After such a disappointing performance last week it was perhaps inevitable that we’d see a modest pullback as European markets got the week off to a positive start, although yesterday’s recovery was largely driven by rising crude oil and natural gas prices, which pushed the wider sector higher. It should also be remembered that we saw a similar start for markets last week, only for sentiment to deteriorate sharply.
US markets also saw a rebound, reversing 5 days of losses, however it was noticeable that the Nasdaq underperformed, finishing the day slightly lower, in a sign that suggests investors remain relatively cautious about the wider outlook, due to the growing increase in inflationary pressures.
Markets in Asia have seen a broadly positive but cautious session, which in turn is expected to translate into a positive start for markets here in Europe, with the main focus today on US CPI for August, however before that we have the latest unemployment numbers from the UK.
The unemployment picture for the UK economy has improved significantly over the last few months, a trend that is best illustrated with the sharp decline seen in the claimant count rate since March, when it was at 7.2%.
Since then, we’ve seen a sharp decline, falling to 5.7% in July, as businesses continue to reopen, even with the delay to July 19th.
Monthly claims fell by 7.8k in July, a modest slowdown from the 136k in June. The ILO unemployment rate for June saw a slight decline to 4.7%, with the furlough scheme still disguising the full effects of the pandemic, even though furloughed employees have now come down to around 1m.
As the furlough scheme continues to wind down and businesses have to contribute more to the scheme, there is a high probability we could start to see the headline ILO number start to edge higher and converge towards the monthly claim’s numbers, although high vacancy rates could well mitigate some of this risk. Wages on the other hand should start to move back down again as jobs at the lower end of the pay scale come back.
The ILO unemployment rate is expected to fall back further to 4.6% for the three months to July, while wages growth excluding bonuses could slip back from 7.4% to 6.8%, however upwards wage pressure could mitigate some of this downside pressure.
At the beginning of the month insolvency firm Mazars said that hotels and restaurants were already starting to feel the pinch, which suggests that some jobs could well disappear for good, in a trend that looks likely to worsen as pandemic support programs start to come to an end.
Despite this, the risks for the unemployment outlook continue to look more positive than negative, with a lot of unfilled positions available for those who want them.
The Bank of England is also more optimistic about the labour market than it was at the beginning of the year, adjusting its outlook for unemployment to 5.2% for this year, and down to 4.7% in the second quarter of 2022. Tomorrow’s CPI numbers could also add extra colour to a discussion over the paring back of bond purchases at next week’s Bank of England rate meeting.
On the subject of CPI, this afternoon’s US CPI numbers could make for uncomfortable reading for US policymakers next week, especially if it follows the trend of US factory gate prices for August. In July there was some relief that US CPI remained steady at 5.4%, raising the possibility that we may have seen a peak. More encouragingly, core CPI slipped back from 4.5% in June to 4.3% in July, however even if central bankers seem sanguine about rising prices, US consumers definitely aren’t if the New York Fed’s latest survey of inflation expectations are anything to go by. Consumer expectations for inflation over the next three years are at a heady 4%, while for one year they are 5.2%.
The biggest worry aside from the surges we are seeing in energy prices, which is worrying enough, has been the continued rise in PPI last week to 8.3%, from 7.8%, which suggests that we may have only seen a pause in the upward trajectory in prices.
Energy prices have continued to remain elevated with the recent call by the Biden administration urging OPEC+ to increase crude oil production in an attempt to divert attention away from the US government's culpability in helping to push fuel prices higher, with their green agenda, although the recent Atlantic storms haven’t helped either.
Despite the rise in PPI, over the last three months, expectations are for headline CPI to come in unchanged at 4.5%, which seems a touch optimistic.
EURUSD – slipped below the 1.1800 area and 50-day MA to the 1.1770 area, before bouncing back. The bias remains for a move towards 1.1750 and previous lows at 1.1660. Resistance remains at the 1.1910 area.
GBPUSD – the pound was rebuffed at the 1.3900 area last week; however, it still looks fairly well supported with support at the 1.3725 area. As long as we hold above trend line support from the August lows at 1.3755 then the upside potential remains intact. A move through 1.3900 targets 1.4000.
EURGBP – briefly slipped down to the 0.8510 level, however the bias remains for a move back towards the 0.8480 area, while below the 0.8560 area. Above 0.8560 targets the 0.8610 area. Below.
USDJPY – still have resistance between the 110.50/60 area, with support at the 109.70 area as well as the 109.10 area and trend line support from the April lows. Above 110.60 targets 111.00
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