It only took a few hours to shrug off Friday’s surprise US jobs miss, as both the Dow Jones and S&P 500 closed at new record highs at the end of last week, however in a manner similar to previous days the Russell 2000 and Nasdaq struggled to match the outperformance of their two larger counterparts.
This underperformance in the Nasdaq once again started to act as a drag on wider market sentiment as another disappointing close served to undermine confidence more broadly, and pull all US indices lower, though not before the Dow posted yet another record high.
Once again it has been concern about inflation that appears to be weighing on broader market sentiment, with commodity prices once again the major culprit, ahead of US CPI numbers that are due out later this week.
Putting to one side the fact that Friday’s jobs miss is likely to keep the Fed on hold for quite a while longer given the lowered expectations for sharply higher jobs growth much before September, when the latest set of unemployment benefits expire, it seems that investors are now fretting about rising prices and sharply higher inflation again.
The big question is whether they are right to be, and while we’ve seen sharply higher prices in the latest ISM surveys and commodity prices are also on a tear, the bigger concern is whether they are likely to be temporary, or much more persistent. In the short term, it is probably too early to know, but we do expect to see a big rise in US headline CPI later this week, however that also has to be put into the context of where prices where a year ago when US oil prices went negative, to -$37 and Brent which went as low as $16.
Quite simply the base effects from last year’s plunge in commodity prices, and especially in oil prices, are set to play out further with a further sharp rise in this week’s April numbers given where prices are now, relative to a year ago.
The fact is while 10-year yields popped back above 1.6% yesterday, after dropping as low as 1.465% on Friday, 2-year yields have barely moved. Nonetheless, this concern about rising prices appears to be being fuelled by rising US five-year inflation expectations, which yesterday hit their highest levels since April 2011.
In any case, yesterday’s big slide in the Nasdaq looks set to translate into a negative open for markets in Europe later this morning, after Asia markets also slid back after the latest Chinese inflation numbers also showed a big jump in April. Chinese CPI rose from 0.4% in March to 0.9% in April, while factory gate prices also jumped sharply to 6.8%, from 4.4%, a really sharp turnaround given that they were at -0.4% at the end of last year.
It will take a few more months for these base effects to wash through, and by then we’ll probably have a much better picture of where we are, and whether central bank confidence about transitory inflation is misplaced or not. Later today we get to hear from various Fed policymakers, including permanent Fed governor Lael Brainard, who is likely to take the opportunity again to reinforce this confidence about the inflation outlook.
On the data front today, the only data of note is the latest German ZEW survey of investor sentiment, which given recent gains in equity markets should see a rise this month to 72, from 70.7.
The pound had one of its better day’s yesterday, posting its best gain in a month after breaking above the 1.4020 level over the weekend as a number of short positions got cleared out, and some of the caution over last weeks elections started to lift, and optimism over the upcoming economic reopening came back to the fore. Today we get the Queens Speech where the government will set out its agenda for fulfilling the promises made as it looks ahead to the post pandemic economic agenda.
EUR/USD – moved up to the 1.2180 level, opening up the prospect of a move towards the high this year at 1.2305. Support now comes in at the 1.2080 level, with a fall below 1.2070 opening up a move back towards 1.2020.
GBP/USD – broke above the 1.4020 area, pushing through this year’s previous high at 1.4115, and we now open up the prospect of a test of the 2018 highs at 1.4375. The 1.4020 area now becomes a key support for this move higher. A fall back below 1.4000 undermines and argues for a move back to 1.3920.
EUR/GBP – the failure to overcome the 0.8730 area has seen the euro fall back through the 50-day MA and 0.8620 area and open up a move back towards the 0.8580 area. A break through here opens up a move back to the April lows at 0.8478.
USD/JPY – has continued to drift back towards the trend line support from the January lows which now comes in at the 108.10 area, which thus far has supported the move higher. Below the 107.80 area opens up the prospect of a move back towards 106.80.
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