The records in the US continued to tumble yesterday with the Dow closing above the 20k level for the first time ever, while the S&P500 came within a whisker of the 2,300 level, as most major US benchmarks closed at record levels.
The signing of executive orders for the Keystone XL pipeline and for the Mexican border wall have served to re-spark the reflation trade pushing money out of bonds and into stock markets, with construction companies getting the biggest lift.
More importantly investors are surmising not unrealistically that all this fiscal stimulus at a time when the US labour market is already fairly tight, is going to exert upward pressure on wages, and ergo inflation.
Today’s US economic data is expected to reinforce that with weekly jobless claims set to come in at 247k, only slightly higher than the 234k seen last week, while service sector PMI activity for January is expected to follow on from this week’s decent manufacturing numbers, rising to 54.4, from 53.9.
Banks also saw lifts in their share prices, as rising yields and steepening yield curve differentials help their profitability.
Despite all of this the US dollar has failed to follow suit, dropping to its lowest level since 8th December on its trade weighted index, over concerns that these and a number of other new measures may damage the US economy in the longer term, due to their protectionist nature.
On a more serious unrelated economic note concerns about isolationism are also growing on reports that President Trump is set to sign executive orders to cut funding to the United Nations and other global organisations.
The recent rebound in the pound shows no signs of slowing down with the rally that started over a week ago continuing to build momentum, in the wake of this week’s UK Supreme Court ruling, as the one way bets that built up in the lead-up to the judgement continue to get unwound.
We also saw some decent industrial trends manufacturing data from the CBI, help things along, though the recent weakness in the US dollar is also playing a part.
Today’s first iteration of Q4 GDP is likely to show that the momentum that we saw in Q3 only saw a modest downtick. Despite an awful start to Q3 the UK economy still managed to post a creditable 0.6% expansion.
This is unlikely to be repeated in Q4, nonetheless expectations are for an initial figure of 0.5% with services providing the lion’s share of activity. On an annualised basis this should come in just above 2%. Activity in the services sector is expected to account for 0.9%, down slightly from 1% in the previous quarter.
While the GDP numbers are somewhat backward looking we’ll get an early look at how retailers have done in the post-Christmas period, with the latest CBI retail sales numbers for January. These are expected to show a modest decline from 35 in December to 27.
On the flip side of that last week’s UK retail sales numbers for December were a bit of a shocker, not only at odds with the December CBI numbers but also because of the number of fairly positive retailer updates that we received in the early part of this month.
EURUSD – continues to find selling interest up near the 1.0770/80 area, but while above trend line support now at 1.0640 from the lows this year, the prospect of further gains towards 1.0850 remains a real possibility. A move below 1.0540 retargets the 1.0450 area.
GBPUSD – we’ve seen further gains in the last 24 hours pushing through 1.2600 to close in on the prospect of a stronger move towards 1.2790 and the December highs. We should find support back at the 1.2420 area on any pullbacks. A move below 1.2400 argues for a return to the 1.2250 area.
EURGBP – having broken below the 0.8570 area the next support lies at the 0.8480 area. A break below here opens up the prospect of a move towards 0.8300. Pullbacks are likely to find resistance at 0.8570 and 0.8650.
USDJPY – the key support remains down near the recent lows at 112.55. A move below 112.55 could well target a move towards 111.60. So far rebounds have been confined to the 114.00 area, with resistance behind that at 114.50.
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