European markets

Bank of Japan stays on hold, UK public finances in focus
By Michael Hewson (Chief Market Analyst at CMC Markets UK)
 
European markets saw a cautious but broadly positive start to the week, despite weakness in basic resources which served to weigh on the FTSE100.
US markets picked up where they left off on Friday with new record highs for the Dow, S&P500 and Nasdaq 100 although we did see a loss of momentum heading into the close, as US yields rebounded off their lows of the day.
 
The tentative nature of yesterday's gains appears to be being driven by a degree of caution ahead of some key risk events over the next couple of weeks, starting today with the latest Bank of Japan policy decision. This is set to be followed by the European Central Bank on Thursday, and then the Fed and Bank of England next week.
 
For most of this month central banks have been keen to reset the policy narrative when it comes to the timing of rate cuts which had markets pricing in the prospect of

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European Markets Sink Amid Recession Concerns and Oil Price Slump

Michael Hewson Michael Hewson 31.05.2023 08:09
With the White House and Republican leaders agreeing a deal on the debt ceiling at the weekend markets are now obsessing about whether the deal will get the necessary votes to pass into law, as partisan interests line up to criticise the deal.   With the deadline for a deal now said to be next Monday, 5th June a vote will need to go forward by the end of the week, with ratings agencies already sharpening their pencils on downgrades for the US credit rating. European markets sank sharply yesterday along with bond yields, as markets started to fret about a recession, while oil prices sank 4% over demand concerns. US markets also struggled for gains although the Nasdaq 100 has continued to outperform as a small cohort of tech stocks contrive to keep US markets afloat. As we look towards today's European open and the end of the month, we look set for further declines after Asia markets slid on the back of another set of weak China PMIs for May. We'll also be getting another look at how things are looking with respect to economic conditions in Europe, as well as an insight into some key inflation numbers, although core prices will be missing from this snapshot. French Q1 GDP is expected to be confirmed at 0.2% while headline CPI inflation for May is expected to slow from 6.9% to 6.4%. Italian Q1 GDP is also expected to be confirmed at 0.5, and headline CPI for May is expected to slow from 8.7% to 7.5%. We finish up with the flash CPI inflation numbers from Germany, which is also expected to see a slowdown in headline from 7.6% to 6.7% in May. While this is expected to offer further encouragement that headline inflation in Europe is slowing, that isn't the problem that is causing investors sleepless nights. It's the level of core inflation and for that we'll have to wait until tomorrow and EU core CPI numbers for May, which aren't expected to show much sign of slowing.   We'll also get another insight into the US jobs markets and the number of vacancies in April, which is expected to fall from 9.59m in March to 9.4m. While a sizeable drop from the levels we were seeing at the end of last year of 11m, the number of vacancies is still over 2m above the levels 2 years ago, and over 3m above the levels they were pre-pandemic. The size of this number suggests that the labour market still has some way to go before we can expect to see a meaningful rise in the unemployment rate off its current low levels of 3.4%. EUR/USD – slipped to the 1.0673 area before rebounding with the 1.0610 area the next key support. We need to see a rebound above 1.0820 to stabilise.   GBP/USD – rebounded from the 1.2300 area with further support at the April lows at 1.2270. Pushed back to the 1.2450 area and the 50-day SMA, before slipping back. A move through 1.2460 is needed to open up the 1.2520 area.   EUR/GBP – slid to a 5-month low yesterday at 0.8628 just above the next support at 0.8620. A move below 0.8620 opens up the December 2022 lows at 0.8558. Main resistance remains at the 0.8720 area.   USD/JPY – ran into some selling pressure at 140.90 yesterday, slipping back to the 139.60 area which is a key support area. A break below 139.50 could see a return to the 137.00 area, thus delaying a potential move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20.   FTSE100 is expected to open 22 points lower at 7,500   DAX is expected to open 64 points lower at 15,845   CAC40 is expected to open 34 points lower at 7,175
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Fed Signals Rate Pause as UK GDP Aims for April Rebound

Michael Hewson Michael Hewson 14.06.2023 08:30
Fed set for a rate pause; UK GDP set to rebound in April    European markets closed higher for the second day in a row, after the latest US inflation numbers for May came in at a 2-year low, and speculation about further Chinese stimulus measures boosted sentiment.   US markets followed suit although the enthusiasm and gains were tempered ahead of today's Fed meeting as caution set in ahead of the rate announcement.   Having seen US CPI for May come in at a two year low of 4%, in numbers released yesterday, market expectations are for the US central bank to take a pause today with a view to looking at a hike in July. Of course, this will be predicated on how the economic data plays out over the next 6-7 weeks but nonetheless the idea that you would commit to a hike in July begs the question why not hike now and keep your options open regarding July, ensuring that financial conditions don't loosen too much.   Today's May PPI numbers are only likely to reinforce this more dovish tilt, if as expected we see further evidence of slowing prices, with core prices set to fall below 3% for the first time in over 3 years. Headline PPI is expected to slow to 1.5%, down from 2.3%.       When Fed officials set out the "skip" mindset in their numerous briefings since the May decision when the decision was taken to remove the line that signalled more rate hikes were coming, there was always a risk that this sort of pre-commitment might turn out to be problematic.   So, while markets are fully expecting the Fed to announce no change today, Powell's biggest challenge will be in keeping the prospect of a July rate hike a credible outcome, while at the same time as outlining the Fed's economic projections for the rest of the year, as well as for 2024.   In their previous projections they expect unemployment to rise to a median target of 4.5% by the end of this year. Is that even remotely credible now given we are currently at 3.7%, while its core PCE inflation target is 3.6%, and median GDP is at 0.4%.     Before we get to the Fed meeting the focus shifts back to the UK economy after yesterday's unexpectedly solid April jobs data, as well as the sharp surge in wages growth, which prompted UK 2-year gilt yields to surge to their highest levels since 2008, up almost 25bps on the day.   While unemployment slipped back to 3.8% as more people returned to the work force, wage growth also rose sharply to 7.2%, showing once again the resilience of the UK labour market, and once again underlining the policy failures of the Bank of England in looking to contain an inflation genie that has got away from them.   This failure now has markets pricing in the prospect that we could see bank rate as high as 6% in the coming months, from its current 4.5%. The risk is now the Bank of England, stung by the fierce and deserved criticism coming its way, will now overreact at a time when inflation could well start to come down sharply in the second half of this year.   So far this year the UK economy has held up reasonably well, defying the doomsters that were predicting a 2-year recession at the end of last year. As things stand, we aren't there yet, unlike Germany and the EU who are both in technical recessions.   Sharp falls in energy prices have helped in this regard, and economic activity has held up well, with PMI activity showing a lot of resilience, however the biggest test is set to come given that most mortgage holders have been on fixed rates these past two years which are about to roll off.     As we look to today's UK April GDP numbers, we've just come off a March contraction of -0.3% which acted as a drag on Q1's 0.1% expansion. The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%.     The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.     This isn't expected to be repeated in today's April numbers, however there was still widespread strike action which is likely to have impacted on public services output.   The strong performance from manufacturing is also unlikely to be repeated with some modest declines, however services should rebound to the tune of 0.3%, although the poor March number is likely to drag the rolling 3M/3M reading down from 0.1% to -0.1%.       EUR/USD – failed at the main resistance at the 1.0820/30 area, which needs to break to kick on higher towards 1.0920. We still have support back at the recent lows at 1.0635.     GBP/USD – finding resistance at trend line resistance from the 2021 highs currently at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.      EUR/GBP – has slipped back from the 0.8615 area yesterday, however while above the 0.8540 10-month lows, the key day reversal scenario just about remains intact. A break below 0.8530 targets a move towards 0. 8350.     USD/JPY – looks set to retest the recent highs at 140.95, with the potential to move up towards 142.50.  Upside remains intact while above 138.30.      FTSE100 is expected to open 10 points lower at 7,585     DAX is expected to open 15 points lower at 16,215     CAC40 is expected to open 3 points lower at 7,288
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Fed's Hawkish Pause and Focus Shifts to ECB: Market Reactions and Outlook

Michael Hewson Michael Hewson 15.06.2023 08:48
As Fed delivers a "hawkish" pause, attention turns to the ECB  European markets closed the day higher yesterday, with the DAX making a new record high, ahead of last night's Fed decision, while US markets closed the session mixed after a choppy session, which saw the Fed deliver a hawkish pause to their rating hiking cycle.     Asia markets were mixed with the latest Chinese retail sales data for May coming in below expectations, rising by 12.7%, along with industrial production which gained 3.5%. The last few weeks have delivered plenty of evidence that headline inflation is slowing sharply, and while core prices are probably stickier than the Fed would like, the direction of travel with respect to PPI suggests that in a couple of months we could be looking at a very different outlook.   Having indicated that they would be looking to hike in July, after removing the line that signalled more rate hikes were coming at the May meeting, there was always a risk that this sort of pre-commitment might turn out to be problematic. So, it has proved, with many suggesting that they would be better off hiking today, and then playing a game of wait and see.   In any case with the Federal Reserve unwilling to step back from its commitment to a pause this month, and delivering on an expectation to keep rates unchanged, they compensated for that by raising their expectation this year for at least 2 more rate hikes, putting the terminal rate at 5.6%, with 12 Fed officials, projecting such a move.    This unexpected hawkish shift saw US 2-year yields spike sharply as the market priced out the prospect of rate cuts later this year, which was never likely anyway, however we also saw the US central bank change their forecasts for unemployment to rise to 4.1% by the end of this year, down from 4.6%, while tweaking its PCE forecast to 3.2% from 3.3%.     Unsurprisingly, the US dollar which had been in retreat, rebounded strongly and stock markets dropped back sharply, over concerns that the US central bank could be on the cusp of a policy mistake.  Once Powell started his press conference the initial moves started to unwind and markets attempted to absorb the message from last night's events, and whether the two more hikes guidance, was based on any type of empirical evidence, or merely a mechanism to steer market expectations, and keep last night's decision unanimous.   The tone of Powell's press conference suggests it was the latter While yesterday's post decision reaction shows that markets were caught the wrong side of last night's decision, the bigger test will be in the economic data. If inflation continues to slow and jobs growth remains steady, the question needs to be asked as to whether the Fed will really pull the trigger on more rate hikes? It seems unlikely.     Moving on from last night's decision, attention will now shift towards today's ECB rate decision.   There appears to be little doubt that we will probably see another 25bps rate hike from the European Central Bank at today's rate meeting.   Nonetheless this would be a notable shift from some of the recent narrative that has accompanied recent discussions about the likely rate path for the ECB. The change of emphasis appears to have come about because of recent sharp falls in the headline rate of CPI, as well as evidence that core prices may well have also seen a peak.   In the latest flash CPI numbers for May, headline inflation fell to 6.1%, a sharp fall from the 7% we saw in April, as well as the 9.2% we were seeing at the end of last year. The big concern in recent months has been core prices which hit a record high of 5.7% in March and fell to 5.3% in the most recent numbers released earlier this month. Based on these numbers alone one can understand the ECB's reluctance to stop hiking, however there are already risks emerging that might suggest the ECB could be close to its own pause moment.       These risks are sharp slowdowns in PPI, which tends to act as a leading indicator for future inflation trends with German PPI now in negative territory. The German economy is also in recession, along with the rest of the eurozone, and yet various ECB policymakers are still calling for several more rate rises, including the likes of Joachim Nagel head of the German Bundesbank, due to still high levels of CPI inflation.     This comes across as particularly risky at a time when we are starting to see increasing signs of deflation across the global economy. Whatever the ECB does today, and a hike is priced in, it is what comes next which is very much up for debate, where ECB President Christine Lagarde will need to tread carefully.     Will the hawks on the ECB maintain their hawkish narrative or will see those claws start to get reined in until we get a better idea of the cumulative effect that the current spate of rate hikes has had. Coming so soon after last nights Fed decision we get US retail sales for May and weekly jobless claims.   Retail sales for May are expected to decline by -0.2%, down from 0.4% in April, while weekly jobless claims which spiked up to 261k last week are expected to slip back to 245k.     The last time we spiked above 260k a few weeks ago it was revised away. Will the same thing happen today?   EUR/USD – pushed above the 1.0820/30 area yesterday and closing in on the 50-day SMA at 1.0880, with resistance now at 1.0920. We still have support back at the recent lows at 1.0635.     GBP/USD – broke above trend line resistance from the 2021 highs at 1.2630 and testing above 1.2680 with the next resistance at 1.2760, which is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.      EUR/GBP – still looking soft despite the key day reversal day earlier this week, but still above 0.8540 support. A break below 0.8530 targets a move towards 0.8350. Resistance at 0.8620.     USD/JPY – still trying to move through the 140.30 area with resistance behind that at the recent highs at 140.95.  Upside remains intact while above 138.30.      FTSE100 is expected to open 10 points lower at 7,592     DAX is expected to open 12 points lower at 16,298     CAC40 is expected to open 15 points lower at 7,313  
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Rising Rates and Stock Markets: Finding Comfort in Unconventional Pairings

Michael Hewson Michael Hewson 19.06.2023 09:44
Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
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Rising Rates and Stock Markets: Finding Comfort in Unconventional Pairings - 19.06.2023

Michael Hewson Michael Hewson 19.06.2023 09:44
Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
Bank of England Faces Dilemma: Will They Raise Rates by 25bps or 50bps?

Bank of England Faces Dilemma: Will They Raise Rates by 25bps or 50bps?

Michael Hewson Michael Hewson 22.06.2023 08:06
Bank of England set to raise rates again, but by how much?      European markets fell for the third consecutive day yesterday, after the IFO in Germany warned that a recession would be sharper than expected in the second half of the year, and UK core inflation unexpectedly jumped to a new 32 year high. US markets also fell for the third day in a row after Fed chairman Jay Powell doubled down on his message from last week to US lawmakers yesterday, that US rates would need to rise further to ensure inflation returns to target.   This weakness in US markets looks set to translate into a lower European open, as we look towards another three central bank rate decisions, from the Swiss National Bank, Norges Bank and the Bank of England all of whom are expected to raise rates by 25bps today. Up until yesterday's CPI number markets were predicting with a high degree of certainty that we would see a 25bps rate hike from the Bank of England later today.   That certainty has now shifted to an even split between a 25bps rate hike to a 50bps rate hike after yesterday's sharp jump in core CPI to 7.1% in May.   As inflation readings go it's a very worrying number and suggests that inflation is likely to take longer to come down than anticipated, and even more worrying price pressure appears to be accelerating, in contrast to its peers in the US and Europe where prices now appear to have plateaued.   This has raised the stakes to the point that the Bank of England might feel compelled to hike rates by 50bps later today, and not 25bps as expected. Such an outcome would be a surprise from the central bank given their cautious nature over the years, however such has been the strong nature of recent criticism, there is a risk that they might overreact, in a sign that they want to get out in front of things. Whatever they do today it's not expected to be a unanimous decision, but the surge in core inflation we've seen in recent months, does make you question what it is that Swati Dhingra and Silvana Tenreyro are seeing that makes them think that the last few meetings were worthy of a no change vote.    In the absence of a press conference to explain their actions a 50bps rate move would be a risky strategy, as it could signal they are panicking. A more measured response would be to hike by 25bps with a commitment to go more aggressively at the next meeting if the data warrants it. The big problem the bank has is that they won't get to see the July inflation numbers, when we could see a big fall in headline CPI, until after they have met in August, putting us into the end of Q3 until we know for certain that inflation is coming down. The resilience in UK core inflation has got many people questioning why it is such an outlier, compared to its peers, however if you look closely enough the reason is probably staring us in the face in the form of UK government policy and the energy price cap, which has kept gas and electricity prices artificially high for consumers.   If you look at the price of fuel at the petrol pump it is back at the levels it was prior to the Russian invasion of Ukraine, due to the slide in oil prices from their peaks of $120 a barrel, with consumers already benefitting from this disposable income uplift into their pockets directly in a lower bill when it comes to refilling the family car.    Natural gas prices have gone the same way, yet these haven't fed back into consumers' pockets in the same way as they have in the US and Europe.   This has forced employers here, in the face of significant labour shortages, to increase wages to attract the staff they need, as well as keep existing staff to fulfil their business functions. We already know that average weekly earnings are trending upwards at 7.6% and in some sectors, we've seen wage growth even higher at between 15% and 25%.    These increased costs for businesses inevitably feed through into higher prices in the cost of delivering their services, and voila you have higher service price inflation which in turn feeds into core prices, in essence creating a price/wage spiral.   It is perhaps a supreme irony that an energy price cap that was designed to protect consumers from rising prices is now acting in a fashion that is making UK inflation a lot stickier, and making the UK's inflation problem a lot worse than it should be.   So, while a lot of people are blaming the Bank of England for the mess the UK is in, we should also direct some of the blame at the energy price cap, a Labour Party idea that was hijacked by the Conservatives and is now acting as moron premium in the UK gilt market.   It is these sorts of poorly thought through political interventions that always have a tendency to come back and bite you in ways you don't expect, and the politicians are at it again, with the Lib Dems calling for a £3bn mortgage protection scheme, another crackpot idea that would push back in the opposite direction and simply make the task of getting inflation under control even more difficult.     On the plus side there are reasons to be optimistic, with the energy price cap set due to be reduced in July, while PPI inflation has also been falling sharply, with the monthly numbers in strongly negative territory, meaning it can only be a matter of time before the year-on-year numbers go the same way.     This trend of weaker PPI suggests that market forecasts of a terminal bank rate of 6% might be overly pessimistic, and that subsequent data will pull gilt yields lower, however we may have to wait another 2 to 3 months for this scenario to play out in the data.   This should still feed into headline CPI by the end of the year, though core prices might prove to be slightly more difficult to pull lower.      EUR/USD – remain on course for the April highs at 1.1095 while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.   GBP/USD – fell back to the 1.2680/90 area yesterday before recovering, having found resistance at the 1.2845/50 area at the end of last week. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.    EUR/GBP – found support at the 0.8515/20 area and has move up towards the recent highs at 0.8620. A move through 0.8630 could see a move towards 0.8680. While below the 0.8620 area the bias remains for a return to the recent lows.   USD/JPY – currently finding itself rebuffed at the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.    FTSE100 is expected to open 45 points lower at 7,514   DAX is expected to open 82 points lower at 15,941   CAC40 is expected to open 34 points lower at 7,227   By Michael Hewson (Chief Market Analyst at CMC Markets UK)
Bank of England Faces Rate Decision: Uncertainty Surrounds Magnitude of Hike

