It was another mixed day for markets in Europe yesterday with investor’s content to play a waiting game ahead of next week’s Spanish government ultimatum to the Catalan government, and this weekend’s IMF meetings in Washington DC.
The pound had a rather choppy day yesterday after EU chief negotiator Michel Barnier admitted that Brexit talks were currently deadlocked. This really shouldn’t have been a surprise to anyone who has been paying attention over the past week or so. There was little prospect of progress ahead of next week’s EU Council meeting given the recent mood music.
If we are still having this conversation two months from now, then it might be time to be a little concerned, but for the moment the pound is at the mercy of the ebb and flow of trader’s interpretation of Brexit politics, and as if to emphasise that the pound quickly recovered its early losses on German media reports that the EU might be open to a two year transition period.
This morning’s Chinese trade data was fairly supportive of a fairly robust domestic economy with a rise in imports in September of 18.7%, an improvement on the August numbers.
Exports on the other hand in August were slightly disappointing probably as a result of the recent strength of the Yuan, but also weaker demand out of Europe, rising 5.5%, down from a summer peak of 10.9% in June. The September numbers came in at 8.1%.
Recent Fed minutes along with decent positive economic data, including last week’s payrolls report, certainly hasn’t done anything to undermine the premise of another rate increase by the end of this year. If anything, recent inflation data from the ISM surveys are more supportive of a rate increase, despite concerns about low levels of inflation which were expressed by the Chicago Fed’s Charles Evans earlier this week.
These concerns speak to a wider befuddlement on the part of Fed officials as to why inflation remains tepid, with Lael Brainard, Jerome Powell and James Bullard also weighing in on the subject in comments made yesterday.
Yesterday’s PPI data for September would also appear to suggest that price pressures are picking up and if today’s headline CPI number follows suit, then it would be a major surprise if US policymakers were to backtrack on a December rate rise now. It is expected that September CPI will see an uptick from 1.9% to 2.3%.
For the moment markets are pricing a 76% probability of a move in December, they just aren’t so sure about how many are coming in 2018 and that’s the point.
With five new board members set to be appointed in 2018 including a new Chair and Vice Chair the overall flavour of monetary policy is likely to be uncertain for a while yet, whatever the data does. Will it be Kevin Warsh who’s been a Fed governor before and whose approach to monetary policy is different to the current approach, or will it be Jerome Powell who is the continuity candidate, and who already has a solid relationship with the current members of the FOMC.
With respect to today’s other data item in the form of retail sales for September, these are also likely to be skewed by the hurricane effect with predictions of a rise of 1.7%, a significant rebound from August’s -0.2%.
EURUSD – has continued to track higher towards the 1.1910/20 area with the potential for a return to the 1.2000 level. We have interim support at the 1.1780 area and below that near last week’s lows at 1.1670.
GBPUSD – the pound has continued to slip back but for now remains above the lows of last week at 1.3020, with interim support also at 1.3120. We need to recover through the 1.3320 area to signal a retest of the 1.3420 area. We still remain in the broader uptrend while above the 1.3000 level and a return to the highs last month.
EURGBP – spilled up over through the 50 day MA at 0.9020 before slipping back, posting a bearish key day reversal in the process. We have support back at the 0.8900 area and below that at the 0.8820 area.
USDJPY – last week’s failure at the 113.40 area has seen the US dollar slip back. It continues to find support around the 112.00 area. The risk remains for a move back to 114.00, though we might see a dip to 111.30 first.
FTSE100 is expected to open 12 points lower at 7,544
DAX is expected to open 8 points higher at 12,990
CAC40 is expected to open at 1 point higher 5,361
IBEX is expected to open 12 points higher at 10,287
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