After a strong finish to July, European and US markets got off to a cautious start to the month of August, with early gains giving way to weakness as China, US tensions ramped up on reports that US House Speaker Nancy Pelosi is due to visit Taiwan later this evening.
These reports prompted some dark threats from China that the PLA would not stand idly if she attempted to visit what is considered by China their sovereign territory without permission. These tensions have spilled over into today’s Asia session, as we look ahead to a lower European open.
Last week’s late rally was helped by a shift in expectations about the likely glide path of future US Federal Reserve rate rises, and the feeling that we are perhaps closer to the end of the Fed's rate hiking cycle than was thought to be the case just over a week ago.
The shift in expectations was given added weight yesterday by a sharp drop in US ISM prices paid numbers for the manufacturing sector which dropped sharply in July to their lowest levels in almost two years.
We also saw broad weakness in yesterday’s manufacturing PMIs, which started in China, and was reflected in the numbers out of Europe, which served to also weigh on crude oil, and which saw the price slip below $100 a barrel.
These weaker numbers also prompted a fall in longer term US yields, either due to concerns over an impending economic slowdown or an expectation that the pace of US rate rises was likely to slow.
In whatever way the market chooses to interpret the move in US 10-year yields, it looks even more likely that we could well see further falls towards 2.5%, on the way to a possible move towards 2%.
This perception over a Fed pivot is likely to face a key test later today when St. Louis Fed President James Bullard is due to speak at an event at New York University. He’s been notably hawkish in his recent pronouncements on the pace of rate hikes so it will be interesting to see if he agrees with Fed chair Jay Powell’s pronouncement that the Fed is within the ranges of what is considered the neutral rate. We’ll also be getting to hear from Charles Evans of the Chicago Fed, as well as Loretta Mester of the Cleveland Fed who said recently, she wants to see consistently lower core and headline inflation before slowing the pace of rate rises. Both Mester and Bullard are voting members this year, Evans is not.
On the data front we’ll also be getting the latest job openings numbers for June, or JOLTS, which are expected to fall slightly from 11.25m to 11m, as we look ahead to this week’s July payrolls report.
In news overnight the Reserve Bank of Australia hiked rates for the fourth meeting in succession, and by 50bps for the third meeting in a row, pushing the headline rate up to 1.85%, as it looks to play catch up, after falling way behind the curve earlier this year.
There is still plenty of scope for the RBA to go further in the coming months, after Q2 CPI rose to 6.1% in data released last week, and the latest Melbourne Institute inflation numbers for July jumped to a record high of 5.4%, from 4.7% in June. Inflation expectations are for a peak of 7.75%, with further rate increases dependant on the data as the RBA outlined a similar stance to other central banks, by indicating it will work on a month by month basis.
The biggest risk for the RBA is the housing market, which, in data released this morning, appears to be feeling the effects of the recent rate rises, with declines in building approvals, as well as lending to households during the month of June.
EUR/USD – continues to find resistance at the 1.0275 area, with bigger resistance at the 1.0350 level. While below the risk remains for a move back towards parity, and the previous lows at 0.9950. A move below 0.9950, towards 0.9660.
GBP/USD – continues to edge higher, above the 50-day SMA, with the potential to extend towards the 1.2400 area. We now have support at the 1.2180 area, as well as support at the 1.1980 area.
EUR/GBP – currently finding resistance at the 0.8420 area, with support just above the lows last week at 0.8345/50. A move through the 0.8430 level targets a move back towards 0.8480. While below the 0.8430 area, momentum remains negative for a move towards the 0.8300 area.
USD/JPY – broken below support at the 131.20/50 cloud support area, and heading for a move towards 130.00. The bias remains lower having broken below the 50-day SMA. Resistance now comes in at the 134.80 level.