Bank of England Faces Rate Decision: Uncertainty Surrounds Magnitude of Hike

Michael Hewson Michael Hewson 22.06.2023 12:28
Bank of England set to raise rates again, but by how much?    By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets fell for the third consecutive day yesterday, after the IFO in Germany warned that a recession would be sharper than expected in the second half of the year, and UK core inflation unexpectedly jumped to a new 32 year high. US markets also fell for the third day in a row after Fed chairman Jay Powell doubled down on his message from last week to US lawmakers yesterday, that US rates would need to rise further to ensure inflation returns to target.     This weakness in US markets looks set to translate into a lower European open, as we look towards another three central bank rate decisions, from the Swiss National Bank, Norges Bank and the Bank of England all of whom are expected to raise rates by 25bps today. Up until yesterday's CPI number markets were predicting with a high degree of certainty that we would see a 25bps rate hike from the Bank of England later today. That certainty has now shifted to an even split between a 25bps rate hike to a 50bps rate hike after yesterday's sharp jump in core CPI to 7.1% in May.     As inflation readings go it's a very worrying number and suggests that inflation is likely to take longer to come down than anticipated, and even more worrying price pressure appears to be accelerating, in contrast to its peers in the US and Europe where prices now appear to have plateaued. This has raised the stakes to the point that the Bank of England might feel compelled to hike rates by 50bps later today, and not 25bps as expected.     Such an outcome would be a surprise from the central bank given their cautious nature over the years, however such has been the strong nature of recent criticism, there is a risk that they might overreact, in a sign that they want to get out in front of things. Whatever they do today it's not expected to be a unanimous decision, but the surge in core inflation we've seen in recent months, does make you question what it is that Swati Dhingra and Silvana Tenreyro are seeing that makes them think that the last few meetings were worthy of a no change vote.      In the absence of a press conference to explain their actions a 50bps rate move would be a risky strategy, as it could signal they are panicking. A more measured response would be to hike by 25bps with a commitment to go more aggressively at the next meeting if the data warrants it. The big problem the bank has is that they won't get to see the July inflation numbers, when we could see a big fall in headline CPI, until after they have met in August, putting us into the end of Q3 until we know for certain that inflation is coming down.   The resilience in UK core inflation has got many people questioning why it is such an outlier, compared to its peers, however if you look closely enough the reason is probably staring us in the face in the form of UK government policy and the energy price cap, which has kept gas and electricity prices artificially high for consumers. If you look at the price of fuel at the petrol pump it is back at the levels it was prior to the Russian invasion of Ukraine, due to the slide in oil prices from their peaks of $120 a barrel, with consumers already benefitting from this disposable income uplift into their pockets directly in a lower bill when it comes to refilling the family car.  Natural gas prices have gone the same way, yet these haven't fed back into consumers' pockets in the same way as they have in the US and Europe.   This has forced employers here, in the face of significant labour shortages, to increase wages to attract the staff they need, as well as keep existing staff to fulfil their business functions. We already know that average weekly earnings are trending upwards at 7.6% and in some sectors, we've seen wage growth even higher at between 15% and 25%.      These increased costs for businesses inevitably feed through into higher prices in the cost of delivering their services, and voila you have higher service price inflation which in turn feeds into core prices, in essence creating a price/wage spiral. It is perhaps a supreme irony that an energy price cap that was designed to protect consumers from rising prices is now acting in a fashion that is making UK inflation a lot stickier, and making the UK's inflation problem a lot worse than it should be.   So, while a lot of people are blaming the Bank of England for the mess the UK is in, we should also direct some of the blame at the energy price cap, a Labour Party idea that was hijacked by the Conservatives and is now acting as moron premium in the UK gilt market. It is these sorts of poorly thought through political interventions that always have a tendency to come back and bite you in ways you don't expect, and the politicians are at it again, with the Lib Dems calling for a £3bn mortgage protection scheme, another crackpot idea that would push back in the opposite direction and simply make the task of getting inflation under control even more difficult.     On the plus side there are reasons to be optimistic, with the energy price cap set due to be reduced in July, while PPI inflation has also been falling sharply, with the monthly numbers in strongly negative territory, meaning it can only be a matter of time before the year-on-year numbers go the same way.   This trend of weaker PPI suggests that market forecasts of a terminal bank rate of 6% might be overly pessimistic, and that subsequent data will pull gilt yields lower, however we may have to wait another 2 to 3 months for this scenario to play out in the data.     This should still feed into headline CPI by the end of the year, though core prices might prove to be slightly more difficult to pull lower.    EUR/USD – remain on course for the April highs at 1.1095 while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – fell back to the 1.2680/90 area yesterday before recovering, having found resistance at the 1.2845/50 area at the end of last week. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.      EUR/GBP – found support at the 0.8515/20 area and has move up towards the recent highs at 0.8620. A move through 0.8630 could see a move towards 0.8680. While below the 0.8620 area the bias remains for a return to the recent lows.     USD/JPY – currently finding itself rebuffed at the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 45 points lower at 7,514     DAX is expected to open 82 points lower at 15,941     CAC40 is expected to open 34 points lower at 7,227
UK Public Sector Borrowing Sees Decline in July: Market Insights - August 22, 2023

UK Retail Sales Outlook and Flash PMI Focus Amid Inflation Concerns - Analysis by Michael Hewson

Michael Hewson Michael Hewson 23.06.2023 11:35
UK retail sales could surprise to the upside, flash PMIs in focus - By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets fell for the fourth day in succession yesterday, driven lower on worries that central banks will look through concerns over a slowdown in economic activity and prioritise the battle against inflation, and look set to open lower this morning.     These concerns have been magnified in recent days with last week's hawkish Fed meeting, followed by the bigger than expected 50bps rate hikes from the Bank of England and Norges Bank yesterday, as investors started to worry that creating a possible recession was likely to become a necessary side-effect in their willingness to push inflation back down to their 2% targets. Certainly, the sticky nature of core inflation is causing a great deal of anxiety not only on the part of central bankers, but also on the part of those who are due to come off fixed rate mortgages in the next 12 months. The hope is that this period of high rates could soon give way to a softening later in the year, however the big rise in core inflation suggests that we may have to endure them for quite a bit longer.     On the plus side the lowering of the energy price cap next month is already seeing energy companies writing to customers and lowering their monthly direct debits with gas prices now back at 2021 levels. This should start to see headline inflation continue to decline into the end of the year.       While concerns over a possible recession are increasing, a lot of the economic data so far thisyear has proved to be reasonably resilient, which makes the timing of yesterday's decision to be more aggressive by the Bank of England a little bit after the fact.   For an economy that is wrestling with food price inflation of close to 20% the resilience seen in the UK consumer has been surprising so far this year, with clothing retailer Next surprising the market earlier this week when it upgraded its full year profits forecasts on better-than-expected trading activity.   Consumer confidence has improved as petrol prices have come down and certainly helped with some of that, however we also can't ignore the recent increase in interest rate costs that are likely to act as a drag in H2 of this year. In April we saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp -1.4% decline in March, which in turn reversed a 1.4% gain in February.   The gain in April was even more surprising given the rise in tax rates, including council tax and other utility bills that kicked in at the start of the fiscal year.   For May estimates are for retail sales to fall by a modest -0.2%, even with recent updates from a few UK retailers pointing to continued resilience when it comes to spending patterns. We also have the latest flash PMI numbers for June which are likely to continue to exhibit one of the more notable trends we've seen in recent months, which has been an ongoing divergence between services sector activity and manufacturing activity.   This trend has also started to manifest itself in China which is seeing its manufacturing sector start to struggle.   In France manufacturing activity remained steady at 45.7, while Germany slipped back to 43.2 from 44.5. Both of these are expected to remain close to current levels.   Services continue to remain resilient but even here activity is cooling off a touch, with France slipping to 52.5 from 54.6, while Germany improved to 57.2 from 56. Again, these are expected to come in slightly weaker at 52.1 and 56.3.   In the UK the picture appears to be more upbeat, although even here manufacturing is struggling, coming at 47.1 in May, while services also slowed to 55.2 from 55.9. UK manufacturing is expected to soften to 46.8 and services to 54.8.     Lower fuel costs may offer some support here; however, most service providers are struggling with higher costs, which by and large they are having to pass on.    EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – spiked up to 1.2850 yesterday before slipping back, however it remained above the lows this week at the 1.2680/90 area. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510, but needs to clear 1.2850.      EUR/GBP – failed between the 0.8630/40 area before slipping back. The main support is at least weeks low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally cracked the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 27 points lower at 7,475     DAX is expected to open 120 points lower at 15,868     CAC40 is expected to open 53 points lower at 7,150
Barclays H1 2023: Mixed Performance with Strong Investment Banking and Consumer Division

Navigating Uncertainty: Shifting Sentiment in European and US Stock Markets

ING Economics ING Economics 26.06.2023 08:04
European and US stock markets have seen a significant shift in sentiment over the past few days when it comes to the global economy. Rising bond yields, driven by more hawkish central banks, which has prompted investors to reassess the outlook when it comes to valuations and growth.     While European markets saw their biggest weekly loss since March, US markets also took a tumble, albeit the first one in 8 weeks, as a succession of central banks pledged that they had significantly further to go when it comes to raising rates. Bond markets also started to flash warning signs with yield curves becoming more inverted by the day whether they be France, Germany, or the UK. Friday's weak finish hasn't translated into a strongly negative vibe as we start a new week for Asia markets, even allowing for events in Russia at the weekend which aren't likely to have helped the prevailing mood, with the US dollar slightly softer this morning after getting a haven bid at the end of last week.     With economic data continuing to show varying signs of vulnerability, particularly in manufacturing the situation could have got even spicier over the weekend when Wagner Group boss Yevgeny Prigozhin set his troops on the road to Moscow in an insurrection against the Kremlin, and Russian President Vladimir Putin.   As it turns out a crisis was quickly averted when it was announced that Prigozhin would go into exile in Belarus, with any charges against him dropped, and Wagner troops would return to their bases. One can only imagine the reaction if that news had broken if markets had been open at the time, however it only adds to the general uncertainty surrounding the war in Ukraine and how quickly things can start to unravel.   This weekend's events also serve to indicate how fragile Vladimir Putin's position is given that one of his most trusted advisors suddenly went rogue.   As we look ahead to the final week of June and the end of the quarter, as well as the first half of the year we can reflect to some extent that markets have held up rather well when all things are considered. They have been helped in that by the sharp falls in energy prices back to pre-Russian invasion of Ukraine levels, as well as the low levels of unemployment which have served to keep demand reasonably resilient.     The elephant in the room has been the stickiness of core inflation as well as signs that demand is starting to falter, and this week we could get further confirmation of that trend.   Today we get the latest Germany IFO Business Climate survey for June, which if last week's flash PMI numbers are any guide could well show that the confidence amongst German business is faltering, with expectations of a slowdown to 90.6, from 91.7.     We also get flash CPI inflation numbers from Germany, France and the EU where headline prices are likely to show further signs of softening, with core prices set to remain sticky. At around the same time we get the latest PCE inflation numbers from the US for May.   These are likely to be important in the context of the Federal Reserve's stated intention to raise interest rates at least twice more before the end of the year.     In April the core PCE Deflator edged up from 4.6% to 4.7%, an area it has barely deviated from since November last year. You would have thought that even with the long lags seen from recent rate hikes they would start to have an impact on core prices.   This perhaps explains why central banks are being so cautious, even as PPI prices are plunging and CPI appears to be following.       EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – currently holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – failed to rebound above the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally moved above the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 6 points higher at 7,468     DAX is expected to open 28 points higher at 15,858     CAC40 is expected to open 8 points higher at 7,171
Challenges in the Philippines: Rising Rice and Energy Costs Threaten Inflation Stability

Yen Plummeting to Multiyear Lows Sparks Market Attention

Michael Hewson Michael Hewson 28.06.2023 08:10
Yen in focus as it falls to multiyear lows   After 6 days of declines, European markets managed to break their recent losing streak yesterday, closing marginally higher after a day when the direction could have gone either way. The catalyst for the recovery off the day's lows was a strong US session which was driven by two sets of strong US economic numbers. US consumer confidence for June hit its highest levels in 17 months, while new home sales jumped by 12.2%, the highest number in over a year. If the US economy is starting to struggle then there is little evidence of that in yesterday's numbers, which in turn helped drive a strong finish for US markets, led by the Nasdaq 100.     Yesterday's resilience came in spite of another slide in crude oil prices, which have continued to suffer under the weight of concerns about a slowing global economy and a drop in demand over the second half of the year. The increased stridency of hawkish central bank rhetoric coming out of Sintra in Portugal at the ECB central bank conference, when it comes to future rate hikes is helping to drive yields higher, yet stock markets appear unfazed.     Yesterday we heard from several ECB governing council members, including President Christine Lagarde pushing back against the idea of rate cuts in 2024, as well as signalling a commitment to another rate hike at the July meeting. This seems set in stone now, although this week's June flash CPI number might cast some doubts as to whether the rate hikes might continue beyond July. Today's speaker slate at Sintra could well create more headlines with the likes of Bank of England Governor Andrew Bailey, Bank of Japan governor Kazuo Ueda, Fed chair Jay Powell and Christine Lagarde speaking on a panel discussing monetary policy.     Of particular interest will be any comments from Governor Ueda given the declinesseen in the Japanese yen over the past few days, seeing it sink to 15-year lows against the euro, as well as 8-year lows against the pound, and record lows against the Swiss franc in the last 24 hours. We've already heard from Japanese Finance Minister Suzuki in the last couple of days warning that excessive movements in the yen might prompt an appropriate response. While yen traders are focussing on the 145.00 area against the US dollar it can't have escaped their attention that their currency is getting hit even harder away from the spotlight of the greenback. If a response is coming it could well come soon.     Staying with currencies the Australian dollar plunged overnight after headline CPI slowed sharply on May from 6.8% to 5.6%, well below forecasts of 6.1%, and with the RBA meeting next week this slowdown could prompt the central bank to re-pause the pace of the current rate hiking cycle.   After the European close we also get the latest results from the US bank stress tests, which couldn't be more timely given recent events in March, however they aren't likely to offer much insight into what took place, as the US regional banks were not covered under the various scenarios, as they were considered too small and not systemically important enough. This was a major oversight, as recent experience in Europe has taught us, and particularly in Spain over 10 years ago, where a large cohort of Spanish Cajas nearly brought the economy to its knees and resulted in a banking bailout. Just because a bank is small doesn't mean it won't cause a financial meltdown if its troubles spread. The tests also had a rather big flaw in them in that they didn't factor a sharp rise in interest rates into any of the scenarios, the very scenario that started the dominos tumbling with the collapse of SVB.     EUR/USD – holding above the 50-day SMA and support at the 1.0870/80 area. We have resistance back at last week's high just above the 1.1000 level, with the main resistance at the April highs at 1.1095. Below 1.0850 signals a move towards 1.0780.     GBP/USD – a positive session yesterday holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – appears to be building up to move higher but needs to move through the 0.8630/40 area. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – continues to edge higher towards the 145.00 area. We have support at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.      FTSE100 is expected to open 19 points higher at 7,480     DAX is expected to open 45 points higher at 15,892     CAC40 is expected to open 25 points higher at 7,240       By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
German Inflation and US Q1 GDP Awaited: Market Focus Shifts

