It’s certainly been a turbulent month for global stock markets as we come to the end of the month as well as the shortest month, and while we have managed to close well off the lows, the volatility that we’ve seen in the past few weeks along with the subsequent rebound can’t disguise the fact that liquidity flows are much lower now than they were at the end of last month, when we were last trading near current levels.

Despite this, the fact that we’re only looking at modest declines at worst is likely to be construed as a positive when you consider how far markets fell at the beginning of the month.

Global economic data for the most part continues to come across as positive, though there have been signs in recent readings of some cooling off.

The latest Chinese manufacturing and non-manufacturing PMI numbers for February came in lower than expected at 50.3 and 54.5 respectively, though it’s questionable how representative these are given the skew that has likely taken place as a result of the lunar New Year holidays. Despite this and the weaker lead from the US Asia markets slipped back this morning and this is expected to see Europe open lower as well this morning.

New Fed chief Jerome Powell didn’t deviate from the script when he met with US lawmakers yesterday saying that the US central bank could continue to raise interest rates gradually against a strong and improving economic outlook, and with little in the way of concern about recent market volatility.

His comments that some of the headwinds facing the US economy were now acting as tailwinds suggests that the Fed is comfortable that inflation is likely to head back towards its 2% target, and as such the bar to further rate rises is likely to be quite high.

While this might seem a reasonable conclusion to arrive at, the latest economic data suggests that the US economy could well be heading for a bit of a soft patch. Today’s preliminary Q4 numbers are expected to slip back slightly to 2.5% from 2.6%, which is below the strong Q3 reading of 3.5%, but there is a concern that some of the recent data we’ve seen in January might suggest that we could see an even lower GDP number in Q1 this year.

Yesterday’s durable goods numbers for January were particularly disappointing, sliding 0.3% missing expectations by quite some distance, while business investment also slipped back. Coming on the back of disappointing new home sales data on Monday there is an argument that we could be heading for further softness, which might cast doubt on US rate expectations this year, if sustained.

For now it’s too early to say one way or the other given that there could be cold weather effects in the January numbers, but nonetheless the direction of travel might suggest some caution about rate rise expectations beyond a March rate rise.

From a purely inflation perspective yesterday’s German inflation numbers don’t bode well for the ECB getting closer to its inflation target any time in the near future.

It is true that Spanish CPI did show a big jump in prices for February to 1.2% from 0.7% in January, but with the amount of additional slack in the Spanish economy it appears unlikely that we’ll see this sharp jump extend much higher.

German inflation on the other hand remains stubbornly low, and is declining, despite an unemployment rate at a record low of 5.4%, and a recent wage settlement of over 4% for IG Metall workers.

The flash German number for February showed a drop from 1.4% in January to 1.2% which doesn’t bode particularly well for today’s flash EU CPI number which hasn’t managed to move above 1.5% since April last year. Expectations are for the headline number to decline further from January’s 1.3% to 1.2%, though core prices are expected to remain steady at 1%, while CPI in France is expected to remain steady at 1.5%.

The US dollar index had a decent day yesterday and looks set to post its first monthly gain since October last year, but still shows no signs of carving out any sort of short term base, despite strong gains in US yields this month on expectations of much higher long term US rates.  

EURUSD – little change here with the peaks this year at 1.2530 and solid support just above the 1.2200 area with a bigger area of support at 1.2160. A break of this sideways consolidation is likely to give a decent indicator of the next move, with a slight bias towards the downside after the key day reversal of a few days ago.

GBPUSD – resistance at this week’s high at 1.4070 as the recent range continues to compress. Long term support still remains down near the 1.3750 area while a break below that and the 50 day MA could prompt a move back to the 1.3660 area, which prompted the recent move higher.

EURGBP – still chopping around in a tight range, but still with a bias lower. While below the 0.8910 area which has held for all of this year the bias remains for a return to the lower end of the recent range at 0.8740.

USDJPY – the rebound off last week’s lows at 105.50 continues to build momentum towards the 108.30 area, a break of which has the potential to open up a move back towards the 110.30 area. Support comes in at 106.70.

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