European markets started the week predominantly on the front foot yesterday, although the FTSE 100 underperformed a touch, finishing marginally higher on the day.
US markets, which opened in positive territory, soon gave up their gains, as US bond yields pushed higher, with the 10-year closing above 1.6%, closing little changed on the day. Away from equity markets, the US dollar continued to gain, hitting new 15-month highs against a basket of currencies, with the euro also slipping to a 15 month low.
As we look towards today’s European open, we can expect to see a fairly flat open after a similarly subdued Asia session thus far, with most attention on virtual talks which are currently taking place between US president Joe Biden and Chinese president Xi Jinping.
Today’s main focus on the data front is on UK unemployment and US retail sales for October. When the Bank of England decided not to push the base rate up to 0.25% earlier this month, they cited concern about the effects that the end of furlough might have on the labour market for their reticence to do so, despite previous heavily hinting that the base rate might have to rise to curb rising inflation expectations.
While no one is questioning the wisdom of them holding fire the central bank has been heavily criticised for its guidance leading up to that decision which suggested they would act in the absence of that data. It is difficult to underplay the huge damage the central bank has done to its credibility over the lead-up to the November decision, and ultimately it is also difficult to understand the rationale behind the apparent change of heart. In comments made yesterday, Bank of England governor Andrew Bailey continued to insist that the decision to hold rates was a close call. To reiterate, 7-2 is not a close call, and one can’t help feeling that while he may have been in favour of a modest rate rise, it has been suggested he wasn’t able to convince enough members of the MPC to do the same, and decided to go with the majority.
Today’s ILO unemployment numbers will shed some extra light on the labour market picture, which Bailey himself admitted yesterday was looking rather tight. The ILO rate has already come down from 5% at the start of this year to 4.5% in August and looks set to fall further to 4.4% later today, while the claimant count rate has fallen even faster from the 7.2% in January to 5.2% in September and could fall further in this morning’s data release. With over 1m vacancies already in the UK economy it would be a surprise not to see further falls in the headline numbers today, and if not today, next month, just prior to the next Bank of England decision which is due a week before Christmas.
Retail sales numbers in the US have been quite difficult to predict in recent months, with consumer confidence coming under pressure, due to rising prices in the shops and at the fuel pumps. In September US retail sales came in better than expected, rising 0.7%, against a forecast of -0.2%, while the August numbers were revised up to 0.9%. These better-than-forecasted numbers, along with the continued improvement in the US labour market helped convince the Federal Reserve that the economy was strong enough for it to proceed with its plans to start tapering its monthly asset purchase program starting this month.
It is certainly true that the US consumer has been more resilient than consumer confidence numbers might suggest in recent months. We’ve come off two successive monthly gains since the -1.8% decline seen in July, and today’s October numbers are expected to see another gain of 1.3%. While this might chime with how well a lot of US retailers have been doing this past quarter, it is completely at odds with the direction of recent consumer confidence data, which has been weak. Given that, there is a decent chance we could see a big miss today.
EUR/USD – broken below the 1.1400 area, with the potential to fall towards the 1.1170 area, and June 2020 lows. To stabilise we need to recover back above the 1.1530 to retarget the 1.1620 area.
GBP/USD – looking slightly better bid after last week’s low at 1.3350. Having pushed through the 1.3430 level we need to move up through the 1.3480 level to open a potential move towards 1.3600 and reduce the risk of further losses towards 1.3160.
EUR/GBP – slid below the 0.8520 area and now on course for the 0.8470 area. A break below 0.8470 reopens the 0.8420 area. The 200-day MA and the 0.8580 area remains the key resistance area.
USD/JPY – decent resistance at the previous highs at 114.75, as well the highs last week at 114.30. While below the 114.20 area the risk is for a move back below 113.70 towards 113.20.