With Q3 now in the rear-view mirror, and European markets posting their first negative month since January, investors are now nervously eyeing October, and wondering perhaps if this could be the beginning of further weakness.
US markets also underwent their first negative month since January, however it was much more severe, with the worst monthly performance for the S&P 500 since March 2020, when we saw the pandemic come crashing through the markets. Even a late deal to fund the US government until 3 December and avert a shutdown wasn’t enough to stop a pretty poor finish to the month.
As we head into the final quarter of 2021, the gains year-to-date are still pretty decent, which raises the question, how much more is left in the tank, and whether this October will live up to the reputation of Octobers past, and deliver a huge curveball, as well as giving investors an anxiety attack. There’s certainly plenty to be concerned about from surging energy prices, supply chain disruptions, and concerns about more persistent inflation.
Today’s European open looks set for a negative start, after yesterday’s lower finish from the US, as well as sharp declines in Asia, although Chinese markets are closed, as we look ahead to a full day of data, ranging from manufacturing PMIs to the latest inflation numbers from the EU, as well as US PCE numbers.
The most recent PMI numbers from both Germany and France were a little weaker last month, although they still remain well above 50 on both counts. Italy and Spain are also expected to see slightly lower readings albeit in the high to late 50s. Nonetheless, there are growing signs of weakness as we head into the winter months, and with energy price rises now starting to prompt production shutdowns, there is a chance that this could start to get reflected in these headline numbers. In China we’ve already seen significant signs of weakness in the past few months, as authorities take measures to cut pollution and drive prices back down. Away from China, readings in Europe, the US, and the UK, remain in the high 50s.
In Germany, activity is even more resilient, despite the disruptions being caused by various industry shutdowns, higher prices, and weaker exports to China, with manufacturing activity above the 60 level. Whether this situation can continue is up for debate given the recent deterioration in business confidence. German IFO business activity has been on the decline in recent months, slipping to a three-month low in August. These manufacturing PMIs look set to fall further in September, especially given the uncertainty over the German election, which is likely to kick off a long-winded tug of war to form a new government as Angela Merkel departs the political scene after 16 years at the helm.
Yesterday’s rise in German CPI to its highest level since 1993 to 4.1% will inevitably lead to anxiety among the more hawkish members of the ECB governing council, that the central bank needs to start calling time on its PEPP programme sooner rather than later. The volume will only get louder if today’s EU flash CPI, which has already jumped from 2.2% in July, to 3% in August, goes even higher later this morning when the flash September number gets released. Expectations are for a gain to 3.3%, however given that core prices are much lower, and still below 2%, ECB president Christine Lagarde may well feel comfortable in facing the hawks down.
Nonetheless the problem isn’t going to go away, and there will be a wider discussion on the PEPP in December, pressure to act will only get louder if the rise in energy prices starts to trickle down into the wider economy, as it will do at some point. On current numbers the EU still has a lesser inflation problem than others, however the recent surge in energy prices will certainly help to sow further debate amongst the hawks and the doves on the ECB governing council.
With the Fed almost certain to start its tapering programme, either next month, or in December, the latest core PCE inflation numbers seem almost incidental, however there are signs that here we may have seen a peak, with expectations of 4.2% for August, the same as July. We also have the latest August personal spending and income numbers which should now start to settle down a bit after the stimulus infused peaks and troughs seen earlier this year.
Personal income is expected to rise by 0.2%, and personal spending by 0.7%, while the latest ISM manufacturing report for August could offer some insight into next week’s non-farm payrolls report, particularly with respect to the employment component. In August this slipped back under 50 to 49, so any sort of recovery back above 50 would be an encouraging sign for a rebound in the September payrolls. The headline number is expected to fall back slightly to 59.5, from 59.9.
EUR/USD – has continued to slide lower, raising the prospect for a move towards the 1.1450 area. We could see a short squeeze towards 1.1760 but the overall momentum would appear to suggest continued weakness.
GBP/USD – having broken below the 1.3600 area the bias has undoubtedly shifted for a move towards the 1.3400 area. It now seems probable we’ll see a move towards 1.3375, and then on to 1.3230. We need to see a move back above 1.3620 to stabilise and open a return to 1.3750.
EUR/GBP – failed at the 0.8660/70 area and 200-day MA. This is now a key level, which if broken could see further gains towards 0.8720. Having fallen back below the 0.8600 area, we could see a move towards 0.8530, on a break below 0.8560.
USD/JPY – appears to have run into resistance at 112.00 with a key day reversal, which could see us move back towards the 110.80 area. The key resistance remains the 2020 peaks at 112.25.