European markets got the first full trading week of 2019 off to a softer start, while US markets continued to move higher after the big gains seen on Friday, as optimism over the start of trade talks between the US and China helped buoy sentiment already boosted by Fed chairman Powell’s comments about the Fed being patient about the prospect for further interest rate rises, and balance sheet reductions.
The decision by Chinese President Xi to send his top trade negotiator Liu He to the first day of medium level talks appears to have been interpreted as a statement of intent by the markets that China is serious about coming to a speedy arrangement. The bigger question remains around whether US officials share that intent now that US equity markets appear to have rediscovered some of their lost mojo.
On the data front Friday’s payrolls and wages data, as well as Powell’s dovish comments, still appear to be overshadowing the latest ISM numbers this time from the US services sector, which showed a small decrease in the headline number for December, as well as the prices paid component, in a similar manner to last week’s internals from the manufacturing numbers.
This would appear to show that the inflationary trend seen in the middle of 2018 has slowed sharply from the mid 70’s prices paid numbers seen in June and July, to the two-year lows we saw in last week’s manufacturing numbers. These declines would appear to suggest that inflationary pressures are sharply abating and if they continue to do so could well further erode expectations about any further tightening measures from the US Federal Reserve as we head into 2019.
While the US economy continues to show decent levels of economic activity there does appear to be some signs that this could be about to slowdown, despite Friday’s bumper payrolls report.
Despite these signs the US still remains a standout performer when compared to its peers, with the Chinese economy slowing sharply, if recent PMI’s are any guide, while in Germany the latest factory orders data for November showed a sharp decline of 1% yesterday.
If today’s industrial production numbers for November show similar weakness then we could well see concerns grow about the prospect of a contraction in Q4 German economic output and a possible recession, following on from Q3’s contraction in economic output.
Crude oil prices have also continued their recent recovery from their December lows, helped by a weaker US dollar, the resumption of China/US trade talks, as well as the more positive sentiment around equity markets, as well as Saudi Arabia delivering on its promise from last month, to cut back on its output.
The US dollar had another poor session yesterday as markets started to price in the prospect that the Fed may well be set to go on a rate pause for the next few months, after Powell’s sudden change of tone at the end of last week. This would appear to be a sensible tactic given the concern at the end of last year that the Federal Reserve was on the cusp of making a huge policy error. It would appear that the message has got through and that after a series of 8 rate rises in the last two years, it might be prudent to pause and reflect for a while.
The pound has shrugged off reports that UK and EU officials are exploring the possibility of asking for an extension of Article 50. This could prove to be highly problematic for some in the Conservative Party, notwithstanding the fact that the European elections are only two months later. Given the current voting mathematics on the House of Commons it isn’t immediately clear what difference it would make, unless the UK was asking for additional time in order to hold another referendum of general election.
The UK retail sector remains in focus yesterday after a couple of decent positive pre-Christmas trading updates from the likes of Next and Dunelm Group. Today it’s the turn of food retail with the latest numbers from Morrison in the wake of yesterday’s update from young upstart Aldi who saw 10% growth in their sales numbers which came in just under £1bn. The big question here whether these record numbers came at the expense of the big four supermarkets or are a bellwether of what is to come, starting today.
EURUSD – continues to chop within the broad range we’ve been in since the end of October, capped around the 1.1500 area and support in the mid 1.1200’s. Until we get a significant break either side of this range then we can expect to see more of the same. Above 1.1500 targets the 1.1600 level.
GBPUSD – made a marginal new multi month low last week at 1.2430 before rebounding strongly. We need to recover back through the 1.2820 area to retarget the 1.3000 area. A move below 1.2400 retargets the 2016 lows near the 1.2000 area.
EURGBP – the 0.9100 level remains a key resistance area despite a brief spike to 0.9120 last week. Bias remains for a move back below 0.8920 towards the 0.8820 level as the broad range of 0.8700/0.9100 that has held sway for the last four months remains intact.
USDJPY – last week’s plunge was unable to break below last year’s low at 104.60, and has rebounded strongly since then. We need to recover back through the 109.20 area to argue for a return to the 110.30 area.
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