European markets had a rather mixed session yesterday after the ECB made a modest adjustment to its monthly bond buying program, resulting in both the DAX and CAC40 recovering off their lows of the day to finish in positive territory.
By comparison the FTSE100 had a shocker, closing over 1% lower, while US markets finished a rollercoaster session down on the day, as well, with bond yields also falling back.
Concerns over the growth outlook as well as rising prices and wages appear to be continuing to weigh on sentiment in Europe. In a further sign of concern over rapidly rising prices China took the unprecedented step of releasing crude oil from its strategic reserves, in an attempt to drive prices down.
As we look to today’s European open, a positive Asia session appears to be alleviating some of the downside pressure as we look to finish what has been a quite choppy week with a modestly higher open.
The pound got a decent leg up earlier this week after Bank of England governor Andrew Bailey said that at least 4 MPC members felt that the recent improvement in basic economic conditions could well be used as justification for a rate rise, although one wasn’t imminent yet. This was quite an unexpected moment of candour as well as insight into the deliberations on the Monetary Policy Committee at the last meeting, and while it doesn’t suggest that policymakers are itching to pull the trigger on a rate move it can’t be too long before the central bank reins in its bond buying program.
This morning’s latest economic numbers for July, including monthly GDP number and manufacturing and industrial production could go a long way to support this narrative, although, in the case of the GDP numbers we are likely to see a modest slowdown after the strong numbers seen in the previous three months. July GDP is expected to slow to 0.5%, down from 1% in June with the rolling three-month average also set to decline from 4.8% to 3.8%, largely as a consequence of rising infections causing large swathes of the workforce to self-isolate due to being pinged by the NHS Track and Trace app.
When compared to recent PMI readings in the manufacturing sector, industrial and manufacturing production numbers have been pretty poor.
This isn’t too surprising given that the PMI numbers don’t cover important sectors like car production. In July UK car production slumped to its worst levels since 1956, which suggests that today’s July manufacturing production numbers could well be similarly disappointing.
Various UK automakers have already announced production slowdowns due to shortages of important parts. In June both industrial production and manufacturing production came in weaker than expected, with industrial production sliding -0.7%, while manufacturing production rose by 0.2%.
Forecasts for July seem somewhat optimistic with a 0.4% rebound in industrial production, with manufacturing set to rise 0.1%. There is little to suppose we won’t see similar lacklustre readings in this morning’s numbers given that it's likely we will have seen the same problems that were reported in June roll into July.
There’s been a great deal of discussion as to how much of the rise in US inflation is transitory and how much is persistent. Recent CPI and Core PCE numbers have shown signs of plateauing however US PPI readings have continued to rise, and while recent ISM prices paid numbers have started to come down, thus far official factory gate prices have continued to rise.
This sketchiness in the data could become clearer today with the latest US PPI numbers for August.
At the last set of US PPI numbers, we saw factory gate inflation hit another record high of 7.8% in July, with little sign of any abatement given the various supply chain disruptions that have continued to be reported through the month.
Rising freight rates, higher raw material costs as well as worker shortages are creating choke points across the whole global supply chain, with China PPI hitting a 13 year high of 9.5% this week.
At some point these price pressures will start to trickle down into company profit margins, and into consumer prices, at which point we could start to see upward pressure on wages as consumers see their purchasing power eroded.
Today’s US PPI numbers will be an added indicator as to whether these price pressures are showing signs of abating or have further to go. Expectations are for August PPI to rise by 8.2%, with core prices rising 6.6%, up from 6.2%.
EURUSD – found support at the 1.1800 area and 50-day MA rebounding for the second day in a row yesterday. A break below 1.1800 opens the 1.1750 area and previous lows at 1.1660. Resistance remains at the 1.1910 area.
GBPUSD – found support at the 1.3725 area this week, recovering back above 1.3780, which should signal a return to the 1.3900 area and the highs last week. A move through 1.3900 targets 1.4000.
EURGBP – the failure at the 0.8610 area has now seen the retest of the 0.8520 level. We need to recover back through 0.8560 to retarget 0.8610. Below 0.8520 retargets 0.8480.
USDJPY – having failed at the 110.50, the break below 110.00 has the potential to retarget the 109.10 area. Above 110.50 targets 111.00.