US markets started the week very much on the front foot yesterday, with the S&P 500 closing above the 4,000 level, and the Nasdaq 100 leading the way higher with its second successive 2% daily gain.
The outperformance in tech appears to point to a growing conviction on the part of investors that the Fed will soon have to look at cutting rates before the end of the year, although to look at bond markets yesterday, yields also moved higher, as money flowed out of treasury markets.
With a lot of tech companies starting to announce job cuts, as well as other measures to rein in costs, and inflationary pressures showing further signs of easing, it would appear that US investors are starting to think in terms of the next move higher, despite concerns over lower profits. Given the uncertain economic backdrop, this comes across as a bit of a leap of faith, and its also notable that while US markets have started to gain momentum in the past few days, European markets have started to lose some of their early year momentum.
After US markets surged higher yesterday, today’s European market open is likely to be a much more tepid affair, suggesting perhaps that investors in Europe don’t share the same enthusiasm about the economic outlook, despite the reopening of the Chinese economy, which may help to provide a demand boost.
This increase in optimism is likely to be reflected in today’ s flash PMI numbers for January, which have already seen a pickup in economic activity in the past few months due to the sharp declines in energy prices from the peaks in August and September. In Germany, manufacturing PMI fell to 45.1 in October, but has recovered since then, albeit it's still very much in contraction territory. Services have seen a similar pattern, dropping to two-year lows of 45, before showing small signs of a recovery. We expect to see a further improvement in today’s January numbers to 48 for manufacturing and 49.5 in services.
In France, we’ve seen a similar pattern in manufacturing, although services have been more resilient due to the energy price subsidies provided by the French government to cushion French households from the worst effects of higher prices. France manufacturing is expected to improve to 49.5 from 49.2, and services to 49.8 from 49.5.
In the UK, manufacturing has struggled over the past three months and looks set to continue to do so, while services have been slightly more resilient. As we head into 2023, the challenges for business will be whether we see new investment, and a pickup in economic activity, after the rising pessimism at the end of last year. Manufacturing is expected to remain subdued at 45.5, while services could slip back from 49.9 to 49.5.
Public sector borrowing in December is expected to remain high on the back of rising debt interest and energy price support, with expectations of a small fall from November’s £22bn to £18bn.
US manufacturing and services are expected to remain weak at 46 and 45 respectively.
EUR/USD – a marginal new high at 1.0927 yesterday, before slipping back again. The main resistance remains at the 1.0950 area which is 50% retracement of the move from the 2021 highs to last year’s lows at 0.9536. A move through 1.0950 opens up a move towards 1.1110. Support remains back at the 1.0780 area.
GBP/USD – ran out of steam just below the 1.2450 area yesterday slipping back towards the 1.2320 area. Has managed to hold above the 1.2300 area for the last three days. Above 1.2450 could see a move towards 1.2600. A move below 1.2290 could see a move towards 1.2170.
EUR/GBP – slid back from the 0.8815 area but while above the 50- and 100-day SMA which acted as support last week the bias remains for a return to the recent highs at 0.8890. The next support below 0.8720 targets 0.8680.
USD/JPY – has squeezed back above the 130.20 area, with a move through 131.60 and last week’s high potentially targeting a return to the 132.50 area in the short to medium term. Support currently at the 128.20 area as well as the lows last week at 127.20.