German Inflation and US Q1 GDP Awaited: Market Focus Shifts

Michael Hewson Michael Hewson 29.06.2023 09:24
German inflation in focus, ahead of US Q1 GDP       Having stopped the rot on Tuesday, ending a 6-day losing streak, European markets saw another positive session yesterday, although gains were tempered by remarks from Fed chairman Jay Powell who warned that several more rate hikes could be expected in the coming months, in comments made in an ECB panel discussion in Sintra, Portugal.     US markets finished the day mixed with little in the way of direction, as they digested the various remarks from central bankers, as they all peddled a similar narrative, of further rate rises to come. The Japanese yen continued to decline, already at record lows on a trade-weighted basis, Bank of Japan governor Kazuo Ueda gave little indication that officials were any close to stemming the recent losses. The subdued finish in the US is likely to translate into a flat European open.     There is the hope that upcoming data could prompt a softening of this hawkish message starting today with the latest June inflation numbers from Germany. We've seen a sharp deceleration in the last few months, falling from 7.6% in April to 6.3% in May. Today's June numbers could see a modest increase to 6.8%, which will do little to assuage ECB concerns that inflation is falling back sharply. In the UK the sharp rise in gilt yields in the wake of surging inflation is prompting concerns about the housing market, and more specifically the ability of consumers to pay their existing mortgage or take out new ones.        Since the start of the year, we've seen a modest improvement in mortgage approvals, after they hit a low of 39.6k back in January. The slowdown towards the end of last year was due to the sharp rise in interest rates which weighed on demand for property, as well as weighing on house prices.     As energy prices have come down, along with lower rates at the start of the year, demand for mortgages picked up again with March approvals rising to 51.5k, before slipping back to 48.7k in April. This could well be as good as it gets for a while with the renewed increase in gilt yields, we've seen in the past few weeks, prompting weaker demand for new borrowing. Similarly net consumer credit has also started to improve after similar weakness.     Although inflationary pressures are starting to subside, the increase in wages is unlikely to offset concern over higher rates and higher mortgage costs in the coming months. Given current levels of uncertainty, consumer credit numbers could well increase further, while net lending could see a further decline after April lending fell by -£1.4bn, the weakest number since July 2021.     We also have the final iteration of US Q1 GDP, which was revised up to 1.3% from 1.1% a few weeks ago. The main drag was down to a bigger than expected scaling down in inventories, as well as an upward revision to personal consumption to 3.8%, which was a significant improvement from 1% in Q4, as US consumers went out on a New Year splurge.     Slightly more concerning was rise in core PCE over the quarter, from 4.4% in Q4 to 5%. We're not expecting to see much of a change in today's revisions, although headline might get revised to 1.4%, while most of the attention will be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers. Weekly jobless claims are expected to come in unchanged at 265k.   EUR/USD – holding above the 50-day SMA and support at the 1.0870/80 area, but unable to move through the 1.1000 level. The main resistance remains at the April highs at 1.1095. Below 1.0850 signals a move towards 1.0780.   GBP/USD – slid back sharply below the 1.2670 area, now opens a move towards the 50-day SMA at 1.2540. If this holds, we remain on course for a move towards the 1.3000 area.    EUR/GBP – broken above 0.8630, heading towards the 50-day SMA at 0.8673, which is the next resistance area. Support comes in at the 0.8580 area.   USD/JPY – continues to edge higher towards the 145.00 area. We have support at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 2 points higher at 7,502   DAX is expected to open 7 points higher at 15,956   CAC40 is expected to open 10 points higher at 7,296   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
Turbulent Times Ahead: ECB's Tough Decision Amid Soaring Oil Prices

Inflation Numbers Take Center Stage as Quarter Comes to a Close

Michael Hewson Michael Hewson 30.06.2023 09:50
Inflation numbers a key focus as we round off the quarter       European markets continued their recent patchy performance, as we come to the end of the week, month, quarter, and half year, with the FTSE100 sliding back while the likes of the DAX and CAC40 were slightly more resilient, after German inflation came in slightly higher than expected in June.   US markets were slightly more positive, but even here the Nasdaq 100 struggled after a sizeable upward revision to Q1 GDP to 2%, and better than expected weekly jobless claims numbers sent US yields sharply higher to their highest levels since March, while the US dollar also hit a 2-week high.   The surprising resilience of US economic data this week has made it an absolute certainty that we will see another rate increase in July, but also raised the possibility that we might see another 2 more rate increases after that.   The resilience of the labour market, along with the fact that core inflation remains sticky also means that it makes the Federal Reserve's job of timing another pause much more difficult to time. Today's core PCE Deflator and personal spending numbers for May could go some way to making that job somewhat easier.   Core PCE Deflator is forecast to remain unchanged at 4.7%, while personal spending is expected to slow from 0.8% to 0.2%. While the Federal Reserve isn't the only central bank facing a sticky inflation problem, there is evidence that it is having slightly more success in dealing with it, unlike the European Central Bank which is seeing much more elevated levels of headline and core prices. Yesterday, we saw CPI in Germany edge higher from 6.3% in May to 6.8%, while in Spain core prices rose more than expected by 5.9%, even as headline CPI fell below 2% for the first time in over 2 years.   Today's French CPI numbers are expected to show similar slowdowns on the headline rate, from 5.1% to 4.6%, but it is on the core measure that the ECB is increasingly focussing its attention. Today's EU flash CPI for June is forecast to see a fall to 5.6% from 6.1%, however core prices are expected to edge back up to 5.5% after dropping to 5.3% in May. Compounding the ECB's and other central banks dilemma when it comes to raising rates is that PPI price pressures are falling like a stone and have been since the start of the year, in Germany and Italy. In April French PPI plunged -5.1% on a monthly basis, even as the year-on-year rate slowed to 7% from 12.8%.   If this trend continues today then it might suggest that a wave of deflation is heading our way and could hit sometime towards the end of the year, however while core prices remain so resilient central banks are faced with the problem of having to look in two different directions, while at the same time managing a soft landing. The Bank of England has an even bigger problem in getting inflation back to target, although it really only has itself to blame for that, having consistently ignored regular warnings over the past 18 months that it was behind the curve. The risk now is over tightening just as prices start to fall sharply.   Today's Q1 GDP numbers are set to confirm that the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on the quarter overall.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.   There is a risk that this modest expansion could get revised away this morning, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile.     One thing we do know is that with the recent increase in gilt yields is that the second half of this year is likely to be even more challenging than the first half, and that the UK will do well to avoid a recession over the next two quarters.       EUR/USD – slid back towards and below the 50-day SMA, with a break below the 1.0850 area, potentially opening up a move towards 1.0780. Still have resistance just above the 1.1000 area.     GBP/USD – continues to come under pressure as we slip towards the 50-day SMA at 1.2540. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – currently being capped by resistance at the 50-day SMA at 0.8673, which is the next resistance area. Behind that we have 0.8720. Support comes in at the 0.8580 area.     USD/JPY – briefly pushed above 145.00 with the November highs of 147.50 beyond that.  Support remains at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 18 points higher at 7,489     DAX is expected to open 12 points higher at 15,958   CAC40 is expected to open 8 points higher at 7,320      
Recent Economic Developments and Upcoming Events in the UK, EU, Eurozone, and US

Equity Markets: Reflecting on the First Half and Looking Ahead to the Second

Michael Hewson Michael Hewson 03.07.2023 09:20
The last six months have been an eventful one for equity markets in general with many of the questions that we were faced with at the start of the year, still just as relevant now.   The main question was whether the rebound that started from the lows back in October was simply part of a bear market rally, or whether it was the beginning of a move towards new record highs.   Others included how many more rate hikes could we expect to see, and when would rates start to come down again, with markets pricing in rate cuts in the second part of 2023.   We got the answer to the main question with new record highs for the FTSE100, CAC 40 and the DAX, while US markets also managed to continue their strong performance, breaking out of their own downtrend from their 2021 peaks, during February, shrugging off a March wobble in the process.   Despite the records highs being set by European markets in the first half of this year, one index above all the others has disappointed, that being the FTSE100, which managed to get off to a flier in the early part of the year, hitting a record high above 8,000, before sinking to a six-month low in the space of 4 weeks. Of all the major indices its greater weighting towards banks, and commodities has seen it underperform, largely due to the weakness of the rebound in the Chinese economy, and the fall in oil and gas prices.   The FTSE100 aside, what has been surprising is that, aside from a couple of exceptions, the stock market gains of the last few months have given few signs of disappearing despite interest rates that are significantly higher than they were at the start of the year, with little sign that they will come down any time soon.   That fact alone is a significant shift from where we were at the start of the year, where we had bond markets pricing in rate cuts as soon as Q3 of this year. This always came across as wishful thinking on the markets part, however we've shifted to the other side of the spectrum of market pricing in the prospect of another 100bps of rate hikes by the Bank of England by the end of the year.   In the same way that rate cuts by year end proved to be mispriced, at the start of the year, this pricing by the market could well go the same way.   One thing that has come as a surprise is how resilient equity markets have been in the face of a much sharper rise in 2-year yields from where we were in early January.   What's more there is no sign that central banks are in any mood to slow down their pace of rate hikes, something that is very much reflected in the way 2-year yields have pushed higher this year. US 2-year yields are higher by almost 50bps year to date, UK 2-year gilt yields by an astonishing 169bps, and German 2-year yields by 43bps.   This big jump in UK yields has seen the pound outperform against its peers, rising by 5% against the US dollar, and by as much as 13.5% against the Japanese yen.   While financial markets try to determine how many more rate hikes are coming, the next question is how long they will have to stay at current levels, and what happens when the deflation that is already being seen in the PPI numbers starts to manifest itself in the core inflation numbers.   For now, there is little evidence of that happening with the focus this week more on the continued divergence between manufacturing and the services sector in the form of the PMI numbers, as well as the US payrolls numbers on Friday.     Today's manufacturing PMIs are set to confirm the weak nature of this part of the global economy, with Spain, Italy, France, and Germany PMIs all forecast to slip back to 47.9, 45.3, 45.5, and 41 respectively. UK and US are also expected to remain soft at 46.2 and 46.3 respectively, while the US ISM manufacturing survey, is also forecast to remain below 50, at 47.2, with prices paid at 44.     Markets are already pricing in further rate hikes this month from the Federal Reserve, as well as the ECB, followed by the Bank of England in August, however the bigger question is what comes after these. One suspects we may not see many more after these hikes, however for now markets seem reluctant to come to that conclusion.   That said as we look towards H2 the bigger question is having seen such a positive H1, is there anything left in the tank, to build on those gains over the course of the rest of the year?   A decent Asia session looks set to translate into a positive start for European markets although current unrest in France is likely to prompt questions about economic activity there in the coming weeks.         EUR/USD – finding support at the 1.0830/40 area and 50-day SMA for now, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – still holding above the 50-day SMA at 1.2540, as well as trend line support from the March lows. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – capped last week just below resistance at the 50-day SMA which is now at 0.8663. Behind that we have 0.8720. Support comes in at the 0.8570/80 area.     USD/JPY – saw a key reversal day after popping above 145.00 last week. We currently have support at the 143.80 area, with a break below targeting the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open 32 points higher at 7,563     DAX is expected to open 50 points higher at 16,198     CAC40 is expected to open 30 points higher at 7,430
Services PMIs and Fed Minutes: Analyzing Market Focus and Central Bank Strategy

Services PMIs and Fed Minutes: Analyzing Market Focus and Central Bank Strategy

Michael Hewson Michael Hewson 05.07.2023 08:19
Services PMIs and Fed minutes in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) In the absence of US markets yesterday, European markets underwent a modestly negative session on a fairly quiet day, and look set to open modestly lower this morning, with Asia markets drifting lower. For the past few days, markets have been trading in a broadly sideways range with little in the way of momentum, as investors weigh up the direction of the next move over the next quarter.   The last few weeks have been spent obsessing about the timing of a possible recession, particularly in the US, with the timing getting slowly pushed back into 2024, even as bond markets flash warnings signs that one is on the horizon.     As we look ahead to Friday's US payrolls report, speculation abounds as to how many more central bank rate hikes are inbound in the coming weeks, against a backdrop of economic data that by and large continues to remain reasonably resilient, manufacturing notwithstanding.     Despite the dire start of manufacturing activity as seen earlier this week, services have held up well, although we are now starting to see some pockets of weakness. A few days ago, in the flash numbers France saw a sharp fall in economic activity, sliding from 52.5 to 48 for June, although activity in the rest of the euro area remains broadly positive.     This is an area of the economy that could help boost economic activity, particularly in Italy and Spain now we're in the holiday season and has seen these two countries perform much better in recent months. The outperformance here could even help avert a 3rd quarter of economic contraction for the euro area.       Expectations for Spain and Italy are 55.7, and 53.1, modest slowdowns from the numbers in May, while France and Germany are expected to slow to 48 and 54.1.     We're also expected to see a positive reading from the UK, albeit weaker from the May numbers at 53.7. US PMI numbers are due tomorrow given the July 4th holiday yesterday.     Later today with the return of US markets, we get a look at the most recent Fed minutes, when the FOMC took the collective decision to keep rates on hold, with the likelihood we will see a resumption of rate hikes later this month.     In the lead-up to the decision there had been plenty of discussion as to the wisdom of pausing given how little extra data would be available between the June and July decisions. The crux of the argument was if you think you need to hike again, why wait until July when the only data of note between the June and July decisions is one payrolls report, and one set of inflation numbers.     All of that is now moot however and while inflation has continued to soften, the labour market data hasn't. Here it remains strong with tomorrow's June ADP report, the May JOLTs report, weekly jobless claims, as well as Friday's June payrolls numbers.     Tonight's minutes may offer up further clues as to the Fed's thinking when it comes to why they think that two more rate hikes at the very least will be needed by the end of this year.     A few members changed their dots to reflect the prospect that they were prepared to raise rates twice more by the end of the year, with a hike in July now almost certain. This stance caught markets off guard given that pricing had been very much set at the prospect of one more rate hike, before a halt.     A key part of the thinking may have been the Fed's determination that markets stop pricing rate cuts by the end of this year. This insistence of pricing in rate cuts by year end has been one of the key characteristics that has helped drive recent gains in stock markets.     This has now been largely priced out, so in this regard the Fed has succeeded,   The key now is to make sure that the Federal Reserve, along with other central banks, while prioritising pushing inflation down, don't break something else, and start pushing the rate of unemployment sharply higher.   This is the balancing act central banks will now have to perform, and here it might be worth them exercising some patience. Given the lags being seen in the pass through of monetary policy it may be that a lengthy pause after July, keeping rates at current levels for months, is a wiser course of action than continuing to raise rates until the tightrope snaps, and the whole edifice comes tumbling down.       Today's minutes ought to give us an indication of the thought processes of the more dovish members of the FOMC, and how comfortable they are with the prospect of this balance of risks.             EUR/USD – remains range bound with support around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – still looking well supported above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently it has resistance at 1.2770.       EUR/GBP – rolling over again yesterday, sliding below the 0.8570/80 area, and looks set to retarget the 0.8520 area. Resistance remains at the 50-day SMA which is now at 0.8655. Behind that we have 0.8720.     USD/JPY – currently capped at the 145.00 area, with support at the 144.00 area this week.  The key reversal day remains intact while below 145.20.  A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open 5 points lower at 7,514     DAX is expected to open 28 points lower at 16,011     CAC40 is expected to open 23 points lower at 7,347
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European Markets Flat as FTSE100 Lags, OPEC Meeting in Focus, Fed Releases Minutes

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.07.2023 08:27
European markets were mostly flat; the Stoxx600 remained close to its 50-DMA, while the FTSE 100 remained offered near its 200-DMA, near the 7544 level. The FTSE has been one of the biggest laggards of the year, as capital flew into the tech stocks. The slow Chinese reopening and the crumbling commodity prices didn't help FTSE extend the last year's outperformance to this year.   Happily, more rate hikes from the Bank of England (BoE) and the darkening economic and political picture for the UK is not a cause for concern for the British blue-chip index. A major part of their revenue comes from outside the UK. Therefore, a rotation from tech to value could throw a floor under the FTSE100's selloff near the 7300 level  if of course we don't see a global selloff due to recession and hawkish central banks-    OPEC meets industry heads  The barrel of oil remains sold near the 50-DMA as OPEC meeting with industry heads is due today. Everything that involves OPEC is an upside risk to oil prices. Yet any OPEC-related rally will attract top sellers and won't let OPEC reach stability around $80pb level. The major medium-term risk is that the unresponsive price action could hide a worsening global glut that could hit suddenly in the H2, and send oil prices higher. Until then, bears will keep selling.    Fed releases minutes  The Federal Reserve (Fed) will release the minutes of its latest policy meeting today, and there will clearly be a couple of hawkish sentences that will hit the headlines, given that the Fed officials paused their rate hikes in their June meeting, but their dot plot showed two more interest rate hikes before a real and a longer pause.   At this point, the Fed expectations went so hawkish that there is a growing chance of correction. Fed funds futures gives near 90% chance for a another 25bp hike in July, and another 25bp after that is more likely than not. No one expects or is positioned for a rate cut from the Fed this year. Unless there is another baking stress or chaos in the housing market, nothing could stop the Fed from pursuing its battle against inflation. And interestingly, Bloomberg research found out that interest rate increases in the US are benefitting savers more than they are costing mortgage payers, because many mortgages are on fixed rates for 30-years and they have yet to expire.  
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US ADP and JOLTs data in focus as European markets face continued losses

