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Europe set for positive open ahead of US PPI, jobless claims

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Yesterday saw another record-breaking day for the FTSE100 as it broke above the 8,000 level for the first time ever. The UK index was undoubtedly helped by a combination of a sharp decline in headline January UK CPI, as well as a weaker pound, which helped to boost the consumer discretionary sector, which includes retailers and house builders.

The sharp -0.6% month on month decline in headline CPI prompted a slide in gilt yields as well as an expectation that yesterday’s numbers might mean less aggressive rate hikes from the Bank of England in the months ahead.

This comes across as wishful thinking at best given that inflation is still in double figures with food price inflation at 16.7%, while wages pressure, which the Bank of England is becoming increasingly concerned about, is still rising, and unlikely to subside soon. One thing inflation in the UK is prone to is being extremely sticky, it goes up very quickly and comes down very slowly.

With strike action still ongoing and the 18% pay deal agreed with London bus drivers likely to act as a benchmark, wage pressure is also likely to remain high. This suggests that far from the Bank of England being close to a pause they may well have to go further in the coming months. When looked at through this prism, it makes the idea of keeping rates where they are, even more mind boggling, which is the current position of at least 2 MPC members.

Today we will get to hear from Bank of England chief economist Huw Pill where he is likely to get questions on this week's inflation numbers as well as the resilience in wages.

US markets also had a strong session, even as retail sales for January came in at 3%, more than wiping out the declines seen in the November and December numbers. The milder weather in January appears to have driven strong growth across the country with restaurant sales seeing an increase of 7.2%.

While this is excellent news for the US economy, it's bad news for those who think the Fed will have to slow the pace of its rate hiking cycle in the coming months, with the US 6-month treasury yield pushing to its highest level since 2007, above 5%.

Despite this move higher in short- and long-term yields, US markets also gained ground with the Nasdaq 100 leading the way, as investors took the view that the US economy could withstand a more aggressive Fed. Whether that remains to be seen in the longer run remains to be seen, but markets are running with that narrative for now as the Nasdaq looks to retest its highs this month.  

As we look ahead to today’s European session, we look set for a positive European open, and another record high for the FTSE100, with the focus shifting to today’s US PPI numbers for January and a confirmation that supply chain and factory gate costs are also easing sharply.

This seems more likely given that freight costs have fallen back and are continuing to do so, and energy costs have also come down. Final demand PPI is expected to fall from 6.2% in December to 5.4%, while core PPI is expected to drop from 5.5% to 4.9%.

Weekly jobless claims are expected to rise modestly to 200k from 196k.

EUR/USD – slipped back to the 1.0650/60 area yesterday which needs to hold to prevent a move down to the 1.0480 level. A move above 1.0800 targets a move towards 1.0920. 

GBP/USD – fell back below the 1.2000 level yesterday but crucially we are still above the 200-day SMA which is the next key support area at 1.1930/40. Below 1.1930 retargets the 1.1835 area, while we need to see a move through 1.2300 to reopen a move towards 1.2400.

EUR/GBP – rebounded strongly yesterday, reversing the declines of the previous 4 days but held below the 0.8900 area. Above 0.8900 retargets the February highs at 0.8960. Support remains back at the 50-day SMA at 0.8780/90, and the 100-day SMA at 0. 8740..

USD/JPY – continues to ratchet higher after breaking above the 50-day SMA earlier this week and looks on course to head towards the 134.50 area, as well as the 200 day SMA at 136.70.

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