It was another day of decent gains for markets in Europe yesterday, with new records for the DAX, FTSE250 and Stoxx600.
The FTSE100 also had a good day, closing at its best levels since February last year, as a softer than expected US core CPI print raised expectations that the upward pressure on prices that we’ve been seeing for most of this year, might be finally starting to level off.
This also helped push US markets to new record highs, with the Nasdaq again underperforming, however Asia markets have been slightly more reticent after China released a 5 year plan outlining its roadmap for greater business regulation, as it steps up its oversight on certain sectors. This underperformance in Asia looks set to translate into a mixed European open.
If today’s US PPI numbers for July follow a similar pattern to yesterday’s CPI, then that could reinforce further the transitory narrative that the US Federal Reserve has been pushing on for several months now.
It’s also likely to be good news for stocks and will also take more heat out of the recent US dollar rally that saw the greenback briefly make a four-month high yesterday. US PPI is expected to come in at 7.2%, with core prices at 5.6%.
Weekly jobless claims are expected to fall to 375k, from 385k.
Before the US numbers it’s also a big data morning for the UK economy, and while there are some who say that today’s numbers are very much rear-view mirror stuff, the GDP numbers will still represent the foundation for the recovery from the Q1 slump and lockdown, and as such is an important base for the levelling off of growth that we can expect to see in Q3 and the rest of the year.
There will inevitably be bumps along the way when we get to see the Q3 numbers three months from now, with the various supply chain and “pingdemic” disruptions, but how well the economy has rebounded in Q2 will determine how solid the foundations are for the second half of this year. It will also offer important clues as to the possible direction of monetary policy over the course of the next few months.
Having seen the UK economy contract by -1.6% in Q1, a much shallower contraction than was originally priced at the start of the year, when most estimates were over double that, today’s expectations are high that Q2 will more than compensate, and more than reverse the damage to the three-month lockdown imposed at the beginning of the year.
In the months after March, we’ve seen strong PMIs of over 60 across the board for manufacturing, construction, and services for all of the second quarter.
Retail sales growth has also been decent, helped by falling unemployment as businesses reopen, and while rising prices have been a headwind, the comparatives from last year will also add a boost.
These comparatives will flatter the annualised numbers somewhat, due to the Q2 lockdown from last year, which saw the UK economy contract by -19.8%.
Private consumption is expected to make a significant contribution to the headline number, of 5.5%, while inventory restocking could also add a tailwind, as all the lost output from Q1 gets dragged into the Q2 numbers.
More importantly we will also want to see a big rebound in business investment after the -10.7% decline in Q1. These numbers could well be a slow burn given the stop start nature of the economic reopening but a rebound of 6%, would be a start, with the hope that it carries on into Q3.
Expectations are for the UK economy to expand by 4.8% on the quarter, and by 22.1% year on year, with decent jumps in imports of 8.3% and exports of 8.2%.
Industrial and manufacturing production for June are also expected to offer positive contributions to the quarter, of 0.3% and 0.4% respectively, with manufacturing rebounding after a decline of -0.1% in May.
EURUSD – found support at the March lows at 1.1704, which looks set to prompt a rebound with a break above 1.1770, seeing the potential for a move back to 1.1830. A move below 1.1700, opening the prospect of a move towards the November lows at 1.1603.
GBPUSD – failed to break below the 1.3800 area, which could well see a pullback towards 1.3920, where we have trend line resistance from the June highs. A fall below 1.3800 argues for a return to the 1.3720 area. We need to move back above 1.3930 to retarget the 1.4000 area.
EURGBP – has found a degree of support at 0.8450 but need to see a move above 0.8510 to stabilise. While below 0.8510 we still have the potential to move lower towards the 2020 lows at 0.8280. The euro needs to recover back above the 0.8510 level to stabilise and squeeze back towards 0.8580.
USDJPY – slipped back from the 110.80 area with support down at 110.20. A move below 110.00 retargets the 109.80 area. This remains a key support for a retest of the July peaks.
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