Michael Hewson Michael Hewson 06.07.2023 08:16
US ADP and JOLTs data a key focus today. European markets have fallen every day this week, although yesterday's losses were by far the worst, and look set to continue again today. US markets also struggled yesterday, although their losses have been much more modest. Yesterday's weakness was driven by concerns over softer than expected Chinese as well as European services PMIs, which fed into increased slowdown worries, as well as rising interest rate risk, which fed into weakness in basic resources, energy and financials, and has translated into further weakness in Asia markets.     Today's Germany factory orders numbers for May could signal a brief respite after 2 months of weakness with a rebound of 1%, up from -0.4% in April, although on an annualised basis it is expected to decline by -9.7%, the 15th month in a row it's been in negative territory.       The release of last night's Fed minutes showcased some significant splits amongst policymakers over the decision to signal a rate pause in June, citing "few clear signs" of progress that US inflation was falling quickly enough.     Some officials wanted to carry on with rate hikes of 25bps but given the "uncertainty" about the outlook it was decided a pause would be preferable, just so long as it was made clear that the door to a July hike, as well as further hikes was pushed to the top of the narrative. This helps to explain the very hawkish guidance with no rate cuts expected by Fed officials until 2024.     The publication of the minutes, and the clear willingness amongst many members to do more on rates saw US 2-year yields close higher on the day, wiping out their early declines.     The committee noted the strength of the US labour market saying it "remained very tight" evidence of which is likely to be borne out by today's data from the JOLTS data for May, the latest weekly jobless claims and the June ADP payrolls report, as well as the latest ISM services numbers.     The resilience of the US labour market was no better illustrated than in the April JOLTS report which saw vacancy numbers surge back above 10m from 9.7m in March. Today's May numbers are expected to see this number drop back to 9.9m, still an eye wateringly higher number, and well above the levels we saw pre-pandemic.     Weekly jobless claims also appear to have hit a short-term peak sliding back from 265k to 239k last week and are expected to edge higher to 245k. While weekly claims have been rising in recent weeks continuing claims have been falling, slipping to a 3-month low last week of 1,742k.     Today's ADP payrolls report is expected to see another solid number of 225k, down slightly from 278k.     While the number of job vacancies available remains at current levels it's hard to imagine a scenario where we might see a weak jobs report in the coming months, which means that its unlikely to be the labour market that prompts the Fed to signal a pause in the near term.     Services inflation has been the one area which the Fed has expressed concern that it might be stickier than it needs to be.     Today's ISM services report is expected to see headline activity edge higher to 51.3, while a close eye will be kept on prices paid which slowed to 56.2 in May, and a 3-year low.        EUR/USD – looks set for a test of support around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.   GBP/USD – still in a tight range with support above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently have resistance at 1.2770.     EUR/GBP – looks set to retarget the 0.8515/20 area and June lows, while below resistance at the 0.8570/80 area. Below 0.8510 targets the 0.8480 area. We also have resistance remaining at the 50-day SMA which is now at 0.8655. Behind that we have 0.8720.   USD/JPY – looks set for a test of the 143.80 area, while below the key resistance at 145.20. A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.    FTSE100 is expected to open 30 points lower at 7,412   DAX is expected to open 84 points lower at 15,853   CAC40 is expected to open 50 points lower at 7,260
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Inflation Front and Centre: China Slips Towards Deflation, European Markets Face Declines

Michael Hewson Michael Hewson 10.07.2023 10:48
Inflation front and centre this week as China slips towards deflation By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a shocker of a week last week, posting their biggest declines since March, despite a modest rebound on Friday. With economic data continuing to look on the soft side and central banks showing little sign of easing up when it comes to interest rate rises there was little to cheer for markets in Europe, with concerns about weakness in the Chinese economy adding to the gloom.   US markets on the other hand, while still finishing the week lower, still managed to perform better after a slightly weaker than expected non-farm payrolls job report, which showed that the US economy added 209k jobs in June, down from 306k in May. There was also a 2-month net revision lower of -110k, taking some of the lustre off recent gains, and removing some of the euphoria around the ADP jobs number of 497k, the day before. The unemployment rate still fell to 3.6%, while average hourly earnings growth came in unchanged at 4.4%, which was at a slightly higher level than expected. One thing that we were able to take away from last week was that further rate rises from the Federal Reserve as well as the European Central Bank are almost certain when they both meet in 2 weeks' time, however there is now rising concern that we may see further rate increases after that in September as well.     The bond market is certainly reflecting the fact that rates are likely to stay higher for longer after the yield curve steepened as 10-year yields outperformed 2-year yields on a week-on-week basis.   With earnings season set to get underway in earnest over the next week or so, there is increasing nervousness that after such a good first half of the year, that the second half of the year is likely to be much more challenging.   What last week's economic data also tells us is that while the economy in Europe could well be set to contract for the third successive quarter in succession, the US economy appears to be holding up reasonably well There is a fear however that central banks are on the cusp of a serious policy mistake when it comes to their determination to drive inflation lower. We already know that inflation has been slowing sharply over the last few months, and we also know that PPI inflation in China and Europe is now in negative territory.       This morning we saw that inflation in China slowed even further in June with headline CPI coming in at 0%, and PPI slipping from -4.6% in May to -5.4% That alone suggests that the rate hikes that have already been implemented over the past 15 months have had an effect, however such is the nature of monetary policy, and the way interest rate markets have changed over the last 20 years, with many more fixed rate loans, there is no way of telling how much more tightening has yet to come through.     This should make central bankers much more cautious, however it seems to be having the opposite effect, causing frustration that inflation isn't coming down quickly enough, due to resilient consumption patterns. With US CPI for June set to be released on Wednesday, and PPI on Thursday we are likely to see further evidence of this disinflationary trend, even while wages growth remains resilient. These are the key macro items for investors to mull over this week ahead of the Federal Reserve later this month, while in the UK tomorrow we have the latest wages and unemployment numbers for the 3-months to May, which are expected to show strong wages growth against a backdrop of a tight labour market.           EUR/USD – broke higher last week after finding solid support around the 1.0830/40 area. We need to see a move above the June highs at 1.1010/15 to target a move towards 1.1100, and the highs this year. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – broke above resistance at the 1.2770/80 area putting it on course for a move towards the 1.3000 area, but needs to take the 1.2850 area and June highs first. Support comes in at the 1.2770/80 area, and below that at 1.2680.      EUR/GBP – continues to find support at the 0.8515/20 area and June lows. Also has resistance at the 0.8570/80 area. We also have resistance at the 50-day SMA which is now at 0.8635. Below 0.8500 targets 0.8460.     USD/JPY – fell below the 144.00 area triggering stops all the way to the 142.00 area, also falling below support at 142.50. Posted a weekly reversal suggesting the top is in and the risk of a return to the 139.80 area. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.       FTSE100 is expected to open 3 points lower at 7,254     DAX is expected to open unchanged at 15,603     CAC40 is expected to open 14 points lower at 7,098  
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UK Gilt Yields in Focus as Wages Data Awaited, European Markets Gain

Michael Hewson Michael Hewson 11.07.2023 08:32
UK gilt yields in focus, ahead of latest wages data By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets managed to procure a second successive day of gains yesterday, despite a slide in Asia markets, after Chinese inflation slipped further towards deflation. The FTSE100 also managed to eke out a daily gain for the first time this month bringing an end to a sequence of 5 successive daily losses.     US markets also underwent a cautious start to the week with attention focussed on this week's inflation numbers, which are due tomorrow and could go some way to indicating whether we see any more rate hikes beyond this month.   While last week's losses were largely predicated on concerns that central banks were gearing up for multiple rate rises in the coming months, the data out of China appears to suggest that the bigger danger in the coming months might be deflation. Today's final Germany inflation numbers are expected to confirm that June CPI rose to 6.8% from 6.3% in May, although most of that rise appears to have been attributed to one-off factors that won't be repeated in the coming months, after temporary reductions in rail fares were reversed.     The pound had a slightly softer tone yesterday after a private sector survey showed that wage growth is starting to slow along with the pace of hiring in June. There has been little evidence of this trend in any other recent data, although with the latest ONS numbers due today there is more of a lag.     Just over a month ago the April UK wages numbers reinforced the challenge facing the Bank of England, after wage growth surged to 7.2%, and a record high outside of the pandemic, prompting a surge in UK 2-year gilt yields which took them above their October peaks of last year in the wake of the ill-fated Kwarteng budget.     The surge in the last few months wages has served to highlight the abject policy failure of the Bank of England to act early enough, as workers already being squeezed on all sides agitate for bigger pay rises in order to close the real wages gap. Today's May wages data is unlikely to see much evidence of a weakening in these upward pressures with expectations of 7.1% for the 3-months to May.       Short term yields have continued to rise in anticipation of further rate rises in the coming months, although we have seen a pullback in the last couple of days, from 15-year highs in UK 2-year yields. If today's wage numbers continue to look sticky, the central bank may find it has no good options when it comes to getting prices under control.     The number of people in employment also rose to a record 76% as high food inflation forced people back into work, forcing the unemployment rate down to 3.8%, where it looks set to stay this month. It's also important to note that the wages numbers are average numbers which means in a lot of cases, pay rises are much higher in certain areas of the economy, trending at between 10% to 20%. This trend may slow in the coming months; however, it is unlikely to slow rapidly even as headline inflation starts to come down rapidly after July.     Later on, this morning, the July German ZEW survey is expected to show a further deterioration in expectations sentiment to -10.6 down from -8.5, with the current situation expected to fall to -62, from -56.5.               EUR/USD – We need to see a move above the June highs at 1.1010/15 to target a move towards 1.1100, and the highs this year. A break below the lows last week at 1.0830, opens the way for a potential move towards 1.0780.     GBP/USD – fell back to 1.2750 yesterday, before making new 14-month highs nudging above the June highs, as we continue to look for a move towards the 1.3000 area. Main support at 1.2680 area.       EUR/GBP – tested up to the 0.8570/80 area yesterday before slipping back. Still have support at the 0.8515/20 area and June lows. We also have resistance at the 50-day SMA which is now at 0.8630. Below 0.8500 targets 0.8460.     USD/JPY – continues to look soft falling below 142.00 with the risk of further losses towards the 139.80 area. Last weeks' weekly reversal suggests that a short-term top might be in. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.     FTSE100 is expected to open unchanged at 7,274     DAX is expected to open 45 points higher at 15,718     CAC40 is expected to open 18 points higher at 7,162
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US CPI Set to Fall to 3%, Bank of Canada to Hike Again?

Michael Hewson Michael Hewson 12.07.2023 08:27
US CPI set to fall to 3%, Bank of Canada to hike again? By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw another positive session yesterday, rising for the third day in a row in anticipation that China's efforts to support its property sector may translate into further measures to support a rebound in economic activity. The FTSE100 once again underperformed as the strong pound and weakness in pharmaceuticals acted as a drag.  US markets also closed higher on optimism that today's CPI report wouldn't spring any unpleasant surprises. This positive finish looks set to see markets here in Europe open slightly higher in a couple of hours' time. US inflation appears to be heading in the right direction, after sliding to a 2-year low last month of 4%, from 4.9% in April. A year ago, US CPI hit its peak at 9.1%. Core prices have continued to look sticky slipping back to 5.3% from 5.5%, however the continued hawkishness of the Federal Reserve has seen the slide in yields that came about because of these numbers, reverse sharply. With another rate rise due later this month this week's CPI numbers won't impact how the Federal Reserve is likely to act in 2 weeks' time, but the numbers might shine a light in whether we can expect another rate hike in September. June CPI is expected to slow further to 3.1% and core prices to slow to 5%. Having decided to signal a pause in their recent rate hiking cycle when they hiked rates in January, the Bank of Canada surprised markets in June by deciding to hike rates again, by 25bps to 4.75%. The decision followed a similar decision by the RBA days before on concerns that inflation was proving to be much stickier than feared. The Bank of Canada also tweaked its guidance about the need for further rate hikes giving them more flexibility when it comes to raising rates or choosing to hold them. Any decision could well be tempered by the current business outlook which in Q2 fell to its lowest levels since Q3 of 2020, although last week's June jobs report was strong, which could prompt the central bank to hike again by another 25bps to 5%. Core inflation did slow to 3.9% in May from 4.3% in April but remains elevated, and with the Fed likely to hike in two weeks' time it's quite likely the BoC will want to get out in front of them.  The Japanese yen has been one of the big movers in recent days on speculation that the Bank of Japan may start to look at tweaking its yield curve control policy, when it next meets at the end of the month.         EUR/USD – looks set for a move towards the recent range highs at 1.1100. Support at 1.0970 as well as last week's lows at 1.0830. Below 1.0820 targets 1.0780.     GBP/USD – continues to move higher as we look to extend to fresh 15-month highs, and the 1.3010/20 area. A move through 1.3020 signals potential for 1.3200. Main support at 1.2680 area.       EUR/GBP – sliding towards the 0.8500 area, with a break below potentially targeting 0.8460. Resistance remains back at the highs this week at the 0.8570/80 area. We also have resistance at the 50-day SMA which is now at 0.8620.     USD/JPY – slipped below the 50-day SMA at 140 which was the next support for the US dollar and could well extend towards the 138.50 area and cloud support. Last weeks' weekly reversal suggests that a short-term top might be in. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.   FTSE100 is expected to open 17 points higher at 7,299     DAX is expected to open 55 points higher at 15,845     CAC40 is expected to open at 35 points higher 7,235  
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Economic Outlook: UK Economy Contracts in May, US PPI Slows Further

Michael Hewson Michael Hewson 13.07.2023 08:34
UK economy set to contract in May, US PPI to slow further   We saw another day of strong gains for European markets yesterday, with the FTSE100 undergoing its best one-day gain since early June, after US CPI came in below forecasts.   US markets also saw strong gains with the S&P500 and Nasdaq 100 breaking above their highs of this year, and pushing up to their highest levels since April 2022, with the Nasdaq 100 leading the gains.   Asia markets followed suit with strong gains across the board despite the latest set of China trade data for June showing that economic activity slowed further. Exports fell by -12.4% from a year ago, missing expectations by a large margin, while imports also declined more than expected, by -6.8%, further reinforcing concerns about deflation, but on the more positive side increasing expectations of stronger stimulus by Chinese authorities in the weeks ahead.        Yesterday's US CPI numbers for June were never likely to change the calculus behind another 25bps rate hike when the Fed meets in two weeks' time, but they have altered the story when it comes to what might come next, and it is this that markets are reacting to, with the US dollar and yields falling back sharply.   The nature of yesterday's numbers suggest that whatever other Fed officials would have us believe in the context of their current hawkishness, further rate hikes beyond this month will be a big ask, and probably won't happen, hence the weakness seen in both the US dollar, and US yields seen so far this week.   That said we can still expect Fed officials to continue to adopt a hawkish tone on the basis that theywon't want markets to prematurely start pricing in rate cuts and will want to keep the option of further hikes very much on the table.     Nonetheless the shift seen in the last few days does help to explain why the US dollar has slipped so much against the Japanese yen, although some are suggesting it is because we might see a policy shift from the Bank of Japan when it meets at the end of this month. Whichever way you come at it from, the net effect is likely to be the same, in that US and Japanese rates are likely to converge, rather than diverge. Today's PPI numbers for June are expected to reinforce the disinflation trends being seen rippling out through the global economy. On the headline numbers PPI is expected to see another sharp slowdown from 1.1% in May to 0.4% in June, while core PPI is forecast to slow down more modestly from 2.8% to 2.6%. Whichever way you look at it, further weakness here is likely to trickle down into the CPI numbers in the coming months, and reinforce the disinflationary narrative, but more importantly signal that US rate hikes are done bar the move in two weeks' time.     Yesterday's US inflation numbers could prove to be good news for UK homeowners, if yesterday's move in UK yields is any guide, in that they might reduce the pressure on the Bank of England to be more aggressive in terms of their own rate hiking policy.   If this month's expected July hike from the Federal Reserve is in fact the last one, then the Bank of England may only need to do another 50bps in August before similarly signalling a pause, which means that UK current terminal rate pricing is too high. This would be an enormous relief for mortgage holders worried that the base rate might rise as high as 6.5%.  The problem for the UK is the energy price cap is keeping inflation levels way too high, and now it has outlived its usefulness it really ought to be scrapped. It was useful in containing the upside, however by way of its design its not reflecting the sharp declines in gas prices in the last 12 months.      Consequently, it is contriving to exert upward pressure on wages as consumers struggle with the higher cost of living due to energy prices not coming down quickly enough. This failure is likely to be reflected in today's UK economic data for May, which is expected to see manufacturing and industrial production to sharp 0.4% declines in economic activity for both. The monthly GDP numbers for May are also forecast to show a -0.3% contraction due to the multiple bank holidays during the month, as well as widespread public sector strike action, with index of services seeing a sharp slowdown from 0.3% in April to -0.2%. The weak performance in May is likely to act as a sizeable drag on Q2 GDP, although we should see some of that recovered in June.             EUR/USD – broke higher through the highs of this year and could well retest the highs of March 2022 at 1.1185. This becomes next resistance, with a break targeting the 1.1485 area, with support now at 1.1020.     GBP/USD – has encountered resistance at the 1.3000 area. We need to see a break above 1.3020 to target a move towards 1.3300, and the March 2022 highs. Support now comes in at the 1.2850 area.       EUR/GBP – failed again at the 0.8500 area, with the rebound currently holding below the 0.8570/80 area. A break above here targets the 50-day SMA which is now at 0.8610.     USD/JPY – slid down to the 138.15 area where we have cloud support. If this gives way, we could see further losses towards 137.20. We now have resistance back at the 140.20 area.     FTSE100 is expected to open 4 points higher at 7,420     DAX is expected to open 20 points higher at 16,043     CAC40 is expected to open 23 points higher at 7,356    
UK Economy Contracts, US PPI Slows, and Global Markets Respond

