European markets look set to finish lower for the second week in succession as concerns about a weakening growth outlook and the efficacy of central bank policy in combating it, start to weigh on sentiment.
The recent weakness in the US dollar along with a rise in oil prices, which has been one of the primary drivers of the recent rebound in equity markets, appear to be showing some signs of tiredness, and it is this uncertainty that appears to have driven a significant amount of profit taking in recent days, along with a realisation that potential earnings growth for the remainder of 2016 may well need to be revised down again, after a raft of disappointing guidance downgrades.
While oil prices did manage to finish higher yesterday this probably had more to do with events in Alberta, Canada and the fire ravaging oil production in that region. In the longer term, any spill over effects are likely to be short lived given the fact that in the wider scheme of things oil inventories remain at historically elevated levels.
The main focus today is set to be on today’s US payrolls report for April with expectations revised downwards a touch after this week’s disappointing ADP report of 156k.
Correlations between the two reports have always tended to be tenuous at best, but the fact remains markets always try and extrapolate a correlation, and this month has been no different.
Expectations around todays number are for 200k new jobs to be added for April, down from 215k in March, which would be more in line with the better than expected ISM non-manufacturing report which came out on Wednesday, which saw a decent rise in the employment component, with the unemployment rate remaining steady at 5%, but there does appear to be an undercurrent of concern that suggests we could see a miss to the downside.
It is important to note that despite the markets fixation on the jobs numbers which have been consistently positive for the last eighteen months that the primary focus has shifted away from the jobs data and more towards the second pillar of the Fed’s mandate which is prices.
A poor or decent jobs number is neither here nor there in spite of last night’s comments from St. Louis Fed President James Bullard that the job market is relatively tight already, and San Francisco Fed President John Williams assertion that 2 to 3 rate rises this year remains a reasonable expectation.
The main focus in recent months has been on inflation and wages, and while Fed funds futures assigns a 10% probability that rates could rise next month it is in this area where we could see expectations start to shift.
There has certainly been evidence in the data this week that prices are starting to edge higher with significant rises in the prices paid components of the ISM manufacturing and non-manufacturing surveys, and a significant increase in Q1 labour costs. As such the focus needs to be more on whether the rise in prices which we’ve seen in some of the recent data is something the Fed is prepared to ignore at a time when jobs growth and potentially the economy could be starting to slow, along with a slowdown in productivity growth.
The missing element all along has been the absence of a rise in average hourly earnings which apart from a sharp jump in January as minimum wage increases kicked in, has been fairly lacklustre. Expectations are for a monthly rise of 0.3%, which would translate into a 2.4% rise year on year.
EURUSD – the euro has continued to decline breaking below the 1.1420 area and potentially opening up a move towards the April lows at 1.1220. Only a move below the 1.1140 level, the lows at the end of March argues for a deeper move towards 1.1050. We need a recovery back through the 1.1480 level to stabilise.
GBPUSD – the pound has continued to remain under pressure after peaking at 1.4770 earlier this week, pushing below the 1.4460 area. The key day reversal continues to loom large over any potential rebound and we need to see a recovery through the 1.4600 level to stabilise. Only a break below 1.4300 would undermine the bullish scenario.
EURGBP – having failed to push above the 200 week MA the bias remains to the downside while below 0.7950. We have neckline support at 0.7750 from the March lows which, if broken could trigger a sharp down move. A move and close above 0.7940 retargets the 0.8000 area.
USDJPY – the next support for the US dollar currently sits down at the 200 week MA at 105.20. A weekly close through here has the potential to open up the 100 level, but for now the risk remains for a recovery back through the 107.80 area, which could well see a return to the 109.00 area.
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