 area. We need to see a recovery back above 1.2470 to open up the 1.2600 area.
EUR/GBP – currently has resistance at the 0.8600 area, and December highs for now, with a break targeting the 0.8660 area. Support lies back at the 0.8470/80 area.
USD/JPY – we appear to have resistance at the 131.35 area and could slip back to the lows last week at 128.60. A break of 131.35 is needed to target 135.00. A move below 128.60 signals a move towards 126.80.
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