For a good part of this month, European and US markets have seen the progress off their lows in October come to a halt, as we come to the end of the year, and ahead of three big central bank meetings later this week.
European markets posted their first significant weekly loss since October, as did markets in the US, with the Dow similarly posting its worst week since September, as concerns over a slowing economy and the future pace of interest rates rises weighed on sentiment. This late Friday slide in the US looks set to weigh on today’s European open.
For most of the last few weeks there has been widespread anticipation that we may well have seen peak inflation in the US, as well as peak US dollar. Recent economic data from the US services sector as well as wages data has thrown this calculation into some doubt, along with the recent sharp drop in temperatures, which is exerting upward pressure on gas prices.
Friday’s US PPI numbers saw November inflation come in higher than expected at 7.4%. While there was some disappointment that this was above the 7.2% forecast, it was still a sizeable fall from the 8.1% seen in October. More importantly, we also saw core prices fall back from 6.8% to 6.2%, the lowest level since July 2021, and over 3% below the peaks this year.
This so-called “miss” saw US bond yields close the week off their lows, and also higher on the week for the first time in over four weeks. While disappointing for the peak inflation narrative, Friday's numbers don’t change that much. Just because the speed of the slowdown is not as big as expected, it still doesn’t change the direction of travel, and with crude oil prices now in negative territory for the year, sometimes it's more about the destination than the speed with which you get there, something that markets occasionally overlook.
Nonetheless the focus this week will remain on inflation, not just in the US, but also in the UK, as we gear up for the final rate decisions of the year from the Federal Reserve, and the Bank of England, as well as the European Central Bank thrown in for good measure.
In fact, we have an absolute avalanche of data announcements this week not only from the US, but also the UK, starting today with the latest monthly GDP numbers for October, as well as industrial and manufacturing production numbers, which are expected to show that the UK economy is in a poor state of health, despite low levels of unemployment.
In September, UK GDP slumped by -0.6% on a monthly basis, as consumers hunkered down ahead of the October energy price cap, as well as the funeral of Queen Elizabeth II. Index of services is expected to lead the rebound in economic activity, with a rise of 0.5%, after the -0.8% contraction seen in September. On a rolling three-month basis, the economy is expected to contract by -0.4%.
Today’s October numbers should see some of that reversed to the tune of 0.4%, however both industrial production and manufacturing are expected to remain subdued, with industrial production expected to come in at 0%, and manufacturing production set to contract by -0.2%.
This week’s UK data will present the Bank of England with a huge problem later this week in terms of the size of this week’s rate hike, albeit one partially of their own making due to being 'asleep at the wheel' a year ago. With economic activity slowing due to a weakening economy and high inflation, the Bank will have to decide between a 50bps or a 25bps rate hike, in the full knowledge being seen to be weak on their core mandate, could invite speculation that they aren’t serious about bearing down on prices, especially with wage inflation above 6% and set to go higher in data due to be released tomorrow.
EUR/USD – had another failed attempt at the 1.0600 area last week. A move above 1.0620 targets the potential for a move towards 1.0800. Below 1.0400 targets the 1.0340 area and 200-day SMA.
GBP/USD – slipped back from the 1.2320 area at the end of last week. Currently have support around the 200-day SMA at 1.2110. A concerted move through 1.2300 targets the 1.2750 area. A move through the 1.2040 area could see further weakness towards the 1.1985 area on a move below the 200-day SMA.
EUR/GBP – slipped back to the 0.8560 area last week with short term support at the just above the 200-day SMA and the 0.8540 area. Below 0.8530 targets 0.8480. Above 0.8675 targets 0.8720.
USD/JPY – ran out of steam just shy of the 138.00 area last week, keeping bias towards the downside. Rebounded from the 135.60 area with support at the 200-day SMA at 135.05. A break below 200-day SMA retargets the lows at 133.60.