After the sell-off seen on Monday, European stocks enjoyed a decent rebound yesterday, helped by a stabilisation in US markets, which have had a difficult start to the year.
The decline in the Nasdaq 100 has been particularly notable, however in the wake of yesterday’s testimony the rebound off the lows that we saw late on Monday continued, as Fed chair Jay Powell gave a fairly assured performance in front of US lawmakers at his reconfirmation hearing, helping US stocks put in their first collective positive finish in over a week.
The more positive tone appears to have come about as a result of the inability of US treasury yields to build on their recent gains, after Powell insisted that while the Fed was going to start the ball rolling on a normalisation process, it would be a long process from where we are now.
His comments that there would be lengthy and detailed discussions over the subject of balance sheet reduction also appear to suggest that the central bank is mindful of the dangers of going too quickly in draining liquidity, although he was clear to stress that the Fed was also alive to the risks of acting too slowly, in curbing inflation risks.
Powell’s calm tone would appear to have resonated with the concerns that came out of last week's Fed minutes, when markets reacted to the prospect that balance sheet reduction would be done in such a way that might be destabilising. Yesterday's rebound suggests that some of these concerns may have been allayed.
Because of yesterday’s US rebound, and a decent Asia session, which was helped by some softer China inflation numbers, markets in Europe look set to open higher, as we look ahead to today’s US CPI report for December, which could well once again spark volatility, if we get a number well north of 7%.
The recent decision by the Federal Reserve to accelerate its tapering programme to $30bn a month confirmed that Fed officials are now much more worried about inflation, than it is about the labour market. With a March rate hike now almost a done deal, today’s US CPI is likely to be a key signpost in the wider discussion, on how many more hikes are coming down the pipe, as central banks wrestle with a dilemma of rising price pressures, the risks of an economic slowdown caused by tighter restrictions, and a decline in consumer confidence.
In November US CPI hit a 39-year high of 6.8%, a trend which looks set to continue with today’s December number, given that PPI is already close to 10%. PPI, which is due tomorrow, has tended to be a leading indicator for CPI over the last 12 months, and while we did see a pause in headline CPI through the summer months, stabilising at 5.4%, we’ve seen a sharp acceleration since October.
The various restrictions that were imposed through much of Q4 have shown no signs of slowing when it comes to supply chain disruptions, along with sharp increases in energy prices. PPI over the same period has risen steadily since April, rising from 6.2% and a record high in November. Even excluding food and energy we’re still at 7.7%, on PPI, which means that there is a real possibility that we could see headline CPI move well above 7% today, and the highest level since 1982, with PPI potentially moving through 10% tomorrow.
EUR/USD – continues to range trade between trend line support just below 1.1280 and the resistance at the 1.1385 area and December peaks. The bias remains towards the downside; however, we could see a squeeze higher, on a move through 1.1420 in the short term.
GBP/USD – appears to be breaking to the upside, breaking above 1.3620 with the potential for a move towards 1.3730, and the 200-day MA, having broken above trend line resistance from last year’s peak at 1.4250. Support remains at 1.3420 and last week’s lows.
EUR/GBP – lack of follow through below 0.8330 has seen a pullback but the bias still remains lower towards 0.8280 and the 2020 lows. Resistance comes in at the 0.8380 level and behind that at 0.8450.
USD/JPY – while support at 114.80 the bias remains for a move back to the 116.35 peaks last week, and then on towards the December 2016 highs at 118.60. A mover below 114.70 targets a return to the 113.80 area.