After an initially positive start to the day yesterday, only the FTSE 100 managed to eke out any sort of gains, after a rebound in yields and the fading of the Nvidia sugar rush saw European markets slip into negative territory. US markets, having started very much in a positive vein with the Nasdaq 100 leading the way higher, also turned tail as bond yields pushed higher, along with the US dollar, finishing the day sharply lower.
As we look towards today’s European open, the rise in yields and weak finish in the US, as well as weakness in Asia this morning, is set to see European markets open lower this morning. Much of the narrative for this month was supposed to be centred around what Fed chair Jay Powell would likely say at Jackson Hole today with respect to the prospect of another pause in the rate hiking cycle when the FOMC meets next month. This week’s poor economic data out of Germany and France has shifted the spotlight a touch when it comes to central bank policy towards the European Central Bank and Christine Lagarde’s speech, at 8pm tonight, after Powell who is due to speak at 3:05pm.
While this year's Symposium is titled “Structural Shifts in the Global Economy” it won’t be just Jay Powell whose words will be closely scrutinised for clues about rate pauses next month it will also be the Bank of England and the Bank of Japan where markets will be looking for important insights into the risks facing central banks in terms of the risks in over tightening monetary policy at a time when the challenges facing the global economy are numerous.
This week’s PMIs have highlighted the challenges quite clearly to the point that it appears the ECB may well also look at a rate pause next month, alongside the Federal Reserve, although the reasons for an ECB pause are less about inflation falling back to target, than they are about a tanking economy. The latest German PMIs suggest the prospect of another quarter of contraction in Q3, while the Bank of England has a similar problem, although the bar for a pause next month is slightly higher given how much higher UK CPI is relative to its peers.
Before we hear from ECB President Christine Lagarde, Powell will set the scene just after US markets open, and his tone is likely to be slightly less hawkish than he was a year ago. When Powell spoke last year, he made it plain that there was more pain ahead for US households and that this wouldn’t deter the central bank in acting to bring down inflation, even if it meant pushing unemployment up. While Powell is unlikely to be anywhere near as hawkish, as he was last year, he won’t want to declare victory either. As we already know from recent comments from various Fed officials it is clear that the Fed believes the fight against inflation is far from over, and in that context it’s unlikely he will deliver any dovish surprises.
This belief of a slightly hawkish Powell is likely to have been behind yesterday’s sharp declines in US markets, which were driven by rising yields as investors continued to price in higher rates for longer. Not even a set of blow-out earnings from Nvidia was enough to keep markets in the black, with the shares opening at a new record high above $500, before sliding back to finish on the lows of the day, closing unchanged. The inability to hold onto any of the early gains suggests that the recent enthusiasm for this $1trn chipmaker may be due a pause.
While investors will be focussing on Powell, the focus today returns to the German economy and in the wake of this week’s poor PMIs we’ll be getting the latest snapshot of the business sentiment in Europe’s largest, but also sickest economy, as well as the final reading of Q2 GDP.
The most recent German IFO business climate survey showed sentiment falling to its lowest level since October last year in July at 87.3, and is expected to slow further to 86.8. Expectations also slipped back to 83.5 suggesting the economy could remain in recession in Q3.
Any thoughts that we might see an improvement in August are likely to have been dealt a blow by the sharp rise in oil prices seen in the last few weeks as well as this week’s PMIs. With recent economic data out of China also suggesting a struggling economy German exporters are likely to continue to find life difficult.
EUR/USD – sinking below the 200-day SMA at 1.0800 with support just below that at trend line support from the March lows at 1.0750. Still feels range bound with resistance at the 1.1030 area.
GBP/USD – slipped below the 1.2600 area which could well open up a move towards 1.2400 and the 200-day SMA. We still have resistance at the 1.2800 area and 50-day SMA.
EUR/GBP – the rebound off this week’s 11-month low at 0.8490 looks set to retest the 0.8600 area. We also have resistance at the 0.8620/30 area.
USD/JPY – rebounded off the 144.50 area with resistance at the highs this week at the 146.50 area, with resistance also at 147.50.