US markets once again managed to break records, as the Dow Jones and S&P 500 made new all-time highs, helped by a rebound in financials and the tech sector ahead of today's latest US Federal Reserve rate decision. The Nasdaq 100 remains well below last week's peaks.
In Asia, markets reacted in a fairly benign fashion to some better-than-expected Chinese industrial production data for May, and retail sales numbers that were slightly down on the April figures.
A surprise rise in UK CPI inflation to 2.9% in May, while helping put a short-term floor under the pound after recent declines, has also served to reinforce the reasons behind the slowdown in consumer spending that has been a hallmark of retail sales data in the past few months. The last two quarters have been a negative contributor to GDP and unless wages start to pick up and keep track of the rise in prices then it is unlikely that we’ll get to see a recovery in spending soon, though input prices would appear to suggest that inflationary pressures may be plateauing in the short term.
In this context today’s wages data for April could not be more important given that they have been in decline for the last five months. In March, weekly wages showed a gain of 2.1%, and it is expected that this decline may well continue with a drop to 2% expected. If we do get an upside surprise, it might raise expectations that wages have bottomed out and the labour market has started to tighten, at a time when the unemployment rate is at a 20-year low, at 4.6%. This rate is expected to remain unchanged in April. A decent wages number could well also help support the pound after a turbulent last few days ahead of tomorrow’s Bank of England rate meeting, which is expected to keep monetary policy unchanged.
Later today we have the culmination of the latest Federal Reserve rate meeting when it is expected that the Fed will raise rates for the third time December last year. A rate rise of 0.25% is expected and fully priced in, though from looking at the performance of US bond markets you wouldn’t know it with 10-year yields just above seven-month lows. The key factors markets will be looking for are likely to be the projections for future rate rises this year, along with inflation forecasts at a time when core PCE has dropped sharply since the beginning of the year.
Fed officials have argued that the recent weakness in Q1 is expected to be transitory, and while the GDP numbers have improved, they did have reservations in April that risks to the forecast for real GDP were tilted to the downside. Inflation has also proved to be much weaker than expected.
At the April meeting officials also outlined a gradual approach to reducing the size of the central bank's $4.5trn balance sheet, a process which all things being equal they expected to happen this year. The process would be signalled beforehand with a series of caps, almost like a taper where the Fed would only allow a fixed US dollar amount of bonds and mortgage-backed securities to run off every month, while reinvesting the rest.
Markets will also be looking for further clues from the press conference as to how these early discussions about balance sheet reduction have progressed, and whether Fed officials will commence the process alongside further rate rises, or instead of them.
EUR/USD – has found some support at the 1.1170 area but continues to struggle below the highs at 1.1280. A break below the 1.1150 area could well see a move back to the 1.1020 area.
GBP/USD – appears to be finding a base just above the 100 and 200 day MA’s with support at 1.2635, and below that at 1.2580. We need to get back above the 1.2750 level initially to argue for a move towards the 1.2830 area, and argue for a stabilisation towards 1.2920.
EUR/GBP – still finding resistance at the 0.8860/70 area, which keeps the risk for a possible move towards the 0.8920 area. Below the 0.8780 area argues for a move back to the 0.8720.
USD/JPY – continues to struggle to push above the 200 day MA at 110.60 and while it does so the risk remains for a move back to the 109.10 level seen last week. We need to see a close above the 200 day MA at 110.60 to argue for a retest of the 111.60 level.
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