After starting the day lower yesterday, European markets gradually clawed their way back to finish in positive territory, even as EU core CPI inflation surged to a new record high, driving yields higher across the board.
These inflationary concerns initially weighed on US equity markets after they opened, but the failure to push below technical support at the 200-day SMA on both the Nasdaq 100 and S&P500 prompted a rebound which resulted in a positive close, after comments from Atlanta Fed President Raphael Bostic that indicated he would be in favour of a rate pause by the summer. This looks set to translate into a positive European open.
Yesterday’s rebound in equity markets came about despite a further increase in US yields with the US 10-year yield finishing well north of 4%, at 4.06%, while the 2-year yield closed at 4.89%.
With US yields continuing to push higher, markets are increasingly pricing a higher Fed terminal rate. Since the start of February, this rate has risen sharply from 4.9% to be currently sitting at 5.5%, yet despite this equity markets have continued to hold up well.
Much of this resilience may have something to do with how the US economy is faring, with the labour market continuing to maintain its recent resilience, as weekly jobless claims once again came in lower yesterday at 190k.
Today equity markets will face yet another crucial test with the release of the latest ISM services report for February, which could act as a decent leading indicator for next week's delayed US employment report.
While a lot of the attention in January was around that non-farm payrolls report, the January services ISM report was almost overlooked, but it could be argued that it was just as important in shaping the narrative of a resilient US economy.
The ISM services index jumped from 49.6 in December to 55.2, while new orders also surged, to 60.4 from 45.2, their highest level since August.
Prices paid remained steady at 67.8, as was employment at 50.0. The resilience of these numbers, along with bumper retail sales, showed the US economy surged in January, and with this jump in manufacturing prices paid earlier this week, there is increasing evidence that the recent declines in inflation might well have bottomed out.
The question now with today’s ISM report was this services resilience sustained in February.
A slowdown to 54.2 from 55.2 is expected, with the employment component expected to remain steady at 50.
Before that we have the latest services PMI reports for Spain, Italy, France, Germany, and the UK, all of which are expected to show modest improvements on their January numbers as lower energy prices feed into improvements in sentiment across Europe.
Spain is expected to improve to 53.7, Italy 52.3, France 52.8, Germany 51.3, and the UK to 53.3 from 48.7, belying the expectation that the UK economy has slipped into a Q1 slowdown.
Yesterday Bank of England chief economist Huw Pill said that inflation risks in the UK economy continue to remain tilted to the upside, and supported the idea that rates are likely to have to continue to rise. His tone was in contrast to Governor Andrew Bailey the day before who would have markets believe that the probability of another rate hike in a couple of weeks’ time should not be taken for granted.
EUR/USD – slipped back from just below the 1.0700 area yesterday but remains above the Monday bullish day reversal off support at the 1.0530 area. We need to push through the 50-day SMA at 1.0730 to open up 1.0820. While below 1.0730, the bias remains for a test of the January lows at 1.0480/85.
GBP/USD – once again retested support at the lows this week at the 200-day SMA at 1.1920/30. A break of 1.1900 retargets the 1.1830 area. The 50-day SMA at 1.2150 remains key resistance, and which needs to break to retarget the 1.2300 area.
EUR/GBP – failed again to move through trend line resistance at 0.8900 from the January peaks. Above 0.8900 targets the 0.8980 area. Support comes in at the 0.8830 area.
USD/JPY – continues to try and push through the 200-day SMA at 136.90/00 but has thus far failed to do so. Support comes in at the 135.20 area. We also have interim support at 133.60. A break above 137.00 could see a move to 138.20.