In a classic case of bi-polar markets we saw the DAX give up all of Monday’s gains yesterday, aided by a disappointing ZEW investor survey, while the FTSE100 finished flat, and today’s European market open looks set to open rather mixed with the FTSE opening lower largely due to a number of companies going ex-dividend overnight.
Markets are shrugging off this morning’s Chinese economic data which came in below expectations. Industrial production in July rose 9%, below the 9.1% expected, while retail sales surprisingly slid from 12.4% to 12.2%, missing expectations of a rise to 12.5%. It would appear that the Chinese are still struggling to boost the consumption side of the economy as much as they would like, as the various measures to try and stem corruption, feed through into the economy.
US markets also slipped back yesterday as concerns about events in Ukraine continued to weigh on investor sentiment, as uncertainty about the fate of a Russian aid convoy when it arrives at the Ukraine border contrived to keep market participants on the side-lines.
As long as events in Ukraine contrive to remain at their current levels of tension, then it is likely that markets will focus more on the latest economic data due out this week.
Unfortunately there isn’t much in the way of positive news here either, which doesn’t bode well for tomorrow’s French and German Q2 GDP data, as well as the final EU July CPI reading, which after the deflationary Portugal and Italy readings this week, could well show further weakness.
If this morning’s final German CPI reading for July also exhibits similar weakness and comes in below expectations of 0.8%, the siren calls for further large scale action from the ECB in addition to next month’s TLTRO’s are likely to get cranked up even further.
In the UK the talk is of the complete reverse with speculation about a rise in interest rates continuing to grow, though some of the weakness seen in recent economic data, has tempered some of this talk recently.
Yesterday’s disappointing BRC retail sales numbers for July suggest that consumers are starting to pull back their spending, as the net numbers showed a decline for the second month in succession.
Attention is likely to be focussed on today’s comments by Mark Carney when he delivers that the latest Bank of England quarterly inflation report.
Having been compared unflatteringly earlier this year as an “unreliable boyfriend” Mr Carney is likely to much more circumspect with respect to his guidance through the rest of the year. Of particular interest will be any changes about the amount of spare capacity in the economy, given the continued weakness in wage growth.
If forecasts for wage growth get downgraded then the likelihood of a rate move this year is likely to recede. Of course the Bank could give out mixed messages if it also reduces its estimates for the amount of spare capacity in the economy from the 1% to 1.5% it gave in its May report. It is unlikely that the Bank will change its growth or inflation forecasts.
Before the inflation report we are expected to get further good news on the unemployment front with the latest ILO unemployment numbers for June expected to see a drop from 6.5% to 6.4%, while jobless claims in July are expected to show another drop of 30k, slightly lower than the 36.3k drop seen in June.
Wages growth continues to be the economic head scratcher and is the Bank of England’s biggest problem when it comes to deciding when to raise rates.
If we continue to see the gap with inflation widen out then it becomes increasingly difficult to see how the Bank could even contemplate a rate rise this year. Expectations are for flat wage growth for the 3 months to June, down from the 0.3% rise in May.
In the US the focus will be on the July retail sales numbers after the bumper consumer confidence number seen two weeks ago. For the last few months these two indicators have diverged with retail sales declining while consumer confidence has been rising.
If the forecasts are correct then we can expect to see another weak number with expectations of a rise of 0.2%, unchanged from a month ago.
EURUSD – another push lower yesterday but we were unable to take out the previous lows at 1.3333. Until such time as we do then we could well see another retest of the 1.3430 level seen at the end of last week. The main resistance remains at 1.3475, which we need to overcome to target a stronger rebound. We need to see a move back through 1.3500 to retarget the 1.3570 level and then on to 1.3640.
GBPUSD – the pound has managed to stay fairly resilient edging up towards the resistance in the 1.6820 area. This rebound now needs to get above 1.6820 to retarget a move back towards 1.6920 and then 1.7000. Support remains at this week’s low at 1.6755, while below that we also have support at the May and June lows at 1.6700, a break of which could see further losses.
EURGBP – the euro appears to have found a short term base for now but needs to get through 0.8000 to target a move towards 0.8030 initially and then 0.8085 the May lows. Downside support comes in at 0.7920 and the lows last month at 0.7874.
USDJPY – indecision remains the primary driver here as the US dollar continues to remain range bound with resistance at last week’s highs at 103.00/10 and support in the mid 101’s. There is nothing to suggest though that we won't continue to trade within the broad range that we've been in over the last six months. We have resistance at 103.00, and support at 101.20.
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