Yesterday proved to be a mixed bag for equity markets, with European markets finishing the day higher, while US markets continued to struggle to hang onto their early gains, with the Nasdaq 100 leading the losses.
The main drag on US markets was a big jump in yields which saw the US 10-year yield push to its highest levels since May 2019, at 2.14%, with a similar sharp rise in US 2-year yields, as markets moved to shift expectations over how hawkish the Federal Reserve is likely to be when it concludes its two-day meeting tomorrow. Also weighing on sentiment was concerns over a sharp slowdown in China as authorities reacted to a surge in Omicron cases in Shenzhen by locking down the entire region indefinitely.
This morning’s latest China retail sales and industrial production numbers have assuaged some concerns over a sharp slowdown in the Chinese economy, although the winter Olympics may have prompted somewhat of a boost. Retail sales for February and which cover the period from the start of January and over Chinese New Year showed a better-than-expected rise of 6.7% and were a significant improvement from December.
Industrial production also beat expectations of an increase of 4%, rising by 7.5%, while fixed asset investment rose by 12.2%. These better-than-expected numbers meant that the PBoC decided to keep rates on hold this morning, however given the recent lockdowns the next few months could be challenging, as could the Chinese government’s target of 5 5% GDP growth..
As we look ahead to today’s European open, sentiment is likely to remain increasingly fragile for the very reason that it reflects optimism over progress on ceasefire talks between Russia and Ukraine, as well as sharp falls in oil and gas prices, and which has seen US oil prices fall below $100 a barrel
Both of these factors seem completely at odds to what is being played out on the ground inside Ukraine and a backdrop of Russian forces which continue to pound Ukrainian cities, with little regard for safeguarding the civilian population. Nonetheless markets in Europe look set to open lower this morning hindered by sharp declines in Chinese markets.
Today’s unemployment numbers are expected to show that the UK labour market remains resilient. In December UK unemployment remained at 4.1% for the 3 months to December, its lowest levels since July 2020. This morning’s numbers for the three months to January is expected to see a further decline to 4%, and another multi month low, while the number of pay-rolled employees for February is expected to increase by 125k, up from 108k in January.
The number of vacancies continues to remain high, which probably isn’t too surprising when you see that wages growth continues to exhibit little sign of picking up. If employers want to be able to fill some of these roles, they will need to start raising salaries. Excluding bonuses, we’ve seen a fall from 5% in September to 3 7% at the end of the last year.
This is disappointing, however it should be remembered that none of these numbers will yet reflect the various pay increases announced by retailers over the past few months, where we’ve seen the likes of Sainsbury announce a 10% increase in baseline wages, Tesco a 5.5% increase, while Lidl has also announced similar, in line with inflation pay rises, in recent months.
This should help to underpin wage growth over the next few months with pay growth including bonuses expected to rise 0.3% to 4.6%.
Moving to the US the inflation outlook continues to look hot, with headline CPI for February rising to 7.9% last week. Today’s PPI numbers which have, over the past few months, proved to be a fairly accurate leading indicator for CPI are expected to continue their upward trajectory, in line with the recent moves higher we’ve seen across the board in commodity prices.
Headline PPI is expected to rise from 9.7% to 10%, and a new record high, while core PPI is expected to rise to 8.7% from 8.3%, keeping the pressure on the Federal Reserve, who start their two day meeting later today, and who are expected to raise rates by 0.25% tomorrow, with the prospect of many more to come. .
EUR/USD – continues to look soft after last week’s failure at the 1.1100 area. While below last week’ s high the risk remains for a move back to trend line support from the 2017 lows, at 1.0800. Below 1.0780 opens up the risk of a move towards 1.0600.
GBP/USD – remains under pressure while below 1.3200, with a move towards 1.2800 still on the cards. We need to get back above the 1.3200 area to stabilise, and retarget 1.3450.
EUR/GBP – finding support at the 0.8360/70 area, with a break above the 100-day MA targeting a move back towards 0.8470 and the 200-day MA. A fall below the 0.8370 area is needed to undermine the current rebound and could see a move back to 0.8320.
USD/JPY – continues to look well supported and on course for a move towards the December 2016 peaks at 118.65. Only a move back below 116.20 undermines this scenario and argues for a move back to 115.40.
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