Having seen the US, China phase one trade deal signed off, US markets enjoyed another day of record highs after retail sales for December posted solid numbers, while weekly jobless claims dropped back to 204k, with the S&P500 busting through the 3,300 level at the third time of asking.
The US Senate also passed the revised USMCA trade deal, giving President Trump his second win of the week, and which he is expected to sign into law next week.
While US markets have continued to get drawn ever higher, markets in Europe delivered a much more tepid response, finishing the day mixed yesterday, with the FTSE100 the worst performer.
Markets in Asia took up the US mantle with the latest economic data from China showing that the economy grew by 6% in Q4.
Industrial production for December also continued its recovery, building from the strong rebound to 6.2% seen in November, coming in at 6.9%, well above expectations, and the best level since last March.
Retail sales also held up coming in at 8%, sustaining the recovery seen in November, as the rebound in economic activity continued with the improvement in the data probably being helped by economic activity being brought forward ahead of the upcoming Chinese New Year holiday.
The new record highs in the US and positive Asia session are likely to see a positive follow through for markets here in Europe later this morning.
A part of the reason for the underperformance of markets in Europe is the weak nature of any recovery in the region, and some concern that President Trump may well turn his attention to Europe on the trade front. If the EU was looking to maintain a low profile in this area, they certainly have a funny way of showing it after EU trade commissioner Phil Hogan criticised US trade policy as short termism, and focussed only on winning the upcoming election. He went on to suggest that the EU might file a case at the WTO with respect to some of the terms of the deal.
While that may well be true, Mr Hogan is unlikely to win friends within the US administration for articulating it at a time when President Trump is taking aim at France’s plan for a digital tax and Airbus for illegal subsidies, and raising the prospect of tariffs on the European auto sector.
Mr Hogan also went on to take aim at UK Prime Minister Boris Johnson for his insistence that there would be no extension to this year’s transition period deadline, accusing him of brinksmanship.
After this week’s surprise drop in UK inflation to 1.3%, which prompted increasing speculation that the Bank of England might cut rates at the end of the month, attention is set to turn back to Europe today and the even more tepid inflation outlook that the European Central Bank is having to contend with.
In recent months we have seen some evidence of an uptick in EU CPI, however it still remains quite subdued on a historical basis, and with an ECB meeting next week, and yesterday’s minutes showing that there is limited appetite for further stimulus, new ECB President Christine Lagarde will have her work cut out to convince on the need for further easing measures.
Both the headline and core CPI measures for December are expected to be confirmed at 1.3%, welcome news given that both are at multi month highs, in contrast to the UK which is at a three-year low.
While speculation about a possible January rate cut served to push the pound to its lowest levels this month earlier this week, we’ve seen a bit of a rebound in the last three days, as currency traders mull the likelihood that the Bank of England will pull the trigger on a cut in two weeks’ time. The jury remains out on the wisdom of a rate cut at a time when questions are increasingly being asked about the efficacy of the current low rate climate.
Today’s December UK retail sales numbers could well tip the scales back away from that rate cut speculation if we see a strong recovery after the 0.6% decline seen in November. One of the characteristics of the recent November data has been how weak some of it has been, however given the political uncertainty ahead of the December election it is perhaps not surprising that business and consumers held back. Expectations are for consumers to have unlocked the purse strings in the wake of last month’s landslide Conservative win and for there to be a rebound of 0.5%.
If we get a strong rebound then maybe some of the rate cut speculation of the last few days may well diminish.
EURUSD – continues to edge higher, and could well close in on the resistance at 1.1220. We still have support at the 1.1100 area and the 50-day MA. A move below the 50-day MA could well open up a move towards the 1.1040 area.
GBPUSD – a third successive day of gains has seen the pound edge higher, as it looks to move towards 1.3120, as well as the 1.3220 level. Trend line support comes in at 1.3020 from the 1.2950 lows. A move through 1.2950 opens up the 1.2900 area.
EURGBP – having failed at the 0.8600 area the euro has slipped back. A move below the 0.8520 area has the potential to target the 0.8470 area. A move above 0.8600 targets the 0.8790 area.
USDJPY – while above the 109.70 area the risk of further gains towards 110.70 remain on the table. Below 109.70 opens up support at 109.20 as well as last week’s lows at 107.65.
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