European markets have had a pretty poor week thus far as the progress made in last week’s rebound slowly gets eroded away on a combination of concerns about China’s economy, and continued weakness in commodity prices. While Asia markets have rebounded overnight on the back of the weaker US Dollar, and the potential that we may see a deferred US rate hike, yesterday’s weak US finish owed more to concern about weak US earnings and concern about what had previously been perceived as a stronger US economy.
There wasn’t much in the positives to take from yesterday’s price action in US markets as the strong rally seen last week, turns into a distant memory. Throughout the day we saw a slow drip of underwhelming data and earnings announcements which served to drag the market lower.
US retail sales for September missed expectations, while August was revised lower, and Wal-Mart (N:WMT) then warned on its sales outlook for the remainder of this year as well as 2016, while a bigger than expected drop in September producer prices served to reinforce the deflationary winds blowing through the US economy.
Given that there is usually a lag on the CPI numbers we can probably expect a similarly weak outlook as we head towards year end, making it doubly difficult for the US Fed to continue pushing its narrative of a rate rise sometime this year.
As a result of yesterday’s much weak PPI reading, attention will be even more firmly focussed on today’s September CPI number which is expected to come in at -0.1% on the headline number, and 1.8% on the core, but given yesterday’s downward PPI surprise we could get a similar downward surprise here too, on both measures.
Yesterday’s Beige Book highlighted the manufacturing sector as a particular cause for concern, as a couple of more regions warned of a slowdown in economic activity. This really shouldn’t have been too surprising given the contractions seen in New York, Philadelphia, Richmond and Dallas manufacturing last month.
Today’s October readings for Empire and Philadelphia manufacturing are expected to show a modest improvement on the poor numbers in September, but are still nonetheless expected to show contractions of -8 and -2 respectively.
Given the splits now starting to appear within the Federal Reserve’s ranks at a very senior level, with respect to the timing of a rate rise this year, a continued deterioration in the data is likely to run the risk of making the hawks start to look a little foolish if they persist on sticking to their current narrative.
As it is currency and bond markets appear to be already making up their minds with the US Dollar getting sold off and yields dropping back, as traders push back their expectations of a rate rise this year.
The pound also jumped sharply unemployment fell back further to 5.4% in the three months to August, its lowest level since mid-2008.
The single month rate for August was even lower at 5.3%, while the number of people in employment came in at a record high level of 73.6m people. Average weekly earnings including bonuses also increased, albeit by less than expected, gaining 3% in the three months to August, in so doing maintaining the balance between weak price pressures which could delay a rate rise, and strong wage growth which could still prompt an earlier move by the MPC.
EURUSD – continue to push higher and have taken out the September high at 1.1470 which should keep us on track towards the 1.1700 level seen in August. Support is expected to come in at the 1.1220 level
GBPUSD – the dip towards 1.5200 earlier this week turned into a massive bear trap as we took out 1.5400 yesterday which would suggest we could well retest the 1.5630 area, but we need to break above the 1.5500 area first. Support now comes in at the 1.5360 area.
EURGBP – this week’s move above the May highs to 0.7495 to an 8 month high fell just short of the 0.7500 area, could well be the catalyst for a move towards the 0.7600 level. Having seen the euro slip back below 0.7420 there is potential to slide back to the 0.7380 area before a rebound.
USDJPY – it feels like the calm before the storm as we continue to range trade between 121 and 118.50. We need a break of these levels to suggest a direction for the next move with a move towards 116.00 the preferred direction.
Equity market calls
FTSE100 is expected to open 31 points higher at 6,300
DAX is expected to open 65 points higher at 9,980
CAC40 is expected to open 39 points higher at 4,641
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