While European markets had a quiet and a somewhat mixed session yesterday, US markets continued to kick on from last week’s gains, once again making new record highs, continuing their divergence away from markets in Europe.
This morning’s market open looks set to pick up from yesterday’s subdued European theme as investors digest recent political events in Germany, Austria and Spain.
Last night’s meeting between Prime Minister Theresa May and EU Commission President Jean Claude Juncker didn’t appear to move discussions any further along than they were at the end of last week, though there did seem to be some movement on the working on a framework for a transition deal amongst the remaining EU27 if sufficient progress was deemed to have been made by December. It does still appear that the EU is sticking to its line that an agreement on the Northern Irish border must be made before trade talks can begin despite the two being interlinked.
The recent change in tone from the Bank of England when it comes to its stance on interest rates has been nothing short of a revelation with a number of policymakers suddenly becoming a lot more hawkish on rate policy, despite evidence that recent economic data is showing an economy that is sluggish at best.
It seems policymakers are belatedly discovering that the emergency rate cut and stimulus that they embarked upon in August of last year had the entirely predictable effect of amplifying the inflationary shock that the economy was trying to absorb in the wake of the Brexit effect, and sudden fall in the pound.
Today’s latest CPI number for September could well see headline inflation edge higher from the move back to 2.9% that we saw in August, and hit 3% for the first time since April 2012. If this were to happen it could prove to be a little embarrassing for Governor Carney. If CPI rises by more than 1% above the banks 2% target Governor Carney will have the unenviable task of having to write to the Chancellor explaining why inflation is above target, and what the Bank intends to do about it.
He can’t very well say, 'well Phil it turns out that rate cut last year wasn’t such a good idea, but don’t worry we’ve got it in hand and we’re going to put rates back to where they were beforehand'.
As it is several members of the MPC have signalled that rates could move in the coming months and while we’re hearing some stark warnings about the risks of reversing last year’s rate cut, the bond markets have already made the adjustment and already priced it in.
Not raising rates now, having led the markets up the garden path on several occasions over the years would be as equally damaging to the banks credibility. Quite simply if Governor Carney cries wolf once more it would be difficult to take him seriously again.
We will have the opportunity to gauge his reaction to this morning’s inflation numbers, as well as his MPC colleagues Silvana Tenreyro and Deputy Governor David Ramsden when all three of them testify to MP’s at the Treasury Select Committee.
It will also be a good opportunity to see where their sensitivities lie on the dove/hawk scale in relation to Gertjan Vleighe who until recently was perceived as one of the more dovish members of the MPC.
Core CPI is expected to come in unchanged at 2.7% while producer prices are expected to increase from 7.6% to 8.2%.
Policymakers are also likely to have taken note of the recent rises in commodity prices which could well be early indications of further inflationary pressures coming further down the pipe.
Later in the morning we’ll also get to see the final EU CPI numbers for September which are expected to be confirmed at 1.5%.
The latest German ZEW sentiment survey is expected to reflect the move to new record highs in the DAX, with an increase to 20.3, almost back to this year’s May peaks, up from 17 in September.
EURUSD – struggling to push back through the 1.1830 area which means we remain at risk of a move back to the 1.1670 lows this month. We need to break above the 1.1920 area to retarget 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 – yesterday’s failure at the 1.3320 level has seen the pound drift back. We could see a fall back to this month’s lows at 1.3020 without jeopardising the current uptrend. We also have interim support at the 1.3120 level. A move through 1.3340 retargets the 1.3420 area.
EURGBP – last week’s bearish key day reversal from the 50 day MA at 0.9020/30 opens up the potential for a correction lower towards the 0.8820 area. We have resistance at the 0.8930 area which needs to hold for further weakness to occur.
USDJPY – the failure at the 113.40 area last week has seen the US dollar slip back. Having slipped back below the 112.00 area the risk is for a move towards the 110.80 area in the short term, with interim support at the 111.30 level.
FTSE100 is expected to open 11 points higher at 7,538
DAX is expected to open unchanged at 13,003
CAC40 is expected to open 7 points higher at 5,369
IBEX is expected to open unchanged at 10,181
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