After a fairly quiet and low key couple of days market volatility could well ratchet higher today with a number of important data announcements coming from the US later this afternoon.
While we saw a positive finish yesterday for Europe, stocks did give up some of their gains towards the end of the day
after the details of the latest round of EU sanctions were announced, wiping out advances we saw in the afternoon session, despite US data showing a significant improvement in consumer confidence to levels last seen in 2007, jumping to 90.9 in July.
This once again highlights the continuing divergence between what US consumers say, and what they do
given that, thus far, retail sales growth has gone in the opposite direction to the confidence surveys.
For some time now we’ve heard all manner of speculation that the slowdown in the US economy seen in Q1 was an aberration, caused by the worst winter in living memory.
The slowdown in Q1, we were told, would be more than offset by a strong bounce back in Q2.
While this may well be true, the fact is that in the space of six weeks, expectations for Q1 growth went from a figure of 1% in April, to a contraction of 2.9%, in a matter of weeks, with no discernible effect on stock market valuations.
The severity of the contraction in Q1 then raised expectations
that due to a rebound effect we could well get a 4% print for Q2. This remains highly optimistic and unlikely given some of the recent data.
First and foremost we have the latest ADP employment report for July.
The recent rebound in the jobs market in comparison to Q1 would certainly support some form of rebound,
and manufacturing data has been positive, but other factors in the US economy have been less so, including retail sales and durable goods which have been lacklustre. This shouldn’t be surprising given that wages growth remains weak and slightly below the rate of inflation.
For example retail sales growth in Q2 was actually below the retail sales growth seen in Q1
, while recent housing data has been less than positive.
Given that the US economy is 70% driven by consumption and healthcare spending
, the best we can possibly hope for is a reversal of the 2.9% contraction seen in Q1, which would put us back to where we were at the beginning of the year in terms of the size of the US economy.
Expectations are for annualised GDP to come in at 3% for Q2
, while the ADP employment report is expected to show 234k new jobs added in July. We could well see a revision to the June jobs number of 281k.
In the wake of these numbers the latest FOMC decision is expected to see a further $10bn shaved off the monthly total of asset purchases to $25bn a month
, bringing us ever closer to speculation about the Fed’s exit strategy with respect to its current extraordinary measures.
Markets will be looking for any hints about a change in tone
particularly in respect to the timing of a possible rate rise.
Irrespective of this afternoon’s GDP number the main focus is likely to remain on the employment outlook and Friday’s employment report
given continued improvements seen in recent weekly jobless claims data.
As for today’s European market open, a lower close in the US last night is expected to see a lower open as geopolitical concerns return
as the details of the new round of sanctions are mulled over ahead of the release of the latest German CPI inflation data.
– the euro continue to drift lower with new lows overnight with the prospect for a move towards the November lows at 1.3300 remaining. We have resistance at the previous lows at 1.3475, but would need to see a move back through 1.3500 to retarget the 1.3570 level and then on to 1.3640.
– the pound has remained under pressure continuing its slow declines of the last few days, breaking below the 1.6950 level in the process. The lack of rebound remains a concern and we could well see a move towards 1.6845 and the 100 day MA. We need to see a rebound back through 1.7030 to stabilise in the short term and argue for a retest of 1.7100.
– continues to tread water just above 0.7900 with the bias remaining towards the downside with support at the 0.7870/75 area The euro needs to overcome last week’s high at 0.7940 and then trend line resistance at from the highs in March at 0.7990, to stabilise. The pressure remains for a move towards 0.7780, with any rebound needing to overcome the 0.8000 level to stabilise in the short term.
– having close higher for eight days in a row we look to be heading towards the trend line resistance at 102.45, from the 105.50 highs, posted at the beginning of this year. Support comes in at around the 101.60 level.
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