Having started the day in positive fashion yesterday, European markets saw the majority of the early gains slowly disappear, and though most did finish higher, it was a somewhat half-hearted affair. The result of the German election went entirely as expected, with little prospect of a new government this side of Christmas.
US markets were similarly half-hearted and also saw a rather mixed session with some decent gains for the Russell 2000, and the Dow, while the Nasdaq and S&P500 finished the day lower.
The weakness in tech shares appeared to be driven by the continued resilience in bond yields, which look to be being driven by higher inflation concerns, with the US 10-year yield nudging above 1.5%, and Brent crude oil prices now above $80 a barrel.
While some are arguing that the move higher in yields is being driven by economic optimism, that seems hard to square with the reality that consumer confidence is falling back at a time when energy prices are surging, supply chains are buckling, and winter is on the horizon.
This concern about more persistent inflation also appears to be becoming a much more consistent theme of central bankers’ discourse, with a number of Fed speakers yesterday coming across a little more forcefully when it comes to the start of tapering.
Even New York Fed President John Williams, who has been one of the more dovish on the FOMC, said that tapering “may soon be warranted”, while permanent Fed Board governor Lael Brainard, another notable dove, also appeared to lean in that overall direction.
The tide also appears to be turning at the Bank of England if yesterday’s comments from governor Andrew Bailey are any guide. His remarks that the MPC was ready to raise rates before Christmas if needed to prevent higher inflation becoming more persistent were a significant departure, and reinforced market expectations that a modest rise in bank rate could come in Q1 next year.
It would appear that some on the MPC are starting to get nervous about a possible surge in wage inflation, although Bailey was careful to say that the bank would not react to sharp wage rises caused by supply shocks.
We’ll also get to hear from ECB President Christine Lagarde, though it’s unlikely she’ll deviate much from her remarks yesterday, when she said that the current rise in inflationary pressures is likely to be transitory, which by implication suggests that the ECB won’t be leaning in a hawkish direction whatever this week’s EU flash CPI numbers for September show.
On the data front we’ll be getting a latest look at US consumer confidence for September, after the sharp nosedive in August to 113.80, from 125.10 in July. The extent of the fall was a little unexpected, however it became apparent that concern about the rise in the delta variant, along with rising energy and food prices was starting to make people more cautious, as the summer season started to draw to a close. There is also the possibility that the remaining unemployment stimulus top-up measures were also coming up for expiry at the beginning of September, thus removing the remaining fiscal buffers afforded by the US government that had been in place since the start of the year. Expectations are for a modest improvement to 115, however I wouldn’t bank on it given the current uncertain climate.
We’ll also get to hear from Fed chair Jay Powell when he speaks to US lawmakers later today. In pre-released comments last night, he warned that the Fed might have to act in raising rates, if inflation becomes more persistent than anticipated.
It certainly feels like central bankers are becoming much more nervous about what is happening with the global economy, particularly when it comes to prices, and while some inflation is welcome, it is becoming increasingly apparent, that even with rising vacancies there are fewer workers available to fill them, potentially creating the perfect conditions for a wage price surge.
EURUSD – has struggled to rally, raising the prospect that we may well see a move towards 1.1650, on a break below the 1.1680 level. We need to see a move through 1.1760 to open up a return to the 1.1840 area. A break below 1.1650 opens up the prospect of a move to the 1.1600/10 level.
GBPUSD – holding up fairly well above the 1.3600 area, however we need to see a sustained move above the 1.3750 level, through 1.3775 to reopen a path towards the 1.3900 area. A move below 1.3600 risks 1.3400.
EURGBP – has drifted back to the 0.8530 area after last week’s failure at the 0.8610 area. The bias remains towards the bottom end of the recent range. Also have support at the lows this month at 0.8500/10.
USDJPY – continues to move higher with the previous highs at 111.60 the next target. Support now comes in at the 110.20 area, as well as back at the 109.20 area.