European markets struggled for gains yesterday, succumbing to the downside, with progress constrained by a sharp rise in US yields, as well as the US dollar, after Minneapolis Fed President Neel Kashkari said that the Federal Reserve would be in no position to pause on rate rises if inflation was still rising, even with the Fed Funds rate at 4.5%.
Kashkari’s comments are key as historically he has tended to lean towards the dovish side on monetary policy, which suggests there is very little appetite thus far of any indication that the Fed is inclined to slowdown the pace of interest rate rises.
This stance was reinforced by his counterpart at the Cleveland Fed, Loretta Mester who said she was prepared to vote for another substantial rate rise in November, on the basis that “consumers are holding up pretty well” and that interest rates need to rise so that “it starts to affect those spending numbers”
US yields have continued to advance on the basis that we could well see 75bps in November and a another 75bps in December, with the 10-year yield and 2-year yields back at levels last seen in October 2007.
Consequently, US markets finished the day sharply lower with most of the pressure on the Nasdaq 100, although the Russell 2000 also saw big falls with the latest Beige Book showing that rising mortgage rates and elevated house prices weakening demand.
Retail spending was weak, reflecting lower discretionary spending. Loan demand also showed signs of slowing amidst growing concerns about the outlook.
All the while the US economy is showing signs of weakening demand, the jobs market has continued to look resilient, with today’s weekly jobless claims expected to come in unchanged at 228k.
We’ll also get to hear from another 3 Fed speakers, Federal Reserve governors Philip Jefferson, Lisa Cook and Michelle Bowman.
European markets look set to open lower on the back of the weaker tone in the US and further weakness in Asia, as rising covid cases in China weighing on risk appetite there and the Hang Seng slipping to a 13 year low.
On the data front in Europe we have the latest Germany PPI numbers which are set to show that inflationary pressure in Europe’s largest economy is far from abating.
In August PPI surged to a record and eye-watering annual 45.8%, and while it is set to weaken slightly to 44.7% in September, on a monthly basis it is still set to increase by 1.3%, although that’s also down from an equally elevated 7.9%.
EUR/USD – still in broader downtrend with resistance just below the 50-day SMA and trend line resistance from the highs earlier this year. The bias remains for further losses towards 0.9000, while below 1.0000. A break above parity and the 50-day SMA is needed to signal a short squeeze, towards 1.0200.
GBP/USD – currently struggling to move beyond the 1.1440 area, just below the 50-day SMA. We need to see a move above the 1.1500 area to stabilise. Interim support at 1.1150, and the lows last week at the 1.0920 area. A move below 1.0920 opens up a return to the 1.0800 area.
EUR/GBP – continues to edge higher after this week’s test 0f 0.8570- and 100-day SMA. A move through 0.8730 targets 0.8770. A break of this key support level could well signal further declines towards 0.8490 and the 200-day SMA.
USD/JPY – continues to head towards the 150.00 level with the next resistance at 152.30. Decent support at the 147.70 area which was the 1998 peaks. Now trading at its highest levels since September 1990.