After the gains of Wednesday which saw markets in Europe close at two-month highs, yesterday was much harder going largely due to the continued rise in energy prices, as Netherlands natural gas prices for one month delivery, closing near to the record highs, posted in March.
US markets initially looked much more buoyant after July PPI went the same way as the July CPI numbers the day before and fell back sharply. On a month-on-month basis PPI fell 0.5%, while year on year it fell from 11.3% in June, to 9.8%, while core PPI fell to 7.6%.
While US inflation appears to be easing, the prospect of something similar happening in Europe appears to be harder to envisage, due to the divergence in energy prices compared to the US.
Nonetheless US markets couldn’t hang onto their gains and closed mixed with the Nasdaq 100 closing lower, after US 10-year yields spiked higher and the yield curve steepened.
Today’s European open looks set to be a weak one as we look ahead to the latest UK Q2 GDP numbers, which aren’t expected to be full of much good cheer.
The UK economy managed to get off to a decent start to the year with 0.8% GDP growth in Q1.
In numbers released later this morning we are expecting this to slow sharply in Q2, especially given the sharp rise in the energy price cap in April, as well as the various tax rises which also came into effect at the same time.
Having said that, on the monthly numbers the picture does look slightly more positive if you don’t look at the June number which is forecast to see a big fall.
In April, not surprisingly the economy saw a -0.2% contraction in economic output, however in May this was more than reversed by a 0.5% expansion. Today’s monthly number for June is expected to show a -1.2% contraction which seems a bit extreme, however it would appear that the weakness here is set to manifest itself by way of manufacturing and industrial production numbers for June which are expected to see large declines of -1.9% and -1.4% respectively.
On the various PMI indicators, despite rising costs economic activity has been positive, which jars with the ONS official numbers which show the complete opposite.
Retail sales have also been a net negative during the quarter thus far, however the Queen’s Platinum Jubilee celebrations could have acted as a positive catalyst in terms of tourism numbers.
We saw in the latest GDP numbers from the likes of Spain and Italy how tourism can offer a positive catalyst and with a cheap pound the UK could see a similar uplift, which could see the UK avoid what is expected to be a negative print of -0.2%, even as Q3 offers an even more challenging environment.
Index of services is forecast to show a monthly contraction of 1% and -0.4% on a rolling 3M/3M basis.
Back in the US, attention is set to switch back to the latest University of Michigan inflation expectations survey for August. Attention will be focussed on the 5–10-year inflation expectations survey given the recent fall to 2.9%, and especially whether it sees further weakness, after matching the October 2021 lows back in July.
EUR/USD – unable to move above the 50-day MA for the time being, thus keeping the downtrend intact the January highs. Yesterday’s pullback found support at the 1.0270/80 area yesterday which acted as resistance through the middle part of July. Below 1.0260 targets 1.0150.
GBP/USD – finding resistance at the neckline of a possible inverse H&S formation at 1.2280. A break through 1.2300 targets a move towards 1.2600. Intermediate support at the lows this week at 1.2030 and the 1.1980 area.
EUR/GBP – finding resistance at the 0.8480 area, sliding back towards the 0.8400 area. Below 0.8400 targets the 0.8340 area.
USD/JPY – having failed at the 135.60 area, we’ve slid back to cloud support at 131.60, with a close below here targeting the 130.20 area, and the lows this month.