UK Economy Contracts, US PPI Slows, and Global Markets Respond

Ipek Ozkardeskaya Ipek Ozkardeskaya 13.07.2023 08:35
The fever is breaking.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   US inflation eased to 3%. It's still not the 2% targeted by the Federal Reserve (Fed), but it's approaching. Core inflation on the other hand eased more than expected to 4.8%. That's still more than twice the Fed's 2% policy target, but again, the US inflation numbers are clearly on the right path, the services inflation including shelter costs is easing, and all this is good news for breaking the Fed hawks back amid mounting tension over the past few weeks.   There hasn't been much change in the expectation of another 25bp hike at the Fed's next policy meeting, which is now given a more than 90% chance, but the expectation for a September hike fell, the US 2-year dropped to 4.70% after the CPI data, while the 10-year yield fell to 3.85%.   One big question is: if inflation is easing at a – let's say - pleasing speed, why would the Fed bother raising the interest rates more? Wouldn't it be better to just wait and see where inflation is headed?   Well yes, but the Fed officials certainly continue thinking that 4.8% is still too hot, and that the risk of a U-turn in inflation expectations, and inflation is still to be carefully managed. Because the favourable base effect due to energy prices will gently start fading away in the coming months and the result on inflation will be less appetizing. Then the rising energy prices today could fuel price dynamics again in the coming months, and if China manages to fuel growth thanks to ample monetary and fiscal stimulus, the impact on global inflation could be felt. And if you listen to Richmond Fed's Thomas Barkin, that's exactly what comes out: 'if you back off too soon, inflation comes back stronger'. But the possibility of two more rate hikes following the most aggressive hiking cycle from the Fed starts looking a bit stretched with the actual data. Due to release today, the US producer price inflation is expected to have fallen to the lowest levels since the pandemic, we could even see some deflation.   And a potential Chinese boost to inflation looks much less threatening today compared to a couple of months ago. Chinese exports plunged 12.4% in June, worse than a 7.5% drop printed in May and worse than the market forecasts of a 9.5% decline. The June decline in Chinese exports marked the steepest fall in sales since February 2020. Deteriorating foreign demand on the back of high inflation and rising interest rates continued taking a toll on Chinese trade numbers. In the meantime, imports fell 6.8%, the fourth straight month of decrease due to persistently weak domestic demand.   China will likely recover at some point, but we will unlikely see the Chinese growth put a severe pressure on commodity markets. That's one good news for inflation watchers. The other one is that the US student loan repayments will resume from October, and that should act as a restrictive fiscal action, and help the Fed tame inflation. Therefore, even though there could be an uptick in inflation figures in the coming months, we will unlikely see inflation spike back above 4-5% again. But we will also unlikely to see it fall to 2% easily.  
Summer's End: An Anxious Outlook for the Global Economy

US Dollar Faces Worst Weekly Decline Since November Amid Disinflation Concerns

Michael Hewson Michael Hewson 14.07.2023 08:26
US dollar set to post its worst weekly decline since November By Michael Hewson (Chief Market Analyst at CMC Markets UK)   If we could sum up the catalyst behind this week's market price action, it can probably be summed up in a single word, disinflation.   Starting with Chinese inflation numbers on Monday, to US CPI on Wednesday, and US PPI on Thursday, all this week's inflation numbers have pointed to one overarching theme, that of rapidly slowing prices, which has had markets pricing in the prospect that this month's Federal Reserve rate hike is likely to be the last one for a while.     Unsurprisingly this has prompted a sharp decline in global yields, a big selloff in the US dollar, as well as giving equity markets a real boost in a complete reversal from the gloom of last week, with the Nasdaq 100 and S&P500 rising to their highest levels since January 2022.     European markets have also undergone a decent rebound on the basis that the multiple rate hikes that investors had been pricing in from the ECB and the Bank of England may now not happen. That doesn't mean we won't see these central banks hike again, it's still very likely that the ECB will hike by 25bps this month and the Bank of England at the start of August. It is what comes after that which has started to become a lot less clear.     UK GDP numbers for May, were encouraging, despite showing a contraction due to the extra Bank Holiday, coming in better than forecast with the pound managing to post another daily gain, putting in its best run of gains this year, and reinforcing its position as the best performing G10 currency this year.     Yesterday's UK data also showed that the services sector performed better than expected, coming in at 0%, showing that despite the challenges currently facing the economy it has continued to hold up reasonably well. This would suggest that the Bank of England still has room to push rates up further with 25bps already priced in for August and potentially 50bps if next week's CPI doesn't show a material slowing. Judging by the current trends around global inflation the feeling is that UK inflation could start to fall rapidly by the end of Q3.     The slide in the US dollar this week has been astonishing, and with the Federal Reserve set to go into a blackout period tomorrow, ahead of its next meeting, there has been little sign that this week's data has swayed the FOMC's stance when it comes to their view that further multiple rate hikes are likely to be needed between now and the end of the year. The problem now is the market isn't buying it, with 2-year yields retreating sharply, as markets price in a goldilocks scenario of slowing prices and a resilient labour market.         Today's only economic numbers of note are US import and export prices for June, which are expected to reinforce the deflationary narrative of this week's data, with both month on month and annual numbers all expected to come in negative for the second month in succession.   We'll also be getting the latest University of Michigan sentiment numbers for July, which have up until recently been market movers when it comes to forward inflation expectations. After this week's CPI and PPI numbers they probably won't get the same level of attention.   On the earnings front the focus will be on the release of the Q2 numbers for JPMorgan Chase, Citigroup and Wells Fargo, and their respective views of the health of the US consumer, and how much they set plan to aside in additional provisions. Their guidance on how they see the US economy in Q3 is also likely to be crucial.     EUR/USD – surged through this year's previous peaks, and rising to its highest level since February 2022, the euro looks on course to test the 1.1500 area and the 2022 highs. The 1.1100 area should now act as support.     GBP/USD – having broken above the 1.3020 area, the pound should now head towards the 1.3300 area and March 2022 highs. Support remains a long way back at the 1.3020 area, and below that at 1.2850.        EUR/GBP – failed at the 0.8570/80 area yesterday as it continues to ping between this area of resistance and the lows this week at 0.8500/10.     USD/JPY – looks set to push lower as we move into the cloud support area with next support at the 200-day SMA at 137.20, and below that at 135.70. Resistance now comes in at the 140.20 area and 50-day SMA.     FTSE100 is expected to open 12 points lower at 7,428     DAX is expected to open 15 points lower at 16,126     CAC40 is expected to open 7 points lower at 7,362  
CHF/JPY Hits Fresh All-Time High in Strong Bullish Uptrend

Fed Set to Raise Rates to a 22-Year High Amidst Cautiously Positive Market Sentiment

Michael Hewson Michael Hewson 26.07.2023 08:18
Fed set to raise rates to a 22 year high   European markets have seen a cautiously positive start to the week, buoyed by hopes of further stimulus measures from Chinese authorities in the wake of recent poor economic data. The FTSE100 has been a key beneficiary of this, putting in a two-month high yesterday.   The modest improvement in sentiment has also been helped in some part by the recent retreat in short term yields which is being driven by the hope that central banks won't have to hike rates as aggressively as thought a few weeks ago. Both German and UK 2-year yields have fallen sharply from their highs this month on this basis, helped by inflation which appears to be slowing more quickly than expected.     US markets have also put together a strong run of gains with the Dow and S&P500 hitting their highest levels since April 2022, on the back of optimism that the start of this week's earnings numbers will live up to the high expectations place on them.   Last night's initial reaction to the numbers from Microsoft, and Google owner Alphabet would suggest that optimism might be justified against a backdrop of a still resilient US economy, and a Federal Reserve that looks set to be close to the end of its rate hiking cycle.           Today's expected 25bps Fed rate hike, after last month's pause, looks set to be the last rate rise this year, whatever Fed policymakers would have you believe.   We may hear officials try and make the case for at least one more between now and the end of the year but given recent trends around US inflation its quite likely that PPI will go negative in July.   While Powell will try and make the case for further rate hikes, his time would be better spent in making the case for rates remaining higher for longer, and projecting when the FOMC expected the 2% target to be met. Core prices remain too high even with headline CPI at 3%, and it is here that the Fed will likely focus its and the market's attention.     If headline CPI continues to fall in the way, it has been doing the Fed will struggle to convince the markets that it would continue hiking rates against such a backdrop.   As things stand markets are already pricing in the prospect that this will be the last rate rise in the current hiking cycle given recent declines in the US dollar and US yields. With the next Fed meeting coming in September the market will have to absorb two more inflation reports and two more jobs' reports. Nonetheless the Fed will be keen to prevent the market pricing in rate cuts which was one of the key challenges earlier this year.   With inflation slowing and the jobs market resilient the US economy is currently in a bit of a goldilocks moment. This will be the challenge for Powell today, as he tries to steer the market into believing that the Fed could hike rates some more. We also shouldn't forget that we will get fresh messaging at the end of August at the Jackson Hole annual symposium.     EUR/USD – retreated from the 1.1275 area which is 61.8% retracement of the 1.2350/0.9535 down move, with the next key support at the 1.0980 level.  Currently have resistance at the 1.1120 area.   GBP/USD – appears to have found a base at 1.2795/00, breaking a run of 7 daily losses. While above the 50-day SMA the uptrend from the March lows remains intact with the next resistance at the 1.3020 area.     EUR/GBP – last week's failure at the 0.8700 area has seen the euro slip back, with the risk that we could revisit the recent lows at 0.8500/10.   USD/JPY – the rebound from the 200-day SMA at 137.20, appears to have run out of steam at the 142.00 area, however the bias remains for a move lower while below the recent highs of 145.00.   FTSE100 is expected to open 10 points lower at 7,681   DAX is expected to open 25 points higher at 16,236   CAC40 is expected to open 35 points lower at 7,380  
Key Economic Events and Corporate Earnings Reports for the Week Ahead – September 5-9, 2023

ECB Set to Follow the Fed with 25bps Rate Hike as European Markets Look to React

ING Economics ING Economics 28.07.2023 08:25
ECB set to follow the Fed and raise rates by 25bps   European markets underwent a disappointing session yesterday, while US markets also underperformed after the Federal Reserve raised interest rates by 25bps as expected, pushing them to their highest level in over 20 years. At the ensuing press conference chairman Powell reiterated his comments from June, that additional rate rises will depend on incoming data.     In the statement it was restated that inflation remained elevated, and that the committee was highly attentive to the risks that prices might remain high. Powell was non-committal on whether the Fed would raise rates again in September, merely restating that if the data warranted the central bank would do so. US yields finished the day mixed, as did US stocks with little in the way of surprises from last night's meeting, as we look ahead to today's ECB rate meeting. If the Fed is close to the end of its rate hiking cycle which appears to be looking increasingly likely, despite Powell's determination to keep markets guessing, the pressure on the ECB to be more aggressive in its own battle against inflation, is also looking as if it might recede.     We've already seen the euro rise sharply against the US dollar in the last few weeks, which is deflationary and will help. Furthermore, factory gate prices in German and Italy have been in freefall for months now, so while core CPI has remained sticky and close to record highs at 5.5%, it's also important to remember that the ECB has pushed rates from 2% to 4% this year already.     We expect to see another 25bps later today, however the consensus that was so prevalent at the start of this year of more aggressive rate hikes is already starting to fray on the governing council, with Stournaras of the Bank of Greece pushing back strongly against the idea of more aggressive action.     He hasn't been the only one however, and we've also started to see more vocal political opposition to further tightening from Italian Prime Minister Giorgia Meloni who has been publicly critical of the ECB when it comes to recent rate hikes. If, as expected last nights Fed hike is the last one then it is entirely feasible that the ECB could similarly be close to the end of its own rate hiking cycle.     EUR/USD – we've seen a modest rebound from levels just above the 1.1000 level, having retreated from the 1.1275 area which is 61.8% retracement of the 1.2350/0.9535 down move.  A break below 1.0980 could see a move towards 1.0850. Currently have resistance at the 1.1120 area.     GBP/USD – continues to pull away from the recent lows at 1.2795/00, having broken a run of 7 daily losses. While above the 50-day SMA the uptrend from the March lows remains intact with the next resistance at the 1.3020 area.         EUR/GBP – continues to look soft with support remaining at the recent lows at 0.8500/10. Resistance currently at the 0.8600 and the highs last week at 0.8700/10.     USD/JPY – continues to drift down away from the 142.00 area, with support at 139.70. A move below 139.50 opens up the risk of a move back towards the 200-day SMA at 137.20.     FTSE100 is expected to open 18 points higher at 7,695     DAX is expected to open 52 points higher at 16,183 CAC40 is expected to open 35 points higher at 7,350
ECB Meeting Uncertainty: Rate Hike or Pause, Market Positions Reflect Tension

Manufacturing PMIs and RBA Rates in Focus: European and US Markets Show Resilience

Michael Hewson Michael Hewson 01.08.2023 10:14
Manufacturing PMIs in focus, as RBA keeps rates unchanged     European markets finished the month of July on a rather subdued note, even allowing for another month of solid gains, although we did see another new record high for the DAX, while the CAC 40 posted a record monthly close. The euro Stoxx 50 also posted its highest monthly finish since October 2007. Both the FTSE100 and FTSE250 also fared reasonably well, with the FTSE100 closing at a 2-month high, helped by a rebound in house builders on the back of easing interest rate rise expectations. US markets also started the final day of July on the front foot before slipping back from their intraday highs, on the back of some end of month profit taking, drawing a line under a 5th successive month of gains. While there is a growing degree of confidence that last week's rate hikes from the Federal Reserve and the European Central Bank might be the prelude to a lengthy pause, there is rising realisation that rates may well have to stay at current levels for quite a while yet.     Nonetheless, despite this apprehension Asia markets have seen a positive session, despite weaker Chinese PMI numbers and this looks set to translate into a modestly positive start for markets in Europe this morning. This week we can expect the Bank of England to follow suit with another rate hike of its own, while this morning the RBA took the decision to keep rates unchanged at 4.1%. The decision was finely balanced with many expecting a rate hike, however the Australian central bank appears to have erred on the side of caution, given last week's weaker than expected Q2 CPI reading, and the weakness in recent PMI numbers.     The RBA went on to alter their inflation forecast to predict that prices would return to target in late 2025, while also revising up their GDP growth targets for this year and next year. The central bank did keep the door open to further hikes in the future. The Australian dollar slid back giving up some of the gains it made yesterday, while the ASX200 pushed back up towards its recent highs.     Today's economic agenda shifts the focus back to the weakness of the manufacturing sector, as well as the resilience of the US labour market, as we look to a flat open. In Germany especially, the performance of the manufacturing sector has been dire with July manufacturing PMI expected to be confirmed at 38.8, the lowest level since the manufacturing sector was shut down due to Covid. In France, manufacturing PMI is expected to slow to 44.5, while only modest improvements are expected in Spain and Italy of 48.3 and 44.3. The UK manufacturing numbers are expected to slow to 45, from 46.5.     Even the US economy hasn't managed to escape the manufacturing slump with the latest ISM manufacturing survey for July expected to show a modest improvement from 46 to 46.9, with prices paid expected to see a modest improvement to 44, from 41.8. It is clear that the manufacturing sector is experiencing a clear deflationary impulse which is likely to continue to act as a drag on prices in the coming months. The bigger question is whether this translates into a similar drag on the services sector, and here prices are proving to be slightly stickier.     One major concern to the slowing prices narrative has been the recent gains in oil prices, which yesterday saw their biggest monthly gain in over a year, over concerns that Saudi Arabia will go further and extend their production cuts into September. This rise in prices over the last 4 weeks is already feeding into higher prices at the fuel pumps, which if sustained could impact on consumer demand in the coming weeks.      We also get an insight into the US labour market with the latest JOLTS job openings numbers for June which are expected to show a fall from 9.82m vacancies to 9.6m, which would be a 2-year low. While such a move would be welcome it's also important to remember that vacancies are still over 2m higher than they were at their pre-pandemic peaks, back in mid-2018. This number needs to come down a lot further before we can infer that the falls in vacancies might lead to a moderation in wage growth.     EUR/USD – currently have support at the 1.0940 lows from last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week's high at 1.1150.     GBP/USD – support currently at the 1.2750 area as well as trend line support from the March lows at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact. Resistance at the 1.3000 area.         EUR/GBP – currently range trading between resistance at the 0.8600 area, with the risk of a return to the recent lows at 0.8500/10. Above the 0.8600 area targets the July highs at 0.8700/10.     USD/JPY – broken above the 142.00 area, opening up the risk of a move back to the previous peaks at 145.00. We need to see a move back above 142.60 for this to unfold. Support comes in at yesterday's lows at 140.70.     FTSE100 is expected to open 3 points higher at 7,702     DAX is expected to open 13 points higher at 16,459     CAC40 is expected to open 5 points higher at 7,502     By Michael Hewson (Chief Market Analyst at CMC Markets UK)
Pound Sterling: Short-Term Repricing Complete, But Further Uncertainty Looms

European Markets React to US Rating Downgrade and Economic Concerns

Michael Hewson Michael Hewson 02.08.2023 08:22
European markets set to open lower after US rating downgrade     We saw a negative start to August for European markets with the DAX leading the way lower, having only put in a new record high the day before, after poor manufacturing PMIs and disappointing earnings prompted profit taking.   Yesterday's weakness appears to have been prompted by concern that the economy is a little bit weaker than perhaps people would like, raising concern for earnings growth heading into the second half of the year. US markets also finished the day lower, although closing well off the lows of the day with the Dow managing to eke out a gain. US yields also finished the day higher, on the rising realisation that rates may well have to stay at current levels for quite a while yet.     This profit taking has continued overnight after Fitch downgraded the US credit rating to AA+ from AAA, while simultaneously boosting demand for haven assets, with Asia markets falling sharply, and which looks set to translate into a sharply lower European open.   The increase in crude oil prices over the past 4 weeks is also raising concern that the falls in input prices that we've seen over the last few months might start to hit a floor and start rising again. Yesterday we got another snapshot of the US labour market as US job openings (JOLTS) fell to their lowest levels since April 2021, although they are still well above the levels, they were pre-pandemic. The latest employment component in the July ISM manufacturing survey also slowed to its lowest level since July 2020.     Today we get the latest insight into private sector hiring with the ADP employment report for July which is unlikely to repeat the bumper 497k seen in the June numbers. We should also be prepared for a downward revision to that report with July expected to see a more moderate 190k, as we look towards Friday's more important non-farm payrolls numbers. While stocks slipped back yesterday the US dollar rose to a 3-week high, gaining ground across the board on the grounds of the broader resilience of the US economy.     EUR/USD – still finding support at the 1.0940 lows from last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week's high at 1.1150.     GBP/USD – has continued to slide lower towards trend line support from the March lows at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact. Resistance at the 1.3000 area.         EUR/GBP – popped briefly above the resistance at the 0.8600 area, before slipping back again, with the risk of a return to the recent lows at 0.8500/10. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to move through the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 30 points lower at 7,636     DAX is expected to open 88 points lower at 16,152     CAC40 is expected to open 36 points lower at 7,370   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
Pound Sterling: Short-Term Repricing Complete, But Further Uncertainty Looms

