With all the bad news that has dominated the airwaves in recent months it was very welcome to see that US CPI rose significantly less than expected in October to its lowest level since January, prompting a huge relief rally in stocks, bonds as well as a sharp selloff in the US dollar.
The rally was given added legs by at least three Fed speakers, Dallas Fed President Lorie Logan, Philadelphia Fed President Patrick Harker, and San Francisco Fed President Mary Daly, who indicated that a slower pace of rate hikes might be appropriate.
US headline CPI has been falling from its peaks in June for several months now, but core prices have proved to be slightly stickier. Yesterday these fell back as well, and while the rise in the US dollar may have had a part to play in that, it's still welcome news at a time when investors are concerned about central banks overtightening.
Unfortunately, inflation is showing little signs of slowing elsewhere, and while one number doesn’t make a trend, markets latched onto the weak number, pushing European markets sharply higher, with the DAX closing well above its 200-day SMA and its highest level since June.
As if to emphasise the diverging fortunes when it comes to inflation, German CPI inflation for October is expected to be confirmed at a record high of 11.6% later today, while UK CPI could see a move up to 10.5% next week.
US markets also closed strongly higher, posting their biggest one day move since April 2020.
Asia markets have seen a similarly positive session, carrying over from the US, but also boosted by reports that China has taken the decision to scrap Covid flight restrictions, as well cutting the quarantine requirements for inbound travellers to 8 days, with other tweaks with respect to close contact periods for those who have been in contact with confirmed cases. This looks set to spill over into a strong end to the week for markets in Europe, with markets here looking to set to build on yesterday’s strong rally with a positive open.
With the fiscal statement due next week, today’s UK Q3 GDP numbers are expected to highlight starkly the foolhardiness of what is likely to come from the Chancellor of the Exchequer next week.
Today’s numbers are expected to see a sharp contraction of -0.5%, with the outlook for Q4 unlikely to be much better, and yet next week the UK government is set to cut spending and raise taxes to plug what the OBR says is a fiscal black hole of £40bn or so, depending on varying assumptions about interest rates, inflation and growth. It’s certainly a worrying number, but I’m not sure the measures next week will do anything to close that gap. If anything, they could make things worse at a time when the economy is slowing sharply.
We already know that retail sales in August and September were very weak, along with industrial and manufacturing production, which means that this morning’s data is likely to point to a sharply slowing UK economy, despite a surprise revision higher to Q2 GDP to 0.2%.
The recent monthly GDP numbers don’t offer much hope for a good number today, with July expanding by 0.1%, while August saw a -0.3% contraction. September is unlikely to be much better, given the extra bank holiday for Queen Elizabeth II's funeral, which means we could see a monthly contraction of -0.4%, and a quarterly contraction of -0.5%.
Private consumption is expected to provide the main drag, with a -0.5% decline, along with index of services which is also forecast to decline -0.2% on a quarter-on-quarter basis.
We also have the latest numbers for September industrial and manufacturing production, as well as construction output which are also expected to be negative.
German inflation is also expected to be confirmed at a record high of 11.6% on an EU-harmonised basis.
EUR/USD – surged above 1.0100 area yesterday, as well as the September highs of 1.0200, opening the prospect of a move towards 1.0370, keeping the uptrend intact from the September lows. Support remains back down near the 50-day SMA at 0.9880.
GBP/USD – having managed to hold above the 50-day SMA at 1.1330 the pound surged higher; tripping stops all the way through 1.1700 with the next resistance at the September peaks at 1.1735/40. Above 1.1750 targets the 1.1980 area.
EUR/GBP – having surged up to the 0.8830 level earlier this week, we went into full reverse and have slipped lower again. Support comes in at the 0.8690 area, a break of which targets the 100-day SMA and trend line support from the August lows.
USD/JPY – broke below the 50-day SMA and 145.10 support, triggering the potential for a move towards the 140.00 area. This coincides with the 22nd September lows. A break of 140.00 targets a move towards 138.00. The 145.10/20 area now becomes resistance on any squeeze higher.