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Europe set for a positive open, as markets eye US inflation

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Having spent most of last week being prepped for a disappointing US January jobs report, by both Federal Reserve, as well as US government officials, the resulting numbers not only confounded expectations, but also saw large upward revisions to November and December as well.

The contrast was even more marked given the big -301k decline seen in the ADP jobs report only two days previously, with the Omicron variant being blamed for the decline because of absences through sickness and isolation expected to make themselves similarly felt in Friday’s numbers as well.

What we got was a complete contrast, with a big jump in hiring in January to 467k, well above expectations of 125k, while the December number was revised higher from 199k to 510k, as the US economy added over 900k new jobs over the Christmas and New Year period.

Despite all the concerns about a big hit to hospitality and retail due to Covid absences, food and drinking places saw job gains of 108k, while retail trade saw 61.1k new jobs added, which doesn’t quite tally with the big jumps in weekly jobless claims.

With the jobs market looking much better than initially feared, the wages data was the hare that got the bond market selling off, pushing yields higher, after another sharp rise in wage growth which jumped sharply from 4.9% to 5.7% in January, putting the prospect of a 50bps rate hike when the Fed next meets in March back on the table.

When US markets opened last Friday, the bias was initially towards the downside, however the lack of change in inflation expectations, in the aftermath of the payrolls report, along with a strong performance from Amazon saw the market rebound into the close, finishing higher for the second week in a row, but still down over 5% year to date.

European markets haven't fared any better, they are also down on the year by a similar percentage, slipping back for the fourth week in a row, and looking slightly less resilient, with the exception of the FTSE100 which has so far managed to hold up fairly well.

Concerns about rising inflation in Europe, which had been lagging, have also started to shift, with the Bank of England raising rates for the second meeting in a row last week, while the European Central Bank dialled back its expectation it wouldn’t be raising rates this year, as well as signalling a possible policy “recalibration” in March.

The shift in inflation risks to the upside prompted ECB Governing Council member Klaas Knot to comment at the weekend he expected the first interest rate rise from the ECB as early as October. While he is acknowledged as one of the more hawkish members of the governing council, inflation in the Netherlands is still well above the EU headline rate of 5.1% at 7.6%, he is still the first governing council member to break ranks and deviate to a much more hawkish stance.

Last week’s subtle shift by the ECB is certain to invite questions for ECB President Christine Lagarde when she testifies this afternoon to a virtual hearing of the European Parliament's Economic and Monetary Affairs Committee.

As we look ahead to the upcoming week, inflation expectations for the US economy are likely to encounter a new challenge with the release of US CPI for January on Thursday, which is expected to rise.

Friday’s payrolls report had the effect of pushing yields higher while keeping inflation expectations in check. This week’s US CPI report may well not have the same effect, which means last week’s volatility is unlikely to be a one-off.

Today’s European open looks set to be a positive one, after Friday’s strong finish for US markets.

EUR/USD – retested the 1.1485 level last week but was unable to break through. A break above the 1.1500 area retargets last November’s highs at 1.1615. To see further gains we need to hold above the 1.1380 area for this to unfold with firmer support at the 1.1270 area.  

GBP/USD – appears to be running out of steam after last week’s failure above 1.3600 and could slip back towards the 1.3400 area where we have trend line support from the December lows.

EUR/GBP – we saw a big reversal last week after failing to crack below the 0.8280 area. We’ve since rebounded back through resistance at the 0.8420 area, and now look to retest the 0.8500 area on the way to a retest of the 200-day MA at 0.8520.

USD/JPY – found support just above the 114.00 area last week and now has the potential to retest the recent peaks at 116.35, on a break above the 115.70 area. 


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