European Markets React to US Rating Downgrade and Economic Concerns - 02.08.2023

Michael Hewson Michael Hewson 02.08.2023 08:22
European markets set to open lower after US rating downgrade     We saw a negative start to August for European markets with the DAX leading the way lower, having only put in a new record high the day before, after poor manufacturing PMIs and disappointing earnings prompted profit taking.   Yesterday's weakness appears to have been prompted by concern that the economy is a little bit weaker than perhaps people would like, raising concern for earnings growth heading into the second half of the year. US markets also finished the day lower, although closing well off the lows of the day with the Dow managing to eke out a gain. US yields also finished the day higher, on the rising realisation that rates may well have to stay at current levels for quite a while yet.     This profit taking has continued overnight after Fitch downgraded the US credit rating to AA+ from AAA, while simultaneously boosting demand for haven assets, with Asia markets falling sharply, and which looks set to translate into a sharply lower European open.   The increase in crude oil prices over the past 4 weeks is also raising concern that the falls in input prices that we've seen over the last few months might start to hit a floor and start rising again. Yesterday we got another snapshot of the US labour market as US job openings (JOLTS) fell to their lowest levels since April 2021, although they are still well above the levels, they were pre-pandemic. The latest employment component in the July ISM manufacturing survey also slowed to its lowest level since July 2020.     Today we get the latest insight into private sector hiring with the ADP employment report for July which is unlikely to repeat the bumper 497k seen in the June numbers. We should also be prepared for a downward revision to that report with July expected to see a more moderate 190k, as we look towards Friday's more important non-farm payrolls numbers. While stocks slipped back yesterday the US dollar rose to a 3-week high, gaining ground across the board on the grounds of the broader resilience of the US economy.     EUR/USD – still finding support at the 1.0940 lows from last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week's high at 1.1150.     GBP/USD – has continued to slide lower towards trend line support from the March lows at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact. Resistance at the 1.3000 area.         EUR/GBP – popped briefly above the resistance at the 0.8600 area, before slipping back again, with the risk of a return to the recent lows at 0.8500/10. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to move through the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 30 points lower at 7,636     DAX is expected to open 88 points lower at 16,152     CAC40 is expected to open 36 points lower at 7,370   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
Eurozone Producer Prices Send Signals of Concern: Impact on Consumer Inflation and ECB's Vigilance - 03.08.2023

Bank of England Poised to Raise Rates to a 15-Year High Amid Economic Concerns

ING Economics ING Economics 03.08.2023 10:13
Bank of England set to raises rates to a new 15 year high European markets underwent another negative session yesterday, clobbered by concerns over weaker than expected economic activity, which in turn is raising concern for earnings growth heading into the second half of the year. Throw in a US credit rating downgrade from Fitch and the catalyst for further profit taking after recent record highs for the DAX completed the circle of negativity.     US markets also underwent a negative session, with the Nasdaq 100 undergoing its worst session since February, while the US dollar acted as a haven and the yield curve steepened. As a result of the continued sell-off in the US, and weakness in Asia markets, European markets look set to open lower later today, and while the Fitch downgrade doesn't tell us anything about the US political governance that we don't already know investors appear to be looking to test the extent of the downside in the market.     Earlier this week we saw some poor manufacturing PMI numbers which showed that the European economy was very much in recession, with disinflation very much front and centre. This has raised questions as to whether the services sector will eventually succumb to similar weakness. There has been some evidence of that in recent readings but by and large services activity has been reasonably robust. In Spain services activity is expected to remain steady at 53.4, along with Italy at 52.2. The recent flash numbers from France saw further weakness to 47.4, while in Germany we can expect to see a resilient 52, down from 54.1.         EU PPI for June is expected to slip further into deflation to -3.2% year on year. In the UK services activity is expected to slow to 51.5 from 53.7. With inflation unexpectedly slowing more than expected in June to 7.9% it could be argued that the pressure on the Bank of England to hike by another 50bps has eased somewhat, especially since the Fed and the ECB both hiked by 25bps last week.     Having seen core CPI slow by more than expected to 6.9% forward rate expectations have eased quite markedly in the past few weeks. Forward market expectations of where the terminal rate is likely to be, have slipped from 6.5%, to below 6%. It's also likely that inflation for July will slow even more markedly as the effects of the energy price cap get adjusted lower which might suggest there is an argument that we might be close to the end of the current rate hiking cycle.     The fly in the ointment for the Bank of England is the rather thorny issue of wage growth which has moved above core CPI, and could prompt the MPC to err towards the hawkish side of monetary policy and raise rates by 50bps, with a view to suggesting that this could signal a pause over the coming weeks as the central bank gets set to consider how quickly inflation falls back over the course of Q3. Such an aggressive move would be a mistake given that a lot of the pass-through effects of previous rate increases haven't fully filtered down with some suggesting that the Bank of England should pause. In the current environment this seems unlikely given a 25bps is priced in already.       In a nutshell we can expect to see a hawkish 25bps as a bare minimum, and we could also see a split with some pushing for 50bps. We could also get an insight into how new MPC member Megan Greene views the current situation when it comes to casting her vote. One thing seems certain, she is unlikely to be dovish as Tenreyro whom she replaced on the MPC.     We'll also get a further insight into the US labour market after another bumper ADP payrolls report yesterday which saw another 324k jobs added in July. Weekly jobless claims are expected to come in at 225k, while we'll also get an insight into the services sector with the ISM services index for July which is expected to come in at 53. The employment component will be of particular interest, coming in at 53.1 in June, having jumped from 49.2 in May.       EUR/USD – managed to hold above the 50-day SMA for the time being, with a break below targeting further losses towards 1.0830. Resistance currently at last week's high at 1.1150.     GBP/USD – also flirting with the 50-day SMA with a clean break targeting a move towards the 1.2600 area.  Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to edge higher drifting up to the 0.8630 level before slipping back, although it is now finding some support at the 0.8580 area. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to look well supported above the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 10 points lower at 7,551     DAX is expected to open 22 points lower at 15,998     CAC40 is expected to open 15 points lower at 7,297   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
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Late Friday US Sell-Off to Impact European Open: Market Analysis

Michael Hewson Michael Hewson 07.08.2023 08:44
Late Friday US sell-off set to weigh on European open    By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets managed to eke out some modest gains on Friday, at the end of what was a negative week overall as concerns over earnings guidance downgrades and rising long term yields weighed on broader market sentiment. A mixed US jobs report looked to have stabilised sentiment, pulling the DAX and FTSE100 off their lows of the week after another slowdown in jobs growth in July and downward revisions to previous months, spoke to the idea that central bank rate hikes have done their job, and that no more are coming. This uplift only lasted until just after European markets had closed with all the signs that US markets would be able to end a 3-day losing streak, however the early gains that we saw in the early part of the day soon evaporated with the Nasdaq 100 and S&P500 both posting their worst weekly performances since March.     In essence there was something for everyone in Friday's jobs report, weaker jobs growth, the unemployment rate inching lower, and robust wage growth. Ultimately it spoke to a resilient US economy, as well as a possible Fed pause in September, ahead of this week's CPI report, although there are some on the FOMC who are still on the "more rate hikes to come" line. One of these members is Governor Michelle Bowman who at the weekend expressed her view that more rate hikes were likely to be needed to return inflation to target. While this may now be starting to become a minority view on the FOMC, it merely serves to highlight the growing uncertainty that is not only starting to permeate central bank thinking but also investor sentiment more broadly, as well as raising broader questions. Has the Fed managed to engineer a soft landing, and should they cause a pause to allow more time to assess any lag effects on consumers as well as the broader economy. Or do they carry on hiking on the basis that we could have seen a short-term base when it comes to prices slowing down? While markets are still pricing in a 40% chance of one more rate hike before the end of the year, this figure could swing either way in the event of a hot CPI print later this week. If next month's jobs report is of a similar "goldilocks" variety then a pause seems the most likely outcome from the next Fed rate decision. Whichever way we go with the data in the coming weeks, a pause still seems the most plausible outcome. For the most part bond markets drove most of the price action in financial markets last week with sharp increases in longer term yields, despite the sharp falls on Friday, as the yield curve steepened sharply. Yields could be the main driver this week with the US set to issue $103bn across a range of maturities this week, in the wake of last week's credit rating downgrade by Fitch.   It's also worth keeping an eye on this week's China trade data for July, due tomorrow, and inflation date on Wednesday, against a backdrop of an economy that appears to be struggling with weak domestic demand, and where economic activity has been struggling. We also have preliminary Q2 GDP economic numbers for the UK at the end of the week as well as industrial and manufacturing production numbers for June.       EUR/USD – rallying off last week's lows just above the 1.0900 area, closing above the 50-day SMA in the process we need to see a move back above 1.1050 to have any chance of revisiting the July peaks at 1.1150.   GBP/USD – drifted down the 1.2620 area last week before rebounding strongly, but we need to see a back above the 1.2800 area to ensure this rally has legs. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.     EUR/GBP – feels like it wants to retest the 100-day SMA at 0.8680, having drifted back from the 0.8655 area last week. Support now comes in at the 0.8580 area, with the bias for a retest of the July highs at 0.8700/10. Below 0.8580 retargets the 0.8530 area.   USD/JPY – failed just below the 144.00 area last week, and has now slid back below the 142.00 area, which brings a move towards the 140.70 area into focus. Main resistance remains at the previous peaks at 145.00.   FTSE100 is expected to open 31 points lower at 7,533   DAX is expected to open 54 points lower at 15,898   CAC40 is expected to open 29 points lower at 7,296
China's Deflationary Descent: Implications for Global Markets

China's Deflationary Descent: Implications for Global Markets

Michael Hewson Michael Hewson 10.08.2023 08:36
China slips into deflation   By Michael Hewson (Chief Market Analyst at CMC Markets UK)   A disappointing set of China trade numbers for July saw European and US markets selloff sharply yesterday, reinforcing concerns that the Chinese economy is struggling, undermining hopes that the slowdown in Q2, was simply a one-off. If anything, the signs of a slowdown have been there for months for China, given that PPI inflation has been negative all this year, with headline CPI following it at a distance.  This morning headline CPI inflation in China followed the PPI measure into outright deflation for the first time in 28 months, increasing fears that for all the promises of further stimulus measures, Chinese authorities may be facing limitations in the type of stimulus they can implement when it comes to kick starting domestic demand.     CPI inflation fell from 0.2% in June to -0.3% in July, while PPI came in at -4.4%, the 10th month in a row that prices have been negative. Chinese deflation has been the proverbial elephant in the room when it comes to recent tightening measures from the Federal Reserve, the ECB, and Bank of England. How many more rate hikes can we expect in the coming months when there is a clear deflationary impulse coming from Asia, and where is the tipping point when it comes to the risk of overtightening. With recent rebounds in oil prices prompting a rebound in gasoline/petrol prices, along with the clear lags when it comes to the effects of previous rate hikes, does the risk of overtightening outweigh the risks of signalling a pause, and waiting to see the effects of previous rate hikes on consumers as fixed rates roll off.     Tomorrow's US CPI, and Friday's PPI numbers could go some way to answering this question, however it is becoming clearer that central banks are leaning more towards pausing in September, which means we could well have seen the end of the rate hiking cycle for all three, the Federal Reserve, ECB, and Bank of England. Tighter credit conditions for banks were also behind yesterday's sell-off after Italy unexpectedly slapped its banking sector with a 40% windfall tax on its profits for this year. This raised concerns that other European countries like Germany, France and Spain may follow suit.     UK banks also fell back although the prospect of a UK tax is lower given that the banking sector here already pays a higher rate due to the 3% banking levy, on top of the 25% corporation tax rate, although there have been some misguided calls for the UK government to follow suit in a similar fashion to the energy profits levy on energy companies. That would be unwise given it could prompt banks to cut back on lending, and in turn become more risk averse which in turn could impact profits growth, as well as cutting credit into the real economy.       EUR/USD – having failed to consolidate its move above 1.1000 the euro has slipped back with the lows last week just above 1.0900, a key support. We currently have resistance at the 1.1050 area which we need to break to have any chance of revisiting the July peaks at 1.1150.     GBP/USD – gave up its Monday gains having failed to move above the 1.2800 area, however while above the lows last week at 1.2620 area the bias remains higher. We need to see a move back above the 1.2800 area to ensure this rally has legs. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to struggle near the 0.8650 area but we need to see a move below the 0.8580 area to signal a short-term top might be in and see a return to the 0.8530 area. Also have resistance at the 100-day SMA at 0.8680.     USD/JPY – looks set for a retest of the 144.00 area having rebounded from the 141.50 area. While below the 144.00 area the risk is for a move towards the 140.70 area. Main resistance remains at the previous peaks at 145.00.     FTSE100 is expected to open 32 points higher at 7,559     DAX is expected to open 88 points higher at 15,863     CAC40 is expected to open 63 points higher at 7,322  
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US CPI Expected to Edge Higher in July: Implications for Rate Hike Decisions and Market Sentiment

Michael Hewson Michael Hewson 10.08.2023 09:07
US CPI expected to edge higher in July    By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw a decent rebound yesterday after the Italian government clarified the details around its windfall tax bombshell from earlier in the week. The gains were also helped by a belief that deflation in China could lead to the end of further rate hikes from central banks here in Europe as well as the US.     US markets on the other hand, underwent another negative session as nervousness crept in ahead of today's US inflation numbers, with Nasdaq 100 leading the falls, at the same time as US 2-year yields finished the day higher.  The slowdown in China does raise the risk that central banks might over play their hand when it comes to further rate hikes, while any indication that inflation might start to baseline and turn higher could well complicate matters further as the Federal Reserve decides as to whether it has done enough, or whether they need to hike again in September. This makes today's US CPI for July and tomorrow's PPI numbers extremely important in the decision-making process.     In the last 12 months we've seen US CPI fall from a peak of 9.1% in June last year, slowing to 3% in June, with the slowdown in prices being very much a one-way process. If we do see a move higher to 3.3% which is what is expected there is a concern that might prompt some concern that we've bottomed. Core CPI slowed to 4.8%, in June which was more encouraging, and it is here that the Fed may well choose to focus its attention. With the Federal Reserve having hiked rates by another 25bps in July, there is this sense that further rate hikes beyond July could be a big ask, especially with PPI inflation on the cusp of going negative, when the July numbers get releases tomorrow. That said anyone expecting a straight-line process when it comes to slowing inflation could find that further weakness towards 2% might not be such a straightforward process. Expectations for July are for headline CPI to tick higher to 3.3%, while core prices are expected to slow to 4.7%.      Any indication that we might be at a short-term base when it comes to headline inflation could prompt some concern that the Fed might think about another rate hike at its September meeting, with the next key focus likely to be on the annual Jackson Hole Symposium at the end of the month. US weekly jobless claims are expected to remain steady at around 230k.     EUR/USD – finding support just above the 50-day SMA, with resistance at the 1.1050 area which we need to break to have any chance of revisiting the July peaks at 1.1150. Support at the 1.0900 area.     GBP/USD – remains capped just below the 1.2800 area. We need to see a move back above the 1.2800 area to ensure this rally has legs. We have support at the 1.2620 area. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to struggle near the 0.8650 area but we need to see a move below the 0.8580 area to signal a short-term top might be in and see a return to the 0.8530 area. Also have resistance at the 100-day SMA at 0.8680.     USD/JPY – continues to edge back towards last week's high just below the 144.00 area, having rebounded from the 141.50 area. While below the 144.00 area the risk is for a move towards the 140.70 area. Main resistance remains at the previous peaks at 145.00.     FTSE100 is expected to open 9 points lower at 7,578     DAX is expected to open 92 points higher at 15,944     CAC40 is expected to open 45 points higher at 7,367  
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UK Q2 GDP Forecast: Potential Stall Amid Economic Outlook Uncertainty - Analysis by Michael Hewson

