Earlier this week the Japanese TOPIX hit its highest level in 33 years. Earlier today the Nikkei 225 followed suit, after US markets closed strongly higher as expectations of a deal on the debt ceiling impasse increased, and US economic data showed little sign of significant weakness. The Nasdaq 100 was a notable outperformer, breaking to a new one year high, while the S&P 500 finished just shy of the 4,200 level.
European markets also underwent a solid session yesterday with the DAX closing at its highest levels this year, as it closed in on the record highs of 2021.
The outperformance of Japanese markets has taken place almost unnoticed until this week, with the Bank of Japan’s currently loose monetary policy helping to underpin recent gains. This month alone the Nikkei has gained 6%, although today’s Japanese CPI inflation numbers might be cause for concern from Bank of Japan officials, as they look to weigh up inflation risks, with core prices rising by 3.4%.
Inflation concerns remain front and centre for central bank officials across the board with both the Federal Reserve as well as the European Central Bank reluctant to offer markets the carrot of an expectation that rates could be on the way back down by year end. The sharp fall we’ve seen in energy prices over the last few months has got markets starting to price in the prospect of rate cuts, with EU and UK natural gas prices falling further yesterday, sinking to their lowest levels since June 2021. Unfortunately, while energy prices have been falling sharply, prices elsewhere are proving to be much stickier, while economic activity more broadly has been holding up well, with labour markets remaining remarkably resilient.
Producer price inflation in particular has been falling sharply in recent months, with German factory gate prices seeing some big falls since the 45.8% highs seen in September last year. In March these fell to 6.7% year on year and are expected to fall further in the April numbers which are due later this morning to 4.3%. On a monthly basis prices have been negative for the last 6 months, falling -1.4% in March, and are expected to decline by -0.5% in this morning’s April numbers. The rebound being seen in equity markets has been all the more surprising given that despite evidence that headline inflation is falling quickly, central banks have been loath to offer encouragement that any sort of pause is on the way.
All this week we’ve had senior Fed policymakers push back against the case for a rate pause, with the likes of Fed governors Michelle Bowman and Philip Jefferson expressing a reluctance to offer any sort of dovish steer to that effect, while the Dallas Fed’s Lori Logan articulated the view that the data doesn’t support the idea of a pause at the June meeting. This in turn has provided a lift to the US dollar, sending it to its highest levels this year against the Japanese yen, as well as pushing US 2-year yields back towards their recent highs, above 4.20%.
Today we’ll get to hear from Federal Reserve chairman Jerome Powell, as well as Michelle Bowman yet again, as well as the New York Fed’s John Williams, who just over a week ago echoed other Fed policymakers in being cautious about being too dovish. ECB president Christine Lagarde is also scheduled to speak after European markets have closed.
EUR/USD – slipped below 1.0800 yesterday closing on the 1.0760 area, which if breached could open a move towards 1.0610, with initial support at 1.0710. To avoid this scenario, we need to see a move back through 1.0840.
GBP/USD – slipped back to the 50-day SMA which if broken could see further weakness towards the 1.2280 area on a break below 1.2370/80 trend line support from the October lows last year. Resistance currently all the way back at 1.2540.
EUR/GBP – range bound currently with resistance just below the 0.8740 area and the 200-day SMA, while holding above last week’s low at 0.8660 key support. A move below 0.8650 could see a move towards 0.8620.
USD/JPY – on course to move towards 139.60 which is a 50% retracement of the down move from the recent highs at 151.95 and lows at 127.20. The 200-day SMA at 137.00 now appears to be acting as support.