It was another decent day for US markets as they finished higher for the fourth straight day, except for the Russell 2000, but we still look set to see European stocks open modestly lower this morning, after Asia markets slipped back and Facebook owner Meta missed on its earnings numbers and issued weak guidance, knocking US markets lower in post market trade.
All eyes in Europe today are set on London and Frankfurt, and two important central bank meetings. Before that however we have the latest services PMI numbers for January, which are set to show a modest pickup after the slowdowns in December, however economic activity is still expected to be subdued. In Germany, services activity rebounded back into expansion territory of 52.2, while in France activity slipped back to 53.1. In the UK, services activity is expected to remain steady at the levels seen in December at 53.3.
It’s a tale of two central banks today, with the Bank of England set to raise its key lending rate for the second meeting in a row, the first time this has happened since 2004, and the European Central Bank, which is expected to keep rates unchanged. So far so straightforward, however today isn’t so much about the decisions, but about the messaging from Bank of England governor Andrew Bailey, and ECB president Christine Lagarde.
It’s hard to say which of the two has the harder task; Andrew Bailey, who has insisted that it’s not the central bank's job to steer financial markets, or Christine Lagarde, who once famously said it’s not the ECB’s job to close spreads, a faux pas which she quickly had to rectify. Either way, both will have to adopt a degree of linguistic legerdemain to stop markets from over interpreting their intentions when they take questions over their respective decisions this afternoon.
Starting with the Bank of England, the expectation is that the MPC will pull the trigger on a 0.25% hike to 0.5% today, while at the same time not giving too much away about their intentions for March, or for the rest of the year. This reluctance in giving too much away will be due to the difficulties in determining the effect of the fiscal and energy price squeeze that is coming in April. As things stand markets are already pricing in five rate hikes for this year, so it’s likely that Bailey will push back on that, however we could also see the central bank also stop reinvestments of bond purchases, which would be passive quantitative tightening.
One thing that has been notable in the lead-up to today’s meeting has been the lack of pre-briefing from MPC members, which has been welcome in a way, as it means market expectations have been completely data driven, and not been driven by the various biases of the MPC members. In any case with CPI already well on the way to 6%, the MPC has no choice but to act today on rates, or risk losing all measure of credibility on their inflation fighting capabilities.
Bank of England governor Bailey will also have to get used to the idea that it his job to steer financial markets given that they appear well over their skis on rate-hike expectations for this year. Let’s hope he’s taken that lesson on board and takes the press conference more seriously than he has appeared to do previously. His dismissive or jocular demeanour about guiding markets' expectations does not serve him well when answering serious questions about policy.
It’s also set to be a key test for the communication skills of President Lagarde after yesterday’s January CPI rose to a new record high of 5.1%, against an expectation of a decline to 4.4%. For several months Lagarde has insisted that that the central bank is not inclined to look at raising rates this year, and that current levels of inflation are transitory in nature.
While her argument that the EU recovery is behind that of the US, and that any policy response need not be rushed, it should also be noted that a key criticism of the US central bank is that they are sharply behind the curve. Lagarde’s words are also likely to ring extremely hollow in the Baltic states where CPI is already above 10%, while in Germany it’s at 30-year highs. She, of course can point to the fact that core CPI fell back from 2.6% to 2.3%, however at some point these energy prices will translate into higher prices in the shops, and become more embedded, a trend that has already made itself felt in the US and UK, where rate hikes are about to begin.
We already know that the PEPP programme is ending next month, and there could well be significant discussion on what happens with respect to the APP program, which is currently running at €20bn a month. Another area to keep an eye on will be new Bundesbank President Joachim Nagel after he fired a broadside at the ECB last month warning that the bank needed to be vigilant given his concern that inflation risks are very much elevated to the upside and could last a lot longer than expected.
This will be the challenge for the ECB especially if they try to persist in the argument that inflationary pressure is transitory and will fall in the second half of the year. Yesterday’s reports that Russia is limiting fertiliser exports will only add further upside pressure on food prices as we look towards the spring and summer planting season. That makes it very difficult to argue the case for lower prices, if they then adjust their inflation forecasts higher, while watching from the sidelines as the Bank of England and Federal Reserve then go on to raise rates multiple times in the coming months.
In the US, weekly jobless claims are expected slip back again, from 260k to 245k, as more people return to work after being off sick with Omicron.
EUR/USD – this week’s rebound from the 1.1125 lows has seen the euro pull back through the 1.1270 area, with the risk of a move towards the 1.1380 level. Support now comes in at the 1.1270 area.
GBP/USD – four days of gains have seen the pound back towards the 1.3600 area with the next resistance around the 1.3670 area. Support comes in at the 1.3520 area, which could be the launching point for a move towards the 200-day MA at 1.3720.
EUR/GBP – continues to find support at the 0.8305 level, but the rebounds are getting shallower, which suggest the potential for a move lower towards 0.8270. We have resistance back at the recent highs at 0.8420.
USD/JPY – continues to drift lower with support now at the 114.00 area. A move below 114.00 has the potential to see a return the 112.20 area. We have resistance at the 115.00 area.