European markets underwent a modest pullback yesterday with modest losses across the board, however there was little in the price action to suggest that the declines were anything other than a brief pause in the overall move higher, with shares set to open unchanged later this morning, despite a sell-off in Asia markets.
One of the main narratives of the last few months has been how central banks might start paring back their emergency stimulus programs, without causing significant market disruption. This month the RBNZ appeared to set the ball rolling by raising its main cash rate by 25 bps to 0.5% in response to rising inflation expectations.
This action has prompted speculation as to who might be next, and while the Federal Reserve is widely expected to fire the starting gun on paring back its own emergency bond buying program next week, speculation has been rising as to who might be next to move on rates.
The Bank of Canada yesterday ended its own bond buying program, while there is speculation that the RBA could do the same next week, while the Bank of England could also to act to nudge rates higher by the end of this year.
The only two central banks who don’t look anywhere near calling to a halt to their own emergency programs are the Bank of Japan, who met earlier today, and the European Central Bank, who are due to announce their decision later, although there aren’t any surprises expected.
The Bank of Japan has been trying to engineer higher inflation for over 40 years, with little success.
At the last meeting the central bank painted a bleaker outlook for exports and output, due to the various supply chain disruptions, and factory shutdowns which have blighted the economy in the past few weeks. Whether it be low vaccination levels and high infection rates the Japanese economy remains in a difficult place. While inflation is rising in the rest of the world the latest Japanese CPI numbers have remained stubbornly in negative territory for all but one month this year, sliding -0.4% in August.
With an election next month, the central bank left monetary policy unchanged while cutting its inflation and GDP forecasts. The cut in the inflation forecast is particularly noteworthy given that most central banks are doing the opposite, and points to a central bank that won’t be paring back stimulus anytime soon.
Today’s ECB meeting is likely to be similarly underwhelming. In September the ECB announced it was slowing the pace of its monthly PEPP bond buying program, over the next three months, which is currently at €80bn a month. There will be a wider discussion on its future in December, which means today is likely to be a placeholder, although it was made clear that the PEPP number could be moved in either direction if required.
There has certainly been an increase in anxiety levels amongst some parts of the governing council due to recent sharp rises in PPI and CPI levels. In Germany PPI recently hit 14%, while CPI is back at levels last seen in the 1990’s, well above 4%, which is prompting a lot of disquiet about an overheating housing market. As far as the economy is concerned President Lagarde expressed concern at the beginning of October, that growth was likely to be impacted by the rise in energy prices and disruption to supply chains, and as such any exit from pandemic measures would need to be handled carefully. Tomorrow’s upcoming EU CPI numbers aren’t likely to soothe these concerns for the ECB, expected as they are to move higher to 3.7%, from 3.4%.
While the ECB looks a long way from acting to significantly pare back its current monetary policy stance, today’s US Q3 GDP numbers, even as they come in weaker than Q2 should still support the narrative of the Federal Reserve starting the process to slow down its own asset purchase program when they meet next week.
US Q3 GDP is expected to slow to 2.6% from the 6.7% seen in Q2, as a combination of rising delta variant cases, weaker demand, and supply chain disruptions act as a brake on the economic rebound. One notable takeaway from the first two quarters of this year has been the resilience in personal consumption which rose 11.4% in Q1 and 12% in Q2. If we do see a substantially weaker reading in today’s Q3 numbers it is here that it is likely to manifest itself, although the number could well be skewed by the tough comparatives of a year ago which saw personal consumption rise by 41%. Expectations are for a rise of 0.9%, a really sharp slowdown from levels seen in H1.
Weekly jobless claims are also expected to reinforce the improvement in the US labour market, with a number similar to last weeks 290k. Continuing claims are also expected to fall further from 2.48m to 2.42m.
EURUSD – still have resistance at the 1.1620/30 level, which keeps the bias towards the 1.1560 area. A move above the 1.1630 area retargets 1.1680, with major resistance at 1.1760. Below 1.1520 targets the 1.1450 area.
GBPUSD – found support at the 50-day MA yesterday before rebounding. It now looks as if a move below 1.3700 is needed to open the 1.3670 area. Resistance remains at the 1.3840 area and 200-day MA. The bias remains for a move towards the 1.3900 area on a move through 1.3850.
EURGBP – the failure to break below the 0.8400 area has seen the euro squeeze back higher. A break below the 0.8400 area targets the 0.8280 level. We need to break above the 0.8470 level to target the 0.8520 area.
USDJPY – found support at the 113.35/40 area yesterday. The November 2017 peaks at 114.75, remains the key resistance. The 113.20 area is the next key support, followed by the 112.40 area.
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