While the FTSE100 slid back for the third day in succession, the DAX and CAC40 broke their own 3-day sequence of successive losses with a modest gain in a subdued trading session.
US markets also managed to eke out a modest gain yesterday, however it was notable that the main action on the day took place on the bond market with a steep sell-off in short-dated bonds, and a sharp rise in 2-year yields in the UK, Germany and the US, with both the UK and US yield curves inverting sharply.
Today’s economic docket is set to show the latest adjustments to German and US Q2 GDP, however on a more up to date note, we also have the German IFO business survey for August, which isn’t likely to be positive reading, as we look ahead to a slightly higher European open,
After the weakness seen in this week’s German flash PMIs, today's IFO survey is likely to paint a bleak outlook for the German economy in terms of the current business climate, as well as business expectations.
With both services and manufacturing in contraction, and energy prices surging to eye wateringly high levels, as Russia continues to weaponize the flow of gas through Nord Stream 1, it would be surprising if we didn’t see further deterioration in these key economic indicators.
In July the IFO business climate fell back to its lowest levels since June 2020, as the economy started to reopen post Covid lockdown. With all the problems the German economy is facing alongside the falling river levels on the Rhine its not likely to be a surprise to see a further deterioration here with the only question being as to by how much.
Economic expectations are also likely to see a further decline from the 80.3 in July.
Before the IFO numbers are released, we’ll get the final update of how the German economy performed in Q2, with no change expected to the initial estimate of 0%.
Later in the day we’ll also get the latest snapshot of the US economy and the latest revision to Q2 GDP, which is expected to see the initial -0.9% contraction revised slightly higher to -0.7%, with personal consumption expected to see an uplift of 0.5% from 1% to 1.5%. These numbers won’t tell us anything we don’t already know about the US economy, in that while the GDP figures say the US is in a technical recession, the labour market tells a different story.
In the last month, weekly jobless claims have fallen back from 8-month highs of 261k to 250k, suggesting that after weeks of edging higher, the labour market still looks as tight as a drum. and this week’s numbers are forecast to hold at or around these levels.
The Jackson Hole Symposium also gets underway today with the main focus expected to be on Federal Reserve chairman Jay Powell’s speech which markets have become increasingly nervous about over the past few days, and which has seen bond yields move sharply higher in the expectation he will deliver a hawkish message.
Entitled “Reassessing Constraints on the Economy and Policy” the symposium will be closely scrutinised for evidence of the Federal Reserve’s intent with respect to its September meeting, 50bps or 75bps, as well as the intent of other central banks more broadly at a time when inflation expectations are surging against a backdrop of concern over the risks of overtightening monetary policy at a time, when the challenges facing the global economy are numerous.
EUR/USD – managed to hold above the 0.9900 level yesterday but the bias still remains for a move towards the 0.9620 area, while below the 1.0220. We also have major trend line resistance from the January highs at 1.0280.
GBP/USD – held above the lows this week at 1.1718 area but the rebounds remain weak. Bias remains to the downside towards the lockdown lows of March 2020 at 1.1500. Resistance comes in at 1.1980 area.
EUR/GBP – found support just above the 0.8400 area where we have trend line support from the recent lows. We also have resistance at the 0.8510 area, and the 50-day MA.
USD/JPY – holding above cloud support at the 137.10 area yesterday but needs to overcome the highs this week at the 137.70 level, to open up the 139.40 area and previous peaks. Major support comes in at the 50-day SMA at 135.70.
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