It was another day of record highs for the Stoxx 600 and FTSE 250, yesterday, with the FTSE 100 also closing at a one-month high, as cautious optimism in Europe outweighed concern about rising Delta variant rates in Asia, and to a lesser extent in the US, where infection rates are also rising.
Rising bond yields do appear to be starting to act as a drag on the Nasdaq, which closed the day lower, ahead of key inflation data later today out of the US. The US 10-year yield has risen for five days in succession, closing at a four-week high, while the US 2-year yield, closed at a three-week high. While the Nasdaq finished lower, the Dow and S&P 500 both closed at new record highs, in the aftermath of the passing of the new infrastructure bill through the Senate, with Asia markets continuing the resilient tone with a similarly positive session.
As we look towards today’s European open there is an expectation of a similarly positive bias ahead of this afternoon’s US CPI inflation numbers. The temperature in the US economy went up a notch in the most recent June CPI data, as headline inflation saw another big increase, rising to 5.4%, with core prices rising to 4.5%, the highest level since 1991, largely driven by another 10.5% rise in used car prices, which have remained resilient over the last couple of months.
We also saw a 1.5% increase in energy prices while food and rent inflation also rose more than expected. PPI prices also saw a big increase in June, which if recent trends are any guide could trickle up into today’s July CPI numbers, even though expectations are for a slight decline. In the most recent core PCE deflator numbers for June, this trend went into reverse as prices fell back a touch in an encouraging sign that inflation pressures may well have peaked.
While the Fed may well still be able to argue the continued rise in prices is transitory, given where the increases are occurring, if June’s number doesn’t mark the high-water mark, then Fed officials may start to shift a little bit more uncomfortably as we head into the autumn, however whatever happens this week the direction of travel towards a taper seems a little more straightforward than it was a couple of months ago, given recent jobs data.
For now, markets are buying the transitory narrative, due to the resilience of the labour market, however if the current trend of rising prices continues, “transitory” will be doing a lot heavier lifting than it is doing now. Expectations are for July CPI to soften a touch, from 5.4% to 5.3%, and core prices to fall back to 4.3%, however if recent trends with respect to PPI are any guide, we could see an upside surprise in prices, and not a move lower. If this happens US 10-year yields could well take another leg higher, towards the 50-day MA and 1.40%, while the US dollar could see further gains across the board.
EUR/USD – closing in on support at the March lows at 1.1704, with a break below 1.1700, opening the prospect of a move towards the November lows at 1.1603. Resistance comes in at the 1.1830 area.
GBP/USD – holding below the 1.3870 area and ergo a test of the 1.3820 area. A fall below 1.3800 argues for a return to the 1.3720 area. We need to move back above 1.3880 to retarget the 1.4000 area.
EUR/GBP – continues to edge lower, posting a new 18-month low at 0.8450, with the potential to move lower towards the 2020 lows at 0.8280. The euro needs to recover back above the 0.8510 level to stabilise and squeeze back towards 0.8580.
USD/JPY – a break above the 110.70 area, opens the potential for a move towards the July highs at 111.65, after last week’s break above the 109.80 area. This should now act as support for another leg higher.
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