While European markets struggled to make progress yesterday, pulling back from six-week highs, US markets had a much better day of it, with the S&P 500 hitting its highest level since 22 March, as concerns about a military escalation in the Middle East subsided in the short term.
This isn’t the first time that US and European markets have diverged from each other; they also did it couple of weeks ago when US markets dropped sharply, while markets in Europe pushed higher.
Markets in Asia appear to have taken their cues from markets in the US though they have also had to digest the latest economic data out of China as well, with Q1 GDP, as well as industrial production and retail sales for March.
Recent data would appear to suggest that the Chinese economy has slowed from its Q4 numbers with the trade numbers in particular seeing significant swings on the export side in recent months. In terms of retail sales, the headline numbers have also slowed a little this year dropping below the 10% level that we saw through most of last year, however they picked back up in March, rising to 10.1% after a slowdown leading up and into Chinese New Year.
At the end of last year, the Chinese economy grew at 6.8% well above the expectations which were set at the beginning of 2017 and a modest slowdown was expected for Q1 to 6.7%..
This year Chinese policymakers set a target of 6.5%, perhaps underplaying their ambitions in the same manner they did a year ago. Even so based on recent data this still appears achievable, however the timing of Chinese New Year in Q1 might have expected to see a slight skew of the data as Q1 comes to a close. In any event Chinese Q1 GDP was reported as coming in at 6.8%, rather surprising given some of the recent survey weakness, while March industrial production dropped back to 6%, from 7.2% in February. While the headline GDP number surprised a little to the upside markets have learned to take the headline numbers with more than a pinch of salt.
The US dollar continued to sink yesterday pressured to some extent by a rather bizarre tweet from President Trump that claimed that Russia and China were playing a devaluation game with their currencies, when the evidence doesn’t support that assertion at all. The Chinese yuan is at its highest level since October 2015 against the US dollar while the rouble has only fallen in recent days due to US sanctions on Russian companies.
With the pound on a seven-day winning streak against the US dollar today’s wages and unemployment data could well be the catalyst that either brings this run to a shuddering halt or sends the pound to its highest level since the day of the Brexit vote.
The data could also go some way to adding a significant piece of the puzzle with respect to whether we could see the Bank of England raise interest rates again when they next meet in a few weeks’ time.
It has already been established that a significant number of Bank of England policymakers are expecting wages to start outstripping headline inflation in the coming months, and today’s average earnings number for the three months to February, could well be the first sign post on the way to that becoming a reality.
Last month’s headline CPI for February saw inflation fall back to 2.7%, in a sign that price pressures may finally be starting to ease on the UK consumer.
If, as expected today’s average weekly wages numbers (excluding bonuses) edge up from 2.6% to 2.8%, this would be the first time that wages have exceeded headline CPI since the beginning of 2017 and could mark a key milestone in which wages start to rise faster than prices on a consistent basis. Including bonuses, the headline number is expected to hit the 3% for the first time since November 2015, up from 2.8%.
Unemployment is expected to remain steady at 4.3%, a 42-year low.
EURUSD – last week’s highs at 1.2400 appear to be capping for now, with a move higher retargeting the previous highs above 1.2500. The broader 1.2200/1.2500 range continues to dominate. We need to see a break below 1.2160 or a break above 1.2540 to suggest a strong move in either direction.
GBPUSD – retesting the highs this year near 1.4345 and holding above the 200-week MA for now at 1.4250. A move through the 1.4350 area has the potential to open up a move towards the 1.4500 area. We have support at 1.4080 as well as the 1.3970 area.
EURGBP – currently finding some support at the 0.8625 area for now, but the bias remains for a move low while below the 0.8690 area. This move lower raises the prospect of a move towards the 0.8300 level and 2017 lows. Only a move back above 0.8750 would stabilise and suggest a return to the 0.8800 area.
USDJPY – continues to look a little soggy after last week’s failure at the 107.80 area. While above last week’s lows at 106.60 the risk remains for a move towards 108.20. The 105.20 area remains a key support with a break below 105.00 opening up a move towards 103.00.
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