Michael Hewson Michael Hewson 11.08.2023 08:07
UK economy expected to stall in Q2. By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets enjoyed their second successive day of gains yesterday, boosted by the announcement by China to end its ban on overseas travel groups to other countries has also helped boost travel, leisure, and the luxury sector. The gains were also helped by a lower-than-expected rise in US CPI of 3.2%, with core prices slipping back to 4.7%, which increased expectations that we could well have seen the last of the Fed rate hiking cycle, which in turn helped to push the S&P500 to its highest levels this week and on course to post its biggest daily gain since July.     Unfortunately, San Francisco Fed President Mary Daly had other ideas, commenting that the central bank has more work to do when it comes to further rate hikes, which pulled US yields off their lows of the day, pulling stock markets back to break even.   This failure to hang onto the gains of the day speaks to how nervous investors are when it comes to the outlook for inflation at a time, even though Daly isn't a voting member on the FOMC this year, and she's hardly likely to say anything else. Certainty hasn't been helped this week by data out of China which shows the economy there is in deflation, despite recent upward pressure on energy prices.     It also means that we can expect to see a lower open for markets in Europe with the main focus today being on the latest UK Q2 GDP numbers, as well as US PPI for July. Having eked out 0.1% growth in Q1 of this year, today's UK Q2 GDP numbers ought to show an improvement on the previous two quarters for the UK economy, yet for some reason most forecasts are for zero growth. That seems unduly pessimistic to me, although the public sector strike action is likely to have been a drag on economic activity.     Contrary to a lot of expectations economic activity has managed to hold up reasonably well, despite soaring inflation which has weighed on demand, and especially on the more discretionary areas of the UK economy. PMIs have held up well throughout the quarter even as they have weakened into the summer. Retail sales have been positive every month during Q2, rising by 0.5%, 0.1% and 0.7% respectively. Consumer spending has also been helped by lower fuel pump prices, and with unemployment levels still at relatively low levels and wage growth currently above 7%, today's Q2 GDP numbers could be as good as it gets for a while.     Despite the resilience shown by the consumer, expectations for today's Q2 are for a 0% growth which seems rather stingy when we saw 0.1% in Q1. This comes across as surprising given that Q2 has felt better from an economic point of view than the start of the year, with lower petrol prices helping to put more money in people's pockets despite higher bills in April. This raises the prospect of an upside surprise, however that might come with subsequent revisions.       Nonetheless, even as we look back at Q2, the outlook for Q3 is likely to become more challenging even with the benefit of a lower energy price cap, helping to offset interest rates now at their highest levels for over 15 years. With more and more fixed rate mortgages set to get refinanced in the coming months the second half of the year for the UK economy could well be a lot more challenging than the first half.     Yesterday US CPI came in slightly softer than expected even as July CPI edged up to 3.2% from 3% in June. Today's PPI numbers might show a similar story due to higher energy prices, but even here we've seen sharp falls in the last 12 months. A year ago, US PPI was at 11.3%, falling to 0.1% in June, with the move lower being very much one way. We could see a modest rebound to 0.7% in July. Core prices have been stickier, but they are still expected to soften further to 2.3% from 2.4%. 12 months ago, core PPI was at 8.2% and peaked in March last year at 9.6%.       EUR/USD – squeezed above the 1.1050 area yesterday, before failing again, and sliding back below the 1.1000 area. Despite the failure to break higher we are still finding support just above the 50-day SMA. Below 1.0900 targets the 1.0830 area.     GBP/USD – popped above the 1.2800 area yesterday and then slipped back. We need to see a sustained move back above the 1.2800 area to ensure this rally has legs. We have support at the 1.2620 area. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – pushed up to the 100-day SMA with resistance now at the 0.8670/80 area. Support comes in at the 0.8580 area with a break below targeting the 0.8530 area. Above the 100-day SMA targets the 0.8720 area.     USD/JPY – closing in on the June highs at the 145.00 area. This is the key barrier for a move back towards 147.50, on a break above the 145.20 level. Support now comes in at the 143.80 area.     FTSE100 is expected to open 42 points lower at 7,576     DAX is expected to open 70 points lower at 15,926     CAC40 is expected to open 30 points lower at 7,403
UK Inflation Expected to Slow Sharply in July: Market Analysis and Insights - August 16, 2023

UK Inflation Expected to Slow Sharply in July: Market Analysis and Insights - August 16, 2023

Michael Hewson Michael Hewson 16.08.2023 11:10
05:35BST Wednesday 16th August 2023 UK inflation set to slow sharply in July  By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets had a poor session yesterday, sliding sharply to their   lowest levels in over a month on the back of concerns over the Chinese economy, and a sharp slowdown in domestic demand. US markets also tumbled for the same reason, although banks also got hit on the back of a warning from ratings agency Fitch that it may have to downgrade the whole US banking sector, including the likes of JPMorgan Chase if financial conditions worsened.     Asia markets have continued this trend of market weakness, with the result we can expect to see a lower open for European markets. The pound had a decent day yesterday, buoyed by the stronger than expected wages data, raising the question as to whether the Bank of England will be forced to hike rates again in September? Yesterday's wages data, which saw a record increase of 7.8% for the 3-months to June, has not only given the central bank a headache, but it could end up giving the UK economy a migraine if the bank gets its policy response wrong. For several months now we've had to contend with tone-deaf warnings from the likes of Governor Andrew Bailey and chief economist Huw Pill for workers not to ask for pay rises. This warning has fallen on deaf ears, and rightly so, but such is the mindset of the stewards of monetary policy they seem unable to grasp that this as a good thing and is certainly no wage-price spiral. If anything, this is a consequence of the central bank's failure to grasp the inflation nettle over a year ago, when a lot of people were telling it to hike faster and harder.     What is happening now is that wages are recouping some of the real income loss that consumers have had to bear over the last 15-months, which is no bad thing for longer term demand considerations.  Today's UK CPI numbers will be the first to include the new lower energy price cap, with the inflation report for August also expected to point to weaker price growth. With several MPC members already saying that interest rate policy is already restrictive, even allowing for yesterday's wages numbers, there is a case for making the argument that we should be close to being done on the rate front, even though markets aren't currently pricing that.     We've already seen a sharp fall in headline CPI from 8.7% to 7.9% in June which offers hope that we can expect to see a fall below 7% in today's July numbers to 6.7%, with core inflation set to slow to 6.7% from 6.9%. On a month-on-month basis we are expecting to see a decline of -0.5%, as the effects of a lower energy price cap show up in the numbers. This welcome convergence between wages and prices is long overdue and will help consumers reset their finances at a time when interest rates are still rising, and the lag effects of previous rate hikes have yet to be felt. There is also the risk that in raising rates further the MPC will push rents higher, and thus make inflation stickier.     The MPC needs to look ahead to what is happening with PPI which is expected to see further declines in July with both input and output prices expected to decline by -2.8% and -1.3% respectively. The latest iteration of EU Q2 GDP is expected to show that the economy remained in expansion of 0.3%, although these numbers were flattered by a big gain of 3.3% in the Irish economy, compared to a -2.8% contraction in Q1. These swings tend to be due to how the big US multinationals which are based in Ireland book their sales which obscures how well or not the Irish economy is performing on an underlying level. We'll also get an insight into the deliberations at the most recent Fed meeting after the US central bank raised rates by 25bps at the July meeting after pausing in June.     There were no real surprises from the statement or for that matter from chairman Jay Powell's press conference, as he reiterated his comments from June that additional rate rises will be needed, although he also insisted that the Fed would be data dependant. In the statement it was restated that inflation remained elevated, and that the committee was highly attentive to the risks that prices might remain high. Powell was non-committal on whether the Fed would raise rates again at its next meeting in September, merely restating that if the data warranted it the central bank would do so. Recent commentary from several FOMC policymakers would appear to suggest growing splits between those who think that a lengthy pause is appropriate now, and those who want further tightening. It will be interesting to see whether these come to the fore in the minutes given how they are already manifesting themselves in recent commentary.     Hawks like Fed governor Michelle Bowman continues to push the line the Fed needs to do more, contrast with those like Atlanta Fed President Raphael Bostic who think the Fed needs to pause.     EUR/USD – slid below the 50-day SMA earlier this week falling to the 1.0875 area before rebounding. The main support remains at the 1.0830 area and July lows. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – got a decent lift yesterday after slipping to the 1.2615 area on Monday but continues to find support above the 1.2600 area. A break below 1.2600 targets 1.2400. Until then the bias is for a move back above the 1.2800 area through 1.2830 to target 1.3000.         EUR/GBP – continues to slip back from the recent highs with the 100-day SMA acting as resistance at the 0.8670/80 area. A sustained move below support at the 0.8570/80 area opens the risk of a move towards the 0.8530 area. Above the 100-day SMA targets the 0.8720 area.     USD/JPY – continues to edge higher, with support now at the 144.80 area. The move above the previous peaks at 145.10, opens the prospect of further gains towards 147.50.     FTSE100 is expected to open 18 points lower at 7,371     DAX is expected to open 67 points lower at 15,700     CAC40 is expected to open 25 points lower at 7,242  
UK Public Sector Borrowing Sees Decline in July: Market Insights - August 22, 2023

UK Public Sector Borrowing Sees Decline in July: Market Insights - August 22, 2023

Michael Hewson Michael Hewson 22.08.2023 08:41
06:00BST Tuesday 22nd August 2023 UK public sector borrowing set to slow in July   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     We saw a lacklustre start to the week yesterday, European markets just about managing to eke out a small gain, although the FTSE100 finished the day slightly below the flat line, closing lower for the 7th day in a row.    The retreat from the intraday highs appeared to be driven by a rise in yields with both UK and German yields seeing strong gains towards their highs of last week. The move higher in yields also saw US 10-year and 30-year yields hit their highest levels since 2007, but unlike in Europe the rise in yields didn't act as a brake on US markets, which managed solid gains led by the Nasdaq 100. US chipmaker Nvidia was a notable outperformer looking to revisit its record highs of earlier this month ahead of its Q2 earnings which are due to be released tomorrow. As we look ahead to today's European open the strong finish in the US looks set to translate into a similarly positive start here in a couple of hours' time, however it's difficult to escape the feeling that stock markets are starting to look increasingly vulnerable.     Economic uncertainty in China, stagnation or weak growth in Europe and the UK, the only positives appear to be coming from the US where the economy is looking reasonably resilient, hence the rise in yields there. It's slightly harder to explain why yields in the UK and Europe are rising aside from the fact that rates are likely to stay higher for longer.     On the economic data front the only data of note is the latest July public sector borrowing numbers for the UK, which are expected to see a fall to £3.9bn from £17.1bn in May. With total debt now at levels of 100% of GDP the rise in rates is extraordinarily painful given how much of its existing debt is linked to inflation and the retail price index. Having to pay out over £100bn a year in interest is money that might have been better spent elsewhere. It's just a pity that the government didn't take greater advantage of the low-rate environment we saw less than 2 years ago, as had been suggested from a number of quarters at the time. We also have the latest CBO industrial orders for August which are expected to slip back to -12 from -9 in July.     In the US we have July existing home sales which are expected to decline for the second month in a row, by -0.2%. We also have comments from the following Federal Reserve policymakers. Chicago Fed President Austan Goolsbee who leans towards the dovish side will be speaking at an event on youth unemployment alongside the more hawkish Fed governor Michelle Bowman.     We also have Richmond Fed President Thomas Barkin whose most recent comments suggest he sees the prospect of a soft landing for the US economy, although he is not a voting member this year.     EUR/USD – finding support just above the 1.0830 area. Still feels range bound with resistance at the 1.1030 area. Below 1.0830 targets the 200-day SMA.     GBP/USD – continues to look supported while above the twin support areas at 1.2610/20. We need to see a move through the 1.2800 area, to signal potential towards 1.3000. A break below 1.2600 targets 1.2400.       EUR/GBP – continues to find support for now at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – looks to be retesting the August highs on the way towards the 147.50 area. Below the 144.80 area, targets a move back to the 143.10 area.     FTSE100 is expected to open 6 points higher at 7,264     DAX is expected to open 48 points higher at 15,651     CAC40 is expected to open 30 points higher at 7,228  
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Flash PMIs Expected to Weaken Further in August: Market Insights by Michael Hewson

Michael Hewson Michael Hewson 23.08.2023 10:04
05:40BST Wednesday 23rd August 2023 Flash PMIs set to weaken further in August   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     The FTSE100 managed to finally break its worst run of losses since 2019 yesterday, posting its first daily gain since the 10th August. The gains were hard-won however with the index trying retreating from its daily highs and failing for the second day in a row to consolidate a move above 7,300. The rest of Europe managed to do slightly better, outperforming and closing higher for the 2nd day in a row, although still closing well off the highs of the day.       US markets on the other hand after starting strongly slipped back after European markets had closed, sliding back on comments from Richmond Fed President Thomas Barkin who said the Fed needed to be open to the prospect the US economy might re-accelerate which might mean the central bank might need to hike rates further and keep them higher for longer, pushing the US dollar to its highs for the day in the process. Despite the weaker finish for US markets, the resilience in Asia markets looks set to see European markets open slightly higher later this morning.  The last set of flash PMIs saw German manufacturing slide to its lowest levels since the Covid lockdowns at 38.8 in further signs that the engine of the German economy continues to stutter. Weak demand in its key export markets as well as domestically, along with higher energy prices weighing on economic activity.       The only bright spot was services which came in at 52.3, but even here economic activity was slower, and both sectors are expected to weaken further in August further complication the task of the ECB which is expected to signal a pause in its rate hiking cycle next month. Manufacturing activity is expected to soften further to 38.6, while services is expected to slip to 51.5. Economic activity in France was also disappointing in July, although the underperformance was more evenly distributed with both manufacturing and services both in contraction heading into Q3. Manufacturing slipped to 45.1 in July and services dropped to 47.1. With energy prices rising sharply over the last few weeks, it's hard to imagine a scenario that will see a significant improvement given the weakness seen in China and other overseas markets. Manufacturing is forecast to come in at 45, and services at 47.5.     While economic activity has been slowing in Europe, the UK has also seen similar slowdowns in both manufacturing and services, although the composite PMI is just about hanging on in expansion territory, unlike its peers across the Channel.     Construction has been a notable strong point, however the focus today is on manufacturing which slowed to 45.3 in July, while services slowed from 53.7 in June to 51.5 in July. The recent GDP numbers for June showed a strong performance, however Q3 is likely to be much more challenging, with higher oil and gas prices likely to filter through at the petrol pump. UK manufacturing is expected to slow to 45, and services to 51.     US manufacturing and services look set to be more resilient at 49 and 52 respectively.      EUR/USD – continues to find support just above the 1.0830 area. Below 1.0830 targets the 200-day SMA at 1.0790 and trend line support from the March lows at 1.0750. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – failing at the 50-day SMA again and the 1.2800 area. We need to see a move through the 1.2800 area, to signal potential towards 1.3000. A break below 1.2600 targets 1.2400.           EUR/GBP – sinking towards support at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – failed to push above the 146.50 area yesterday,but while above the 144.80 area bias remains for a move towards 147.50. Below the 144.80 area, targets a move back to the 143.10 area.     FTSE100 is expected to open 10 points higher at 7,280     DAX is expected to open 42 points higher at 15,747     CAC40 is expected to open 14 points higher at 7,255
Positive Start Expected as Nvidia's Strong Performance Boosts Market Confidence

Positive Start Expected as Nvidia's Strong Performance Boosts Market Confidence

Michael Hewson Michael Hewson 24.08.2023 10:53
05:40BST Thursday 24th August 2023 Positive start expected after Nvidia knocks it out of the park   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Despite a raft of disappointing economic data from France, Germany and the UK which saw services activity slide into recession territory, European equity markets managed to finish the day higher yesterday. Rather perversely markets took these data misses as evidence that rate hikes were starting to work and that further rate hikes were likely to be unnecessary, sending bond yields sharply into reverse, as markets started to price an increased probability of recession. Yesterday's economic data will certainly offer food for thought for central bankers as they get set to assemble today at Jackson Hole for the start of the annual symposium, ahead of interest rate meetings next month where they are likely to decide whether to raise rates further to combat sticky inflation. If yesterday's data is in any way reflective of a direction of travel, then we could see a Q3 contraction of 0.2%. Of course, one needs to be careful in reading too much into one month of weak PMIs, especially in August when a lot of industry tends to shutdown or pare back economic activity, however the weakness in services was a surprise given that the summer holidays tend to see that area of the economy perform well.     US markets also underwent a strong session led by the Nasdaq 100 in anticipation of a strong set of numbers from Nvidia with the bar set high for a strong set of Q2 numbers. Back in Q1 when Nvidia set out its revenue guidance for Q2 there was astonishment at the extent of the upgrade to $11bn. This was a huge increase on its Q2 numbers of previous years, or any other quarter, with the upgrade being driven by expectations of a big increase in sales of data centre chips, along with investments in Artificial Intelligence.       Last night Nvidia crushed these estimates with revenues of $13.5bn, datacentre revenue alone accounting for $10.3bn of that total, a 171% increase from a year ago. For comparison, in Q1 datacentre revenue accounted for $4.3bn. Gross margins also beat expectations, coming in at 71.2% as profits crushed forecasts at $2.70 a share. Nvidia went on to project Q3 revenues of $16bn, plus or minus 2%. The company also approved an extra $25bn in share buybacks, with the shares soaring above this week's record highs in after-hours trading, with the big test being whether we'll see those gains sustained when US markets reopen later today.     On the back of last night's positive finish, as well as the exuberance generated by the belief that interest rate hike pauses are coming next month, European markets look set to open higher later this morning. The focus today is on the latest set of weekly jobless claims numbers which are set to remain unchanged at 239k, as well as July durable goods orders, excluding transportation, which are forecast to see a rise of 0.2%, a modest slowdown from June's 0.5% gain.      EUR/USD – bounced off the 200-day SMA at 1.0800 with support just below that at trend line support from the March lows at 1.0750. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – the 1.2600 area continues to hold with resistance still at the 1.2800 area and 50-day SMA. A break below 1.2600 targets 1.2400.        EUR/GBP – briefly hit an 11-month low at 0.8490 before rebounding sinking towards support at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – the failure to push above the 146.50 area has seen a pullback below the 145.00 level. This raises the prospect of a move towards the 50-day SMA at 142.70 area.     FTSE100 is expected to open 24 points higher at 7,344     DAX is expected to open 70 points higher at 15,798     CAC40 is expected to open 36 points higher at 7,282  
Persistent Stagnation: German Economy Confirms Second Quarter Contraction

