European markets underwent a fairly lacklustre session yesterday, despite new record highs for the DAX and CAC40, finishing the day marginally lower, while US markets also declined, breaking a sequence of 8 successive daily gains, with the Nasdaq leading the way lower, on the back of big falls in Tesla and PayPal, both falling by more than 10%.
As we look ahead to this morning’s European open, the focus remains very much on company earnings, against a backdrop of rising prices, with apprehension rising that the inflation genie still has some way to go in terms of further upward pressure, as we look ahead to this afternoon’s latest US CPI numbers for October.
Asia markets have seen a bit of a dive after Chinese PPI prices rose more than expected again in October, this time, pushing up to 13.5%, well above expectations of 12.2%, and herein lies the worry. While official CPI measures appear to be absorbing the worst of the price rises, PPI measures aren’t, begging the question as to how long these can be absorbed by companies in their margins, or consumers in their wallets.
Despite the continued resilience shown in yesterday’s US PPI numbers, and the increases seen in last week’s ISM prices paid numbers, the last few months US CPI numbers have shown signs of stabilisation, and may well have peaked, assuming you believe what the numbers are showing.
Core CPI may well have peaked in June at 4.5% in June, however given it doesn’t include food and energy it is a largely meaningless measure for the average consumer and is still high, despite falling back to 4% in September. Nonetheless recent falls do give an indication that the underlying trend might be slowing.
The wider headline CPI numbers have remained fairly static at 5.4% for the last four months, which while encouraging still suggests that prices are likely to remain fairly sticky for some time to come, particularly since PPI has risen from 7.3% in June to 8.6% in October, and generally tends to be a lagging indicator.
Yesterday’s PPI numbers do offer some hope that inflationary pressures may well be easing after they remained steady at 8.6% in October, with core prices also steady at 6.8%, however they won’t guarantee that today’s CPI numbers might not take another lurch higher.
Today’s US CPI numbers for October are expected to push above the levels seen back in 2008, when they hit 5.6%, with expectations we could see a rise to 5.9%, which would be the highest level since 1990, while core prices are expected to come in at 4.3%, also a multiyear high.
With a number of Fed policymakers making louder noises about the need for rate hikes next year, a strong number here could well prompt a rebound in US yields which have declined quite sharply in the last week or so, with the 10-year down over 15bps from last week’s highs.
On a more positive note, we also have the latest weekly jobless claims numbers due to Veteran’s Day on Thursday, and which are expected to fall to 260k, from 269k, while continuing claims are expected to fall further from 2.1m to just over 2m, and closer to the pre-pandemic levels of 1.7m, which was the average in the first three months of 2020.
EUR/USD – a lacklustre day yesterday saw the euro push back above the 1.1600 level but was unable to overcome the 1.1620 area, which it needs to do to head towards the 50-day MA and 1.1680 area. Support remains down at last week’s low at 1.1514. Below 1.1500 targets the 1.1400 area.
GBP/USD – ran out of steam at the 1.3600 area yesterday before slipping back. We need to push on through the 1.3600 level to stabilise, and open up the 1.3720 area. A break below 1.3400 is needed to signal a move towards 1.3160.
EUR/GBP – rebounded from the 0.8520 area, with the 200-day MA currently acting as resistance, along with the 0.8600 area. A break below 0.8520 opens up the 0.8470 area.
USD/JPY – slipped below the 113.00 area, potentially opening up the 112.40 area initially, as well as 111.80. We now have resistance back at the 113.30 area, as well as the previous highs at 114.75.