While European markets managed to shrug off yesterday’s blockbuster US inflation print, US markets weren’t anywhere near as resilient, slipping back for the second day in a row.
A late surge in the US dollar and a blow out in yields gradually undermined sentiment towards US equities, with the Nasdaq and Russell 2000 seeing the biggest losses, as investor sentiment gradually deteriorated as the day went on.
Not only did US CPI hit its highest levels in 31 years, at 6.2%, but core prices also surged, rising to 4.6%. With the biggest components of the rise being in food and energy, there is rising concern that we could only be getting started with further increases in prices, especially as the weather hasn’t even started to get cold yet. There is a fear now that consumers, as well as markets may well have to absorb further price rises, with all the inherent risks that brings for company profit margins, and consumer inflation expectations.
As a result of yesterday’s slide in US markets, after Europe had closed we look set for a slightly softer open this morning.
As we look ahead to today’s market action, both the US and Canada will be marking Veteran’s Day which is likely to mean lower volumes in the afternoon session, while in the UK we will get the first glimpse of the first iteration of Q3 GDP.
It would be no surprise to anyone to find that the UK economy has slowed in Q3, after a decent upward revision to the numbers in Q2 saw a rebound of 5.5%.
These revisions came in the form of higher household spending on the likes of food services, accommodation, and hospitality, and this is expected to remain fairly resilient in Q3.
The normalisation of economic activity, as well as so called staycations appears to have been the main driver here and is likely to have continued into the first part of Q3 given that this also covers the period of the school holidays. As such this should be reflected in the index of services numbers, which should account for a good part of the economic expansion during the quarter with expectations of a rise of 1.9% over the period of July to September. Private consumption is expected to slow from 7.2% in Q2 to 3.1% in Q3.
Manufacturing, particularly new car production was, and is likely to remain a drag due to the chip shortages, along with maintenance shutdowns in the North Sea.
The better-than-expected numbers in Q2 also means that the UK economy was much stronger than we thought when heading into Q3.
It also means that the slowdown we are currently experiencing is coming from a much higher level and as such may be easier to absorb, although concerns over higher inflation could act as a brake in Q4.
Monthly GDP numbers over the period do suggest a bit of a slowdown at the beginning of the quarter with a 0.1% contraction in July followed by a 0.4% rebound in August, with today’s September GDP number also forecast to see a 0.4% expansion.
Expectations for today’s Q3 numbers are for a slowdown to 1.5%, from 5.5%, with GDP year on year forecast to slow to 6.8%, down from the 23.6% expansion in Q2, although this number was skewed by the lockdowns from the same quarter in 2020.
Industrial and manufacturing production for September are expected to show a modest improvement of 0.2%.
EUR/USD – slid below 1.1500 yesterday and looks set for a retest of the 1.1400 area initially, with the potential for a move towards 1.1170. We still have resistance at the 1.1620 area, which we need to overcome to stabilise.
GBP/USD – having failed to overcome the 1.3600 area earlier this week, the risk remains for further losses on a break below 1.3400, and a move towards 1.3160. We need to push on through the 1.3600 level to stabilise and open up the 1.3720 area.
EUR/GBP – still have support at the lows this week at the 0.8520 area, with the 200-day MA currently acting as resistance, along with the 0.8600 area. A break below 0.8520 opens the 0.8470 area.
USD/JPY – rebounded from the 112.70 area, and currently on course for a retest of the 114 20 area. We also have resistance at the previous highs at 114.75.