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German economy set to be confirmed in recession

We saw a cautious start to the week for European markets yesterday with the CAC 40 and DAX both treading water close to last week’s record closing highs, and today’s economic numbers expected to show further evidence of weak economic activity in Europe.

US markets were slightly more upbeat with the S&P500 setting fresh record highs ahead of tomorrow’s Fed rate meeting and today’s earnings numbers from Microsoft, Alphabet and AMD all of which will be reporting after the closing bell, while the other three from this week’s big cap earnings releases from Amazon, Apple and Meta are all due to report Thursday.

The strong finish in the US could see European markets open at, or close to recent record highs themselves later this morning.

In view of the gains that we’ve seen in these big cap stocks over recent weeks the bar has been set very high. How high can be shown in the current value of just these 5 companies of Apple, Amazon, Alphabet, Meta Platforms and Microsoft which add up to a total market cap of just over $10trn, putting the total value of all 5 companies at over 50% of the total market cap of the Nasdaq 100.

Let’s hope the market likes what this week’s earnings numbers tell them.  

Today’s economic numbers from Europe could also serve to bring forward market expectations of when to expect the first rate cut from the European Central Bank. At the end of last year, the ECB was at pains to push back on the idea that we might see a rate cut much before the summer of this year, citing a sharp uptick in December CPI and concerns about elevated wage growth.

A few weeks further forward and one month into 2024 and cracks are starting to emerge in that consensus, after comments yesterday from Portuguese ECB governing council member Mario Centeno who said that rate cuts should start sooner rather than later so that the process is gradual, without any need to wait for wages data.

Additional comments from Slovakia member Peter Kazimir served to reinforce the dovish shift, arguing the case for rate cuts although his confidence over timing was less fixed, and very much data dependant, although he admitted that June was more likely than April. 

Today’s Q4 GDP numbers from Europe’s 4 biggest economies could well serve to bring that June timeline forward into April, with markets now pricing the first rate cut at the April meeting, sending EUR/USD below 1.0800 for the first time in 6-weeks,

The French economy is predicted to improve modestly to 0% in Q4 from -0.1% in Q3, however there is considerable downside risk to this estimate if recent PMI numbers are any guide.

 In Italy the picture looks little better with a stagnation also expected, and a modest slowdown from 0.1% in Q3, while in Germany the economy is expected to be in recession with a -0.1% contraction in Q3 followed by a bigger -0.3% contraction in Q4.

The only silver lining is Spain where the economy is expected to grow by 0.2%, however that is unlikely to be enough to prevent the bloc sliding into a technical recession with another quarterly contraction of -0.1% following a similar contraction in Q3.

This would be a blow to the ECB which has consistently insisted that Europe isn’t in a recession, however based on how poor recent PMI and other related economic numbers have been, it is difficult to see how it can’t be.

We’ve also got some important economic numbers from the UK with the latest lending numbers for December, and which could point to a weak end of the year, given the sharp slide in retail sales we’ve seen in some of the recent economic numbers.

The recent decline in mortgage rates has seen a pickup in mortgage approvals from the lows of 43.7k in September, and could well see a further pickup to the highest levels since June last year with 53k.

Net consumer credit is expected to slow from £2bn to £1.5bn.

Markets will also be focussed on the conclusion of the Federal Reserve rate meeting, which starts today, and concludes tomorrow, with today’s JOLTS data expected to show vacancies in the US to slow modestly to 8.72m in December, from 8.79m in November which would be close to a 3-year low, but still well above the levels we saw pre-pandemic, when they were around 7.2m.

EUR/USD – slipped below the 1.0800 area yesterday, opening up the prospect that we could see a move towards the 1.0720 area. Resistance at the highs last week at 1.0930 and behind that at 1.1000. 

GBP/USD – the failure to move back towards the recent highs could see a return to the 1.2590 area on a move below the 50-day SMA. We need to get above 1.2800 to maintain upside momentum, and target the 1.3000 area.

EUR/GBP – continues to look a little soft, with a break below 0.8500 opening the risk of a move towards 0.8470. Resistance at the 0.8570/80 area and behind that at the 0.8620 area.

USD/JPY – struggling to move back through the 148.50 area for the time being, with the risk we could slip back to the 146.65 area which saw the US dollar rebound from last week. Above the 148.80 area potentially opens a move towards 150.00.

FTSE100 is expected to open at 7,632

DAX is expected to open at 16,941

CAC40 is expected to open at 7,640.


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