Equity markets look set to end a choppy week with no clearer idea of where to go to from here than they did at the end of last week. One thing is certain there is increasing anxiety that for all the narrative from central bankers it is increasingly obvious that it is going to be extraordinarily difficult for policymakers globally to improve economic conditions in any significantly meaningful way from where we are now without politicians help. This looks some way off and helps explain this week’s weakness in equity and bond markets.
Having now moved beyond last week’s ECB decision to keep policy unchanged and yesterday’s similar action from the Swiss National Bank and Bank of England attention now turns to next week’s Bank of Japan and US Federal Reserve decisions where there is likely to be a similar outcome.
This week’s economic data from the UK and US told us much about the relative health of both the US and UK economies along with the attitude of the policymakers who oversee them.
On the one hand you have a number of members of the US Federal Reserve who appear to think that the US economy is strong enough to handle an interest rate rise, despite increasing evidence that the economy is slowing down sharply.
Yesterday’s US economic data showed that August retail sales, industrial production and PPI inflation numbers all fell short of expectations, which when combined with the recent weak ISM surveys makes the prospect of any move on interest rates next week extremely unlikely.
Given recent data it is becoming increasingly difficult to imagine a scenario that could see the Federal Reserve nudge rates higher next week. To do so would fly in the face of their claim to be data dependant, given that Q3 GDP expectations continue to get marked lower, which if sustained would see the trend of lower US economic activity, that has been in place since the end of Q1 2015, continue.
On the other side of the equation you have the Bank of England who think the UK economy is so weak that we could well see another interest rate cut by the end of the year, despite there being no clear evidence that the UK economy is about to falter, and on most measures is performing better than the US economy. Decent retail sales numbers, low unemployment data, as well as decent PMI numbers all point to an economy, while not firing on all cylinders, still doing better than its US counterpart.
Despite this surprising resilience the Bank of England refused to rule out a further rate cut by the end of the year, despite increasing evidence that last month’s actions were a significant overreaction.
The contrast between the two central banks could not be greater, with the US Federal Reserve trying to be too hawkish for its own good, and hastening a possible recession, while the Bank of England seems to be intent on looking for evidence of problems behind every corner, in its determination to offset one.
This uncertainty about central bank policy action and its declining effectiveness which has been a hallmark of this week’s price action and choppiness is likely to leak into next week as well ahead of the Bank of Japan and US Fed rate meetings next Wednesday.
Today’s US CPI inflation numbers are likely to show that inflation pressures in August remained fairly benign with little expectation of a significant increase in pricing pressures, particularly since oil prices appear to have stabilised around current levels on continually changing supply and demand expectations.
EURUSD – continues to range trade between 1.1200 and 1.1300 but as long as hold above the support near the 1.1120 area the risk remains for a move to 1.1400. A move below 1.1120 retargets the low 1.1000’s.
GBPUSD – still looks a little weak falling to 1.3140 earlier this week but its recovery back above 1.3200 is encouraging for a recovery back through 1.3300 towards last week’s highs.
EURGBP – while above the 0.8480 level there is a risk of a move towards the 0.8600 area. If we fall below 0.8480 then we could see a return to the 0.8420 area.
USDJPY – the line of least resistance remains towards the downside while below the 103.50 area and for a move towards the recent lows around the 99.50 area.
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