While US markets managed to post gains for the second quarter in succession this probably owed more to the prospect of a weaker US dollar and a slight capitulation by the US Federal Reserve than any significant improvements in the US economy.
European markets haven’t been so fortunate and though they finished well off their February lows they still finished the quarter down by a significant margin, though they did manage to post their first monthly gains since November, while the FTSE 100 managed to eke out a second consecutive monthly gain, despite finishing the day lower yesterday.
As we head into the second quarter of 2016 the same factors that have troubled markets for the last few months or so are likely to continue to play into the overall narrative for investors. While the threat of an imminent US rate rise has diminished significantly it hasn’t gone away completely, though the closer we get to the US election the window for the Federal Reserve to act is likely to diminish even further.
Before we get to this afternoon’s US jobs report we have to get through a whole host of manufacturing PMI numbers for March, as the sector continues to battle with low commodity prices and a sectoral recession.
Overnight we started with the latest Chinese manufacturing numbers for March which appear to be showing some signs of improvement. The official manufacturing PMI came in at 50.2, while the Caixin measure came in at 49.7 . On the services side the outlook was also more promising with the official non-manufacturing PMI coming in at 53.8, and improvement from 52.7. Asia markets seem to have taken their cues from the latest Japanese Tankan survey which was disappointing with the Nikkei sliding sharply, and this looks set to weigh on European markets this morning as we look ahead to more data from Europe’s major economies.
European manufacturing PMI’s have been a mixed bag in recent months with Spain and Italy outperforming Germany and France, though they have all been on a downward track since January. The French numbers are expected to come in at 49.6, and Germany 50.4.
UK manufacturing which has been in the news all week with the Tata Steel (NS:TISC) story and the prospective job losses there is expected to show a slight improvement in March to 51.4 from 50.8.
Most of the attention today will be on this afternoon’s US jobs report for March, which given the fairly good ADP number earlier this week is expected to see a slight fall to 206k, from February’s fairly decent 242k. It is not here though that the Fed has concerns, but with the international outlook and a worry that the central bank could fall short of its inflation target.
Despite the unemployment rate being at 4.9%, prices by the Feds preferred inflation targeting measure showed some weakness this week with the core PCE price index falling back to 1.7%, while personal spending for the last three months has struggled to rise at all, eking out gains of 0.1% per month.
The other concern is the lack of significant wage growth, particularly last month as we saw an unexpected 0.1% decline, after a decent rise of 0.5% in January. Some took this January bump as evidence that we could be about to see wages start to rise, however we saw the same pattern 12 months earlier with a 0.6% rise in January 2015. As happened in 2015, happened again this year, as once the minimum wage increase dropped out the numbers fell back.
While the unemployment rate is now much lower at 4.9% as opposed to 5.7% a year ago, we really should start to see some evidence of rising wages by now, but so far significant gains have proved elusive, and today’s average hourly earnings numbers aren’t expected to be any different with a 0.2% rise month on month and 2.2% year on year.
We should see an improvement in the March ISM manufacturing index, back into expansion after recent improvements in some of the regional numbers. Expectations are for a number of 50.7, up from 49.5.
EUR/USD – having hit a 5 month high of 1.1411 the euro has slipped back a touch, with the next resistance at 1.1500, the October highs. Pullbacks should find support around the 1.1140 area. Only a move below 1.1030 argues for a move towards 1.0800.
GBP/USD – the pound appears to be consolidating below trend line resistance at 1.4460 yesterday, which appears to be the neckline of a potential inverse head and shoulders reversal. A move through 1.4500 has the potential to target a move towards 1.5000. A move below 1.4050 argues for a move towards the recent lows at 1.3835.
EUR/GBP – we’ve seen two failures at the 0.7945 area which is in close proximity to the 200 week MA at 0.7935. For now this keeps the bias towards the downside. A weekly close above 0.7935 suggests a move towards 0.8100, while a failure argues for a drift back down towards 0.7820.
USD/JPY – after eight successive days of gains we’ve seen the US dollar drop for two days in a row with resistance currently at 114.20 and support down near the 110.70 area. We still remain in a broad range with an overall bias to the downside.
Equity market calls
FTSE100 is expected to open 50 points lower at 6,125
DAX is expected to open 67 point lower at 9,898
CAC40 is expected to open 30 points lower at 4,355
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