Confused? Markets certainly are, up one minute and down the next as speculation about the US economy continues to divide opinion, along with speculation about the number of possible rate rises the Fed might decide upon over the course of the remainder of this year.
Having risen sharply on Monday US markets turned on a dime and came crashing back down again as Fed officials continued to brief that the markets are underestimating the possibility of a move in June, and this is likely to see markets in Europe open lower this morning, less than 24 hours after the FTSE100 made a two week high.
Following on from yesterday’s economic data, which also helped plant a seed of concern, markets moved to price the possibility of a move in June from 4% to 14%, on the back of a significant pick up in inflationary pressures in April. Prices rose across the board, as consumers had to contend with a pickup in gasoline prices, rents, healthcare and insurance costs.
With industrial production also picking up in April, despite a downward revision to March, a number of Fed officials have continued to push the narrative of the possibility of a move next month.
Yesterday we heard from a number of Fed policymakers putting forward the optimistic case for the US economy with Robert Kaplan of the Dallas Fed along with the Atlanta Fed’s Dennis Lockhart, and John Williams of the San Francisco Fed, pushing the case for two to three rate hikes this year, though it’s easier for them to lean in this direction given that none of them have a vote this year.
Given that we saw the Fed remove its reference to global financial developments as an ongoing risk at the last meeting, the latest minutes released later today could well give an important insight into the Fed’s deliberations when it met a few weeks ago, though events have moved on a touch since then given recent weak Chinese data.
Since that meeting, at the end of April, recent Chinese economic data has turned lower, after a decent pick up in March, while we’ve heard all manner of doomsday scenarios played out in the media with respect to the consequences of a vote to leave the EU in the forthcoming “Brexit” vote, which takes place 8 days after the Fed meeting.
While there is no question that recent US economic data has been better of late, in reality it would have been hard pressed not to be, given how weak the initial Q1 GDP reading came in at.
Bearing that in mind it still seems unlikely that the Fed would move in June, firstly because there may not be enough positive data available to act with confidence, and secondly because to do so would suggest that the US central bank doesn’t really consider the UK referendum a significant enough tail risk, despite all the siren calls to the contrary, from bodies like the IMF, OECD, World Bank, not to mention President Obama.
Before the release of the latest minutes we get the latest unemployment and wages data from the UK economy in the wake of yesterday’s weaker than expected inflation numbers.
April CPI came in weaker than expected at 0.3%, down from 0.5% in March, with airfares and clothing making up the bulk of the pullback. The cost of food and going out increased, while the recent increase in oil prices look set keep a floor under prices in the months ahead, with core CPI also weakening slightly to 1.2%.
The weaker than expected inflation numbers are good news for UK consumers with average earnings still outstripping inflation. Last month, average earnings, excluding bonuses in the three months to February saw an increase of 2.2%, and this month it is expected to see wages rise 2.3%, while the ILO unemployment rate is expected to remain steady at 5.1%.
There is some concern on the margins that we could see a slowdown in hiring rates given the proximity of the referendum vote, but given that employment levels are already at record levels, this could merely be a symptom of a tighter labour market, as well as some caution ahead of next month’s vote.
EURUSD – continues to look soft while below the 1.1350 area, keeping the prospect of a move towards the April lows at 1.1220 a distinct possibility in the short term. A fall below here could well see a move towards 1.1030. We need to see a move back through 1.1430 to stabilise.
GBPUSD – we saw a brief rally back through the 1.4500 level yesterday but the failure to push through 1.4530 has seen the pound fall back. We still remain in the broader uptrend since the lows this year but need to stay above the recent lows at 1.4330 to move higher.
EURGBP – we’ve moved down through the 0.7860 level and now look set to target neckline support from the March lows which comes in at the 0.7760 area. A move through here has the potential to target further losses towards the 0.7500 area. The 0.7860 area should now act as resistance.
USDJPY – despite a brief move to 109.65 the US dollar is currently finding life difficult near the 109.50 area. While we could well extend up to 110.20 the bias remains for a move back towards 107.80 and back to the recent lows at 106.80, with the 200 week MA at 105.30 the major support level.
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