If the market price action of the last few days is any guide the penny finally appears to have dropped that the Federal Reserve is willing to risk a recession to get inflation under control.
Powell’s message from last week’s speech at Jackson Hole on Friday, couldn’t have been any clearer, that the Fed would keep going until the job is done, the pity being it took so long for investors to take notice, as stock markets dropped, and bond yields spiked higher.
The US dollar also hit a new 20 year high, while the pound slipped below 1.1700 for the first time since March 2020 as concerns about the UK’s fiscal position took its toll on the currency.
With the European Central Bank also indicating that it was considering going in for a 75bps rate move next week, markets are slowly realising that their ideal scenario of rate cuts in 2023, was wishful thinking at best, and that higher rates are here to stay for some time to come.
Perhaps it’s understandable that some investors were holding on to the narrative of the last 14 years, that had become conditioned to a “buy the dip” mind set. The difference now is that economic conditions now are completely different, and rising price pressures look set to become the next key challenge not only for central banks, but for the wider global economy.
It now looks increasingly likely that the Fed will go again by another 75bps move when they next meet in September, with this week’s non-farm payrolls numbers set to be the next key data milestone.
Before that we can expect to see the ECB and the Bank of England to also raise rates aggressively in the next two weeks, despite fears that further rate moves will hinder, rather than help the economy, as we head towards year end.
Having dithered for so long when it came to the dangers that inflation wasn’t going to be transitory, central banks are now faced with two equally unappealing options, without knowing which one is likely to be the least damaging.
Do nothing and allow inflation to become more persistent and entrenched, killing demand that way, or hike aggressively in an attempt to kill demand more quickly, and drive prices lower that way.
European markets got off to a negative start to the week yesterday with the UK out for the August bank holiday, while US markets also started the week lower, although the losses were fairly modest after Friday’s big falls with the S&P500 finding some support just above the 50-day SMA and closing off its lows of the day.
As we look at the return of UK markets, we can expect to see the FTSE100 open lower as markets here play catch-up, while we’ll also get an insight into how higher inflation and interest rates is slowing demand for loans and mortgages in July.
The effect of higher interest rates as well as the rising cost of living has already started to manifest itself in the most recent lending data. It’s been a trend that has been in place since the start of this year, but appears to be accelerating as we head into the autumn.
In June mortgage approvals slipped to their lowest levels in two years, coming in at 63.7k. Having seen a well flagged 50bps rate rise delivered in August and the possibility of another 50bps move at the very least in September, it’s likely that we will probably see another slowdown in today’s numbers.
Net consumer credit was more resilient in June, jumping sharply to £1.8bn from £0.9bn in May, however this could be down to consumers loading up on debt to get by as monthly bills increase in size.
In the US we’ll also get the latest consumer confidence numbers for August.
There has been a significant disconnect in recent consumer confidence numbers this year, when compared to how the US labour market has been faring, along with resilient retail sales numbers. Even as US unemployment has continued to fall and retail sales have been positive every month, with the exception of May, it has been notable that US consumer confidence has been on the decline over the last 12 months.
It’s been particularly notable in the last 6 months, although in relative terms it’s still above the lows of last year
Nonetheless the combination of higher gasoline prices and rising food prices has seen a particularly sharp drop in the last two months to 95.7 in July. Today’s August numbers may see a slight improvement to 97.5, due to the recent fall in US petrol prices.
EUR/USD – rallied up to just shy of 1.0100 last week, before slipping back. Choppy trading above the 0.9900 level continues to dominate but bias remains for a move towards the 0.9620 area, while below 1.0220. We also have major trend line resistance from the January highs at 1.0260.
GBP/USD – slipped below the previous lows at 1.1718 yesterday, with the bias remaining for a move towards the lockdown lows of March 2020 at 1.1500. Resistance comes in at 1.1980 area.
EUR/GBP – broken higher through the 0.8510 area and 50-day MA, opening up the 0.8600 area. We have trend line support from the lows this month now coming in above the 0.8425 area.
USD/JPY – the previous highs at 139.40 are the next key resistance area and obstacle to further gains towards the 140.00 area. Support now comes in at the 137.15 area or cloud support, and below that at the 50-day SMA at 135.80.
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