European markets slid back yesterday, having initially got off to a decent start, as concerns over the impact new restrictions would have on travel and leisure weighed on sentiment, with the FTSE100 feeling the effects more than most.
Despite increasing evidence that Omicron symptoms are milder, the tone from the UK government over the speed of infections from the variant has become increasingly anxious. The confirmation that the UK had seen its first Omicron related death didn’t help sentiment either, with the lack of detail around the circumstances of it merely serving to add to the overall uncertainty.
US markets fell back sharply as well with travel and leisure also leading the way lower, which in turn served to act as a drag on the wider market, pulling the Nasdaq down sharply, as investors pared back risk ahead of the conclusion of tomorrow’s Fed meeting.
This softness looks set to translate into a cautious European open, with today’s focus on the latest UK unemployment figures for October, and US PPI numbers for November.
If Bank of England governor Andrew Bailey was serious when he said he was looking at UK labour market data for clues as to whether to raise rates, then last month’s unemployment data gave him fewer excuses not to act with a modest rate increase this week.
The ILO unemployment measure for the three months to September slipped back to 4.3%, with the monthly September figure falling to 3.9%, while vacancies rose to a new record of 1.17m for the three months to October, a rise of 64k. Coming on top of his uneasiness about higher inflation, today’s unemployment and tomorrow’s inflation data should be the cherry on the top, when it comes to a rate rise later this week.
However recent events around the Omicron variant adding to the uncertainty, there is no guarantee that a decent set of unemployment numbers today, and another rise in headline CPI, will tee us up for a Thursday rate increase.
Expectations are for ILO unemployment to fall further to 4.2%, although we could slip even lower, if the single month trend seen in September, is replicated into October.
Under normal circumstances this surely would have been the trigger for some sort of response, from the central bank, however with the implementation of tighter restrictions at the end of last week, and the threat of more heading up to Christmas, it’s now quite likely the Bank of England will wait until February, with all the attendant risks any delay might bring. Average weekly earnings ex bonuses are forecast to fall from 4.9% to 4%.
Having seen US CPI for November come in at 6.8% last week, up from 6.2% the month before and its highest levels since 1982, you’d be forgiven for thinking that perhaps yields would have pushed sharply higher. In fact, they did the opposite, falling back sharply. This comes across as a rather odd reaction, at a time when inflation risks show little signs of peaking.
One reason for the slide in yields was the belief perhaps that the CPI number could have come in higher, which if it had could have prompted a sharper response from the Federal Reserve when they conclude their meeting tomorrow.
This may well be a touch premature especially with US PPI for November which is due out later today. As a leading indicator for CPI, it has proved to be fairly accurate in the last few months, and is expected to continue to move higher from where it was in October, when it came in at 8.6%. As a reminder US PPI was at 1.7% in January, and today is expected to rise to 9.2%, and up to 7.2% excluding food and energy.
For those on the FOMC who have been sounding the alarm on inflation in recent months, this afternoon’s readings are only likely to reinforce those inflation concerns, with further upward pressure expected to continue in the weeks and months ahead.
A strong PPI number here could well force the FOMC to accelerate tomorrow’s taper beyond the doubling that is currently expected by the markets.
EUR/USD – has so far failed to move above the 1.1385 area, keeping the pressure on the downside. The key support remains at the November lows at 1.1185, as well as the 1.1160 level. A move through 1.1420 argues for a move back to the 1.1520 level.
GBP/USD – has so far managed to hold above the 1.3160 area, and while we do so we can move back towards the 1.3400 area. A break of 1.3160 opens the 1.3000 level. We need to recover back above the 1.3300 level to stabilise and move towards the 1.3500 level.
EUR/GBP – despite a short squeeze to the 0.8600 area last week the euro still looks weak, falling back quickly below the 200-day MA again. Support remains at the 0.8480 level and needs to break below this level to diminish the risk of further gains.
USD/JPY – the 114.00 level continues to act as resistance. A breakthrough 114.00 has potential to target the 115.00 area. The 112.50 level still looks fairly solid for now. A move below the 112.50 level targets the 111.80 area.