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UK unemployment and US PPI in focus

employment form

European markets got off to a poor start to the week yesterday, with the DAX falling to an eight-month low, while the FTSE 100 underwent its second biggest one day fall this year. Losses were widespread across the board, as concerns over an escalation on the Ukraine-Russia border prompted a bit of a flight to safety, although some of the losses were tempered by a hope that a continued Russian willingness to talk would head off an incursion into Ukraine.

This risk-off tone initially manifested itself in a move into US treasuries, sending yields sharply lower, however the decline in yields was quickly undone after St Louis Federal Reserve president James Bullard doubled down on his comments last week, by expressing conviction that the Fed should raise rates by 50bps hike in March, with two more of 25bps each by July. While it is clear he doesn’t have the support of the rest of the FOMC, judging by his comments that he needs to convince his colleagues of the merits of this approach, there does appear some concern that they might start to lean in this direction if the data continues to move in that direction. US 10-year yields moved back above 2%, after dropping to within touching distance of 1.90%.

In a sign of some of the extraordinary volatility being seen in bond markets, the US 10-year yield has moved in a range of in excess of 12bps for three days in a row, without really going anywhere. US markets also had a difficult session, closing lower for the third day in succession, although they managed to close off their intraday lows, as well as remaining above the lows seen towards the end of January.

As we look ahead to today’s European open, and another weak Asia session, it looks like we can expect to see a lower open as we look ahead to the latest UK unemployment numbers for December, EU Q4 GDP and US PPI for January.

Unemployment in the UK fell back to its lowest level since July 2020 in the three months to November, however the fall to 4.1% was overshadowed by a fall in wages to 3.8%, putting further pressure on incomes as concerns over a cost-of-living squeeze are exacerbated further. Unemployment for the three months to December is expected to remain steady at 4.1%, while wage growth is expected to slow to 3.6% from 3.8%. The direction of travel suggests this could get worse before it gets better, given the continued upward pressure on prices. Since the middle of last summer when wage growth rose by 7.4%, the level of increase has been in decline, with little sign of a pickup.

Even with the level of UK unemployment still well above pre-pandemic levels of 3.8%, and the number of payrolled employees rising by 184,000 in December, the number of vacancies has also increased, rising to 1.25m. The number of people on payrolls is expected to rise by another 133,000 in January. Compared to pre-pandemic, the figures showed that there were still 459,000 fewer people in work, with no obvious sign that these people are likely to return to the workforce any time soon.

The latest revision to EU Q4 GDP is expected to come in at 0.3%, unchanged from the earlier reading we saw at the end of last month.

The last set of US PPI numbers for December did offer some optimism that inflationary pressure in the US economy was starting to slow after the headline number slipped back to 9.7% from 9.8%, although PPI excluding food and energy edged higher to 8.3%. Today’s January numbers could reinforce that hope with headline PPI expected to drop sharply to 9.1% from 9.7%, while core prices are expected to fall to 6.3% from 6.9%. A sharply softer number here could well see some of the more hawkish rate-hike scenarios get unwound a little given PPI tends to be a leading indicator for CPI.

EUR/USD – slipped down towards the 1.1270 area yesterday, with the bias still for a move towards the lows this year at 1.1120. Key resistance remains at last week's highs at 1.1485.  

GBP/USD – has continued to slip lower with interim support at the 1.3480 area and then below that at the 1.3430 area where we have trend line support from the December lows. A sustained move above the 1 3600 area targets 1.3720.

EUR/GBP – while below the 0.8410/20 area the bias remains for a to a retest of the 0.8280 lows earlier this month. Above the 0.8420 area retargets the 200-day MA at 0.8510.

USD/JPY – found support at the 115.00 area for two days in a row after last Friday’s sharp reversal from the 116.34 area. Support at the 114.70 needs to hold to keep the upside momentum intact, or risk a return to the 113.50 area. A break above 116.35 targets the 117.50 area.


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