We saw another strong session for markets in Europe yesterday, with the FTSE 100 putting in a new two year high, with the rest of Europe also putting in some good gains.
US markets also saw a solid session led by the Nasdaq 100 which retested its 200-day MA for the first time since last week’s failure, which in turn is expected to translate into a mixed lead for today’s European open.
Today’s US inflation report could well be the catalyst that determines whether the Nasdaq 100 breaks back above that key 200-day MA level in the next few hours. The recovery off the January lows has been a rollercoaster one for US markets, with some wild intraday moves, and while we haven’t retested these lows, the key test this week is likely to be whether we are able to push through the highs of last week.
This week’s rise in US yields in the aftermath of last Friday’s non-farm payrolls report, would appear to suggest that bond markets have already made up their minds about today’s January CPI number, and that it is expected to be a strong number. The strength of last week’s payrolls numbers has certainly shifted thinking towards the possibility of a 50bps rate move by the Fed in March, with a strong CPI number today only serving to reinforce that narrative.
We’ve already seen the US 2-year yield put on another 16 bps since the end of last month, on top of the 44bps seen in January. Given that expectation, anything at the lower end of expectations could well trigger a sharp adjustment in pricing, and a pullback in yields.
Today’s range of expectations for US CPI for January has the upper end at 7.6%, while the consensus has come down to 7.2% from a week ago, when it was at 7.3%. When we got the numbers for US CPI in December there was an almost audible sigh of relief when it came in at 7%, in line with expectations. There was also a hope that we might be starting to see the first signs that US inflationary pressures might be easing, with PPI slowing from 9.8% to 9.7%, in a sign that we may well be near the peak of this inflationary surge.
On a month-on-month basis the fall in PPI was even starker, falling from 1% to 0.2%. Given how PPI has been a leading indicator on the move up with respect to this inflationary surge over the last 12 months, there is every reason to think that a slowdown in the pace of price rises would be similarly reflected in subsequent CPI prints.
As mentioned earlier, the consensus view has come down from last week, with expectations of a move higher to 7.2%, however core prices are still expected to rise from 5.5% to 5.9%. We might also consider recent trends in China, which have seen weaker inflation, which also might translate into the prospect of a downside surprise today.
Weekly jobless claims are expected to continue falling back after the move higher seen at the start of this year. Expectations are for 230k, with continuing claims falling back to 1.61m.
EUR/USD – while above the 1.1380 area there is potential for a move through 1.1485, above 1.1500 and towards the 1.1600 area. A break below support at the 1.1380 area signals a move back towards the 1.1270 area.
GBP/USD – fell short of the 1.3600 area yesterday, keeping the bias for a move back towards 1.3470. A break below 1.3470 potentially targets a retest of the 1.3400 area, where we have trend line support from the December lows. A break above 1.3620 retargets 1.3720.
EUR/GBP – found support at the 0.8410/20 area before rebounding. We still have resistance at the 0.8480 area. A move below 0.8400 retargets the 0.8370 area.
USD/JPY – still have resistance at the 115.70 area, with a break above targeting the January peaks at 116.35. Support comes in at 114.70.