As European markets declined for a second day in a row yesterday, US markets also struggled to maintain the positive momentum of the last few days as concerns about the economic outlook and a disappointing start to US earnings season saw US markets drop back overnight. This weakness looks set to translate into a weaker European open this morning as investors, already concerned about Chinese growth, saw German ZEW economic sentiment expectations hit a one year low on the back of concerns about the ripple out effect of the VW defeat device will have on the German economy over the remainder of this year. With China inflation continuing to remain weak the focus today is set to be on UK and US data. Having seen the pound drop sharply yesterday as CPI inflation dropped back into negative territory for the second time this year, largely as a result of falling fuel and food prices is certainly nothing to be concerned about, but what it does do is put back interest rate expectations for a rise in rates further out into 2016. This belief was reinforced by comments by new MPC member Gertjan Vlieghe who suggested that inflation risks were tilted to the downside, which would appear to suggest he won’t be in any rush to push for a rise in rates any time soon. Today’s average earnings data could present Bank of England policymakers with a problem in the short term if they continue to trend higher as they have been doing for the past few months. Expectations for the three months to August are for an increase in wages to 3.1% from 2.9%, giving a further boost to hard pressed consumers who up until a year ago had undergone a five year fiscal squeeze in the other direction. The main concern would be if wages start to push higher in a wage/price spiral but that doesn’t seem likely at this point in time. The latest ILO unemployment rate for August is expected to remain unchanged at 5.5%. As far as the US economy is concerned we continue to get the on/off speculation as to when the Fed might make a move on interest rates as various policymakers queue up to offer conflicting views on the timing or otherwise of when to push the Fed Funds rate up. We’ve heard comments from Fed vice chairman Stanley Fischer at the weekend, as well as FOMC members Lockhart and Bullard which would appear to be at pains to keep the option available, though Chicago Fed President Charles Evans has been consistent in stating his preference for a move sometime next year at the earliest. As such Monday night’s comments from permanent voting member Lael Brainard were a significant departure from the usual rhetoric when she urged the FOMC to be patient when it came to deciding when to raise rates. Given her previous experience as an international policy advisor to President Obama her comments highlight her more outward looking perspective relative to the more hawkish comments from policymakers like James Bullard, who seem blinded to external factors when determining lift off timing. In making these comments she put herself at odds with those policymakers who continue to keep the prospect of a 2015 rate rise on the table, and in so doing made the prospect of a rate rise this year much less likely by insisting that the economic risks to the US economy are tilted to the downside. Having broken the consensus on keeping 2015 on the table she was joined yesterday by Daniel Tarullo, another permanent member who said it was not appropriate to raise rates at this point. On the data front we will be looking to the US consumer who, despite the fiscal boost of low gasoline prices has been fairly reluctant to spend money this year. September retail sales are expected to show a rise of 0.2%, unchanged from August and bringing to a close another quarter of a 1% increase in retail sales. On the inflation front headline producer prices are also expected to remain in negative territory at -0.8%. Later in the day we will also get the latest snapshot of economic conditions around the 12 Fed regions with the latest Beige Book, and it is likely to be a significantly different story to the survey of 2nd September, which was fairly neutral, though it was notable that there was concern over the energy sector. The sharp deterioration in the regional manufacturing data since then could well show up in this evening’s missive and could well increase concerns about the overall resilience of the US economy. EURUSD – we managed to get above the 1.1400 level yesterday but it proved short-lived, and we haven’t dipped back that far which suggests we can still go higher towards the September high at 1.1470 and on towards 1.1700. Support is expected to come in at the 1.1220 level GBPUSD – yesterday’s sharp drop scuppered any thoughts of a move beyond 1.5425 towards the September highs at 1.5630. Nonetheless we managed to stay above the 1.5200 area which means we can still see a return to the 1.5400 area. Pullbacks need to stay above the 1.5200 area to reassure or we could slip back towards the lows this month at 1.5110. EURGBP – yesterday’s move above the May highs to 0.7495 to an 8 month high fell just short of the 0.7500 area, could well be the catalyst for a move towards the 0.7600 level. For this to unfold we need to stay above the 0.7420 area. A move below 0.7420 potentially retargets the 0.7380 area. USDJPY – it feels like the calm before the storm as we continue to range trade between 121 and 118.50. We need a break of these levels to suggest a direction for the next move with a move towards 116.00 the preferred direction. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Lower open for Europe as growth concerns continue
08:00, 14 oktober 2015