Asia markets traded slightly softer overnight as investors looked for clues as to the next move as to what countries might be hit by US President Trump’s tariff proposals. The background noise hasn’t been helped by events in Japan which could threaten the survival of Japanese Prime Minister Shinzo Abe. His finance minister Taro Aso has been embroiled in a financial scandal involving a piece of public land whose paper trail could lead back to the Japanese leader himself, and potentially undermine his position, as well as his government.
After the big gains on Friday US markets finished slightly more mixed last night as investors continued their focus on the prospects for inflation over the remainder of this year, as well as the risks of further tension in the ongoing discussions over tariff barriers currently taking place between the US and EU.
Having seen a big jump in wages data in January to 2.8%, last week’s data showing a surprise decline back to 2.6% appears to have introduced a little bit more uncertainty as to whether the risks surrounding inflation are being priced correctly by the markets.
Yesterday’s decline in the US dollar, as well as in bond yields appears to reflect this slightly less confident tone with the prospect of four rate rises this year being pushed into the background for the time being.
What isn’t in doubt is whether the Fed will hike rates next week, the main question appears to be around the timing and pace of additional rises in the context of whether we’ll see an additional two or three this year.
Today’s CPI inflation data is likely to add further colour to the US inflation picture, however it probably won’t add any further clarity to the overall inflation outlook puzzle, given that the Fed doesn’t use CPI as its inflation benchmark. Nonetheless it is still a useful gauge in establishing when and how the price pressures we’ve been seeing build up in US supply chains start to filter down into the wider economy.
The various prices paid components of the ISM surveys show price pressures at multi year highs yet for all of that the headline CPI number in the US has remained stuck in and around the 2% level since September last year. Today’s February numbers aren’t expected to be any different with a rise to 2.2% expected in line with last Novembers number. Core CPI is expected to come in at 1.8%, unchanged from the previous month.
Also on the agenda we have the spring statement from Chancellor Philip Hammond which is expected to be a fairly low key affair.
It is quite likely that while we’ll see a number of revised forecasts from the Office for Budget Responsibility included an updated borrowing forecast.
In addition it is expected that the OBR will adjust down its target for UK government borrowing by at least £10bn, giving the Chancellor a welcome boost as a result of higher than expected tax receipts. As a result of this he is likely to find himself under pressure to loosen the purse strings a little. Given Mr Hammond’s cautious manner this will probably have to wait until October, when we have a better idea of the type of deal that is on the table from the EU.
We are also expected to see some detail on the EU divorce settlement payments in the wake of the recent deal signed by Prime Minister May in December.
EURUSD – still supported at the 50 day MA at 1.2270 for now after last week’s failure at 1.2446. A fall below 1.2260 would suggest a retest of the range lows at 1.2160.
GBPUSD – we still have resistance at the 1.3920 level and last week’s high. The large resistance at 1.3980 remains a key level. On the downside we have support at 1.3710, this month’s low, and below that at 1.3660.
EURGBP – continues to drift lower after last week’s failure above the 0.8950 level last week, falling below last week’s low at 0.8874 we could see further declines towards the 0.8810 area.
USDJPY – the current rebound appears to be struggling to move much beyond the 107.00 area. We need to move beyond the 107.20 level, or run the risk of a return to this month’s lows. A move below 105.00 targets the 100.00 area. We need to move above the 108.30 area to stabilise.
FTSE100 is expected to open 10 points lower at 7,204
DAX is expected to open 8 points lower at 12,410
CAC40 is expected to open 4 points lower at 5,272
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