Analyzing Powell's Jackson Hole Speech and Lagarde's ECB Insights: Market Insights by Michael Hewson

Michael Hewson Michael Hewson 25.08.2023 09:07
All ears on Powell and Lagarde at Jackson Hole today   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     After an initially positive start to the day yesterday, only the FTSE100 managed to eke out any sort of gains, after a rebound in yields and the fading of the Nvidia sugar rush saw European markets slip into negative territory.   US markets, having started very much in a positive vein with the Nasdaq 100 leading the way higher, also turned tail as bond yields pushed higher, along with the US dollar, finishing the day sharply lower. As we look towards today's European open, the rise in yields and weak finish in the US, as well as weakness in Asia this morning, is set to see European markets open lower this morning. Much of the narrative for this month was supposed to be centred around what Fed chair Jay Powell would likely say at Jackson Hole today with respect to the prospect of another pause in the rate hiking cycle when the FOMC meets next month.   This week's poor economic data out of Germany and France has shifted the spotlight a touch when it comes to central bank policy towards the European Central Bank and Christine Lagarde's speech, at 8pm tonight, after Powell who is due to speak at 3:05pm.   While this year's Symposium is titled "Structural Shifts in the Global Economy" it won't be just Jay Powell whose words will be closely scrutinised for clues about rate pauses next month it will also be the Bank of England and the Bank of Japan where markets will be looking for important insights into the risks facing central banks in terms of the risks in over tightening monetary policy at a time when the challenges facing the global economy are numerous.   This week's PMIs have highlighted the challenges quite clearly to the point that it appears the ECB may well also look at a rate pause next month, alongside the Federal Reserve, although the reasons for an ECB pause are less about inflation falling back to target, than they are about a tanking economy.   The latest German PMIs suggest the prospect of another quarter of contraction in Q3, while the Bank of England has a similar problem, although the bar for a pause next month is slightly higher given how much higher UK CPI is relative to its peers.   Before we hear from ECB President Christine Lagarde, Powell will set the scene just after US markets open, and his tone is likely to be slightly less hawkish than he was a year ago.  When Powell spoke last year, he made it plain that there was more pain ahead for US households and that this wouldn't deter the central bank in acting to bring down inflation, even if it meant pushing unemployment up. While Powell is unlikely to be anywhere near as hawkish, as he was last year, he won't want to declare victory either. As we already know from recent comments from various Fed officials it is clear the Fed believes the fight against inflation is far from over, and in that context it's unlikely he will deliver any dovish surprises.   This belief of a slightly hawkish Powell is likely to have been behind yesterday's sharp declines in US markets, which were driven by rising yields as investors continued to price in higher rates for longer. Not even a set of blow-out earnings from Nvidia was enough to keep markets in the black, with the shares opening at a new record high above $500, before sliding back to finish on the lows of the day, closing unchanged. The inability to hold onto any of the early gains suggests that the recent enthusiasm for this $1trn chipmaker may be due a pause. While investors will be focussing on Powell, the focus today returns to the German economy and in the wake of this week's poor PMIs we'll be getting the latest snapshot of the business sentiment in Europe's largest, but also sickest economy, as well as the final reading of Q2 GDP.   The most recent German IFO business climate survey showed sentiment falling to its lowest level since October last year in July at 87.3 and is expected to slow further to 86.8. Expectations also slipped back to 83.5 suggesting the economy could remain in recession in Q3.   Any thoughts that we might see an improvement in August are likely to have been dealt a blow by the sharp rise in oil prices seen in the last few weeks, as well as this week's PMIs. With recent economic data out of China also suggesting a struggling economy, German exporters are likely to continue to find life difficult.        EUR/USD – sinking below the 200-day SMA at 1.0800 with support just below that at trend line support from the March lows at 1.0750. Still feelsrange bound with resistance at the 1.1030 area.   GBP/USD – slipped below the 1.2600 area which could well open up a move towards 1.2400 and the 200-day SMA.  We still have resistance at the 1.2800 area and 50-day SMA.       EUR/GBP – the rebound off this week's 11-month low at 0.8490 looks set to retest the 0.8600 area. We also have resistance at the 0.8620/30 area.   USD/JPY – rebounded off the 144.50 area with resistance at the highs this week at the 146.50 area, with resistance also at 147.50.   FTSE100 is expected to open 5 points lower at 7,328   DAX is expected to open 39 points lower at 15,582   CAC40 is expected to open 16 points lower at 7,198    
Pound Sterling: Short-Term Repricing Complete, But Further Uncertainty Looms

US ADP Set to Slow in August: Impact on Markets and Economic Outlook

Michael Hewson Michael Hewson 30.08.2023 09:42
06:00BST Wednesday 30th August 2023 US ADP set to slow in August   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     We've seen a strong start to the week for European markets with the FTSE100 outperforming yesterday due to playing catch-up as result of the gains in the rest of Europe on the Monday Bank Holiday. US markets also saw a strong session, led by the Nasdaq 100 as yields retreated on the back of a sharp slowdown in US consumer confidence in August, and a fall in the number of vacancies from 9165k to 8827k in July, and the lowest level since March 2021.     The sharp drop in the number of available vacancies in the US helps to increase the probability that the Federal Reserve will be comfortable keeping rates unchanged next month, if as they claim, they are data dependent, and that rates are now close to restrictive territory.   This belief was reflected in a sharp fall in bond yields, as well as a slide in the US dollar, however one should also remember that the number of vacancies is still well above pre-pandemic levels, so while the US labour market is slowing, it still has some way to go before we can expect to see a significant move higher in the unemployment rate. Today's ADP jobs report is likely to reflect this resilience, ahead of Friday's non-farm payrolls report. The ADP report has been the much more resilient report of the two in recent months, adding 324k in July on top of the 455k in June. This resilience is also coming against a backdrop of sticky wages, which in the private sector are over double headline CPI.   Nonetheless the direction of travel when it comes to the labour market does suggest that jobs growth is slowing, with expectations for that jobs growth will slow to 195k in August. We also have the latest iteration of US Q2 GDP which is expected to underline the outperformance of the US economy in the second quarter with a modest improvement to 2.5% from 2.4%, despite a slowdown in personal consumption from 4.2% in Q1 to 1.6%.     More importantly the core PCE price index saw quarterly prices slow from 4.9% in Q1 to 3.8%. The resilience in the Q2 numbers was driven by a rebuilding of inventory levels which declined in Q1. Private domestic investment also rose 5.7%, while an increase in defence spending saw a rise of 2.5%.     Before the release of today's US numbers, we also have some important numbers out of the UK, with respect to consumer credit and mortgage approvals for July, and Germany flash inflation for August. Mortgage approvals in June saw a surprise pickup to 54.7k, which may well have been down to a rush to lock in fixed rates before they went higher. July may well see a modest slowdown to about 51k.   Net consumer credit was also resilient in June, jumping to £1.7bn and a 5 year high, raising concerns that consumers were going further into debt to fund lifestyles more suited to a low interest rate environment. This level of credit is unlikely to be sustained and is expected to slow to £1.4bn.     As long as unemployment remains close to historically low levels this probably won't be too much of a concern, however if it starts to edge higher, or rates stay higher for an extended period of time, we could start to see slowdown in both, as previous interest rate increases start to bite in earnest.     In comments made at the weekend deputy governor of the Bank of England Ben Broadbent said he that interest rates will need to be higher for longer despite recent declines oil and gas prices as well as producer prices. These comments prompted a sharp rise in UK 2 year and 5-year gilt yields yesterday, even as US yields went in the opposite direction. This rise came against a welcome slowdown in the pace of UK shop price inflation which slowed to 6.9% in August.     Headline inflation in Germany is expected to slow to 6.3% from 6.5% in July, however whether that will be enough for Bundesbank head Joachim Nagel to resile from his recent hawkishness is debatable. As we look towards European session, the continued follow through in the US looks set us up for another positive start for markets in Europe later this morning.     EUR/USD – rebounded off trend line support from the March lows at 1.0780 yesterday. Still feels range bound with resistance at the 1.1030 area, and a break below 1.0750 looking for a move towards the May lows at 1.0630.     GBP/USD – has rebounded from the 1.2545 area, but the rally feels a little half-hearted. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.         EUR/GBP – the rebound off last week's 11-month low at 0.8490 has seen a retest and break of the 0.8600 area, however we need to push through resistance at the 0.8620/30 area to signal further gains, towards the 50-day SMA resistance.     USD/JPY – wasn't able to push through resistance at 147.50 and has slipped back. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 28 points higher at 7,493     DAX is expected to open 49 points higher at 15,980     CAC40 is expected to open 21 points higher at 7,394
A Bright Spot Amidst Economic Challenges

Inflation Data Analysis: Will Key Numbers Prompt ECB's September Pause?

Michael Hewson Michael Hewson 31.08.2023 10:25
Key inflation numbers set to tee up ECB for September pause?     By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a bit of a pause yesterday with a mixed finish, although the FTSE100 did manage to eke out a gain, hitting a two-week high as well as matching its best run of daily gains since mid-July. US markets continued to track higher, with the Nasdaq 100 and S&P500 pushing further above their 50-day SMAs, with both closing at a two-week high, for their 4th day of gains.   As we look towards today's European session, the focus today returns to inflation, and more importantly whether there is enough evidence to justify a pause in September from both the ECB as well as the Federal Reserve, as we get key flash inflation numbers from France, Italy, and the EU, as well as the latest core PCE inflation numbers for July from the US.   Over the course of the last few weeks there has been increasing evidence that the eurozone economy has been slowing sharply, with the recent flash PMIs showing sharp contractions in both manufacturing and the services sector. Other business surveys have also pointed to weakening economic activity although prices have also been slowing, taking some of the pressure off the ECB to continue to hike aggressively.   At the last ECB meeting President Lagarde suggested a pause might be appropriate at the September meeting, acknowledging that policy was starting to become restrictive. We've also seen some ECB policymakers acknowledging the risks of overtightening into an economic slowdown, while on the flip side head of the Bundesbank Joachim Nagel has insisted further rate hikes are likely.   Yesterday's Germany and Spain flash CPI numbers for August highlight the ECB's problem, with Spain CPI edging up in August to 2.4% with core CPI slowing modestly to 6.1%. Headline inflation in Germany only slowed modestly to 6.4% from 6.5%.   Today's headline EU flash CPI numbers are therefore expected to be a key test for the ECB, when they meet on 14th September especially if they don't slow as much as markets are pricing. French CPI is expected to accelerate to 5.4% in August while Italy CPI is forecast to slow to 5.6%.   EU headline CPI is forecast to slow to 5.1% from 5.3%, with core prices expected to slow to 5.3% from 5.5%, although given the divergent nature of the various CPI readings of the big four eurozone economies there is a risk of an upside surprise.    The weaker than expected nature of this week's US economic data has been good news for stock markets, as well as bond markets, in so far it has helped to reinforce market expectations that next month's Fed meeting will see US policymakers vote to keep rates on hold.   A slowdown in job vacancies, a downgrade to US Q2 GDP and a weaker than expected ADP jobs report for August appears to show a US economy that is not too hot and not too cold.   Even before this week's economic numbers the odds had already been leaning towards a Fed pause when the central bank meets in September, even if there is a concern that we might still see another rate hike later in the year.   These concerns over another rate hike are mainly down to the stickiness of core inflation which only recently prompted a sharp move higher in longer term rates, causing the US yield curve to steepen off its June lows. The June Core PCE Deflator numbers did see a sharp fall from 4.6% in May to 4.1% in June, while the deflator fell to 3% from 3.8%.   Today's July inflation numbers could prompt further concern about sticky inflation if we get a sizeable tick higher in the monthly, as well as annual headline numbers, reversing some of the decline in bond yields seen so far this week.   When we got the July CPI numbers earlier this month, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. This could translate into a similar move today with a move higher to 3.3% in the deflator, and to 4.2% in the PCE core deflator.     Personal spending is also expected to rise by 0.7% in July, up from 0.5% in June. Weekly jobless claims are expected to remain steady, up slightly to 235k.       EUR/USD – the rebound off the 1.0780 trend line support from the March lows continues to gain traction, pushing up to the 1.0950 area. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year.   GBP/USD – another day of strong gains has seen the pound push back above the 1.2700 area. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.       EUR/GBP – the failure to push through resistance at the 0.8620/30 area yesterday has seen the euro slip back towards the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.   USD/JPY – the 147.50 area remains a key resistance. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 6 points higher at 7,479   DAX is expected to open 30 points higher at 15,922   CAC40 is expected to open 13 points higher at 7,377  
European Markets Face Headwinds Amid Rising Yields and Inflation Concerns

European Markets Face Headwinds Amid Rising Yields and Inflation Concerns

Michael Hewson Michael Hewson 06.09.2023 11:51
05:40BST Wednesday 6th September 2023 Higher yields set to weigh on European open   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets fell for the second successive day yesterday, as weak services PMIs for August, along with concerns over sticky inflation briefly pushed the FTSE100 and DAX to one-month lows. With oil prices jumping to their highest levels since November after OPEC+ extended their production cuts into the end of the year, there is increasing concern that the rise in oil prices that we've seen since June, will put a base under the recent slowdown in prices, and keep inflation at elevated levels for longer.   This fear is being reflected in a sharp rise in bond yields on both UK gilts and US treasuries yesterday, with the US dollar also rising to 6-month highs. The rise in yields and oil prices also serves to complicate the challenge facing central banks in their battle to bear down on inflation and drive it back towards their 2% target rate. The rise in yields also pushed US markets lower on the day and looks set to translate into a lower European open.     Now that the malaise that has affected the manufacturing sector for all this year has spread to the services sector, the US economy appears to be setting itself apart from the rest of the world, with today's services data expected to show a more resilient consumer. Both the August PMI and ISM numbers are expected to show that the sector is in expansion territory at 51.2 and 52.5, respectively. Before that we get the latest German factory orders for July which are expected to see decline of -4.3% while EU retail sales are expected to decline by -0.2%. The latest UK construction PMI for August is also set to slip into contraction territory from 51.7 in July to 49.8.   Yesterday the RBA kept rates unchanged at 4.10% signalling little indication that rates would be going lower in the near future. The central bank was insistent that inflation remains too high, and that it will take until late 2025 for prices to return to the 2-3% target range.     Today, attention shifts towards the Bank of Canada, and the likelihood that they will do the same as the RBA in leaving rates unchanged as well as keeping their options open for the rest of the year. Since the Bank of Canada last raised rates back in June, the headline rate has remained at 5%. At the last set of jobs numbers, the Canadian economy saw a net decline of -6.4k jobs, with most of those jobs lost being part-time in nature.     The unemployment rate edged up to 5.5% and to its highest level since January 2022. With wage growth at 5% and the economy growing at 0.3% in June the increase in rates does appear to be slowly acting as a brake on the Canadian economy with consumer spending slowing to stall speed over the last couple of months.     With the central bank saying that inflation is unlikely to return to target until 2025, no changes are expected today with rates staying at 5%.     EUR/USD – slipped below the August lows at the 1.0760/70 area sliding below trend line from the March lows, the break of 1.0750 area opening a move towards the 1.0630 level. Resistance remains back at the highs last week at 1.0945.     GBP/USD – slipped below the August lows at 1.2545, opening the risk of a move towards the 200-day SMA just above the 1.2400 area. For this to unfold we need to see a move below the 1.2520/30 area. Resistance at last week's highs at 1.2750.         EUR/GBP – continues to drift lower, despite a brief move to the 0.8570/80 area. The bias remains for a move back towards the August lows at 0.8500, while below the 0.8620/30 area.     USD/JPY – remains on course for the 150.00 area, having moved above the 147.50 area yesterday. Only a move below last week's low at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 26 points lower at 7,412     DAX is expected to open 28 points lower at 15,743     CAC40 is expected to open 26 points lower at 7,228
Oil Price Surges Above $91 as Double Bottom Support Holds

Lower Open Expected as European Markets Decline for the Fourth Consecutive Day, China Trade Shows Modest Improvement

Michael Hewson Michael Hewson 08.09.2023 10:22
Lower open expected, China trade sees modest improvement   By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets declined for the 4th day in a row yesterday with both the DAX and FTSE100 falling to one-week lows on concerns over slowing economic activity, against a backdrop of rapidly rising oil prices which could act as a long-term headwind for central banks. The initial catalyst was a truly dreadful German factory orders number for July which saw output plunge by -11.7%, the biggest fall since April 2020. When combined with the recent manufacturing and services PMI numbers, which showed further deterioration.     The weakness in European markets also weighed on US markets, which came under additional pressure for an entirely different reason after the latest ISM services report saw economic activity rise to its highest level since February, while prices paid jumped to their highest levels since April, pushing both the US dollar and yields higher, on expectations that even if the Fed pauses this month, we could still see another rate hike in November. Last night's Beige Book showed the US economy grew at a modest rate through July and August, with consumer spending stronger than expected, while today's weekly jobless claims are set to remain steady at 230k.     Earlier this morning we got another snapshot of the Chinese economy, with the latest trade numbers for August. Over the past few weeks China has taken several measures to help boost the prospects for its economy and has continued to do so on a piecemeal basis. From easing overseas travel restrictions to modest cuts to lending rates, recent PMIs have shown that these have had limited success. In July, the economy slipped into deflation after headline CPI fell from 0.2% in June to -0.3%. PPI, which has been in deflation since the end of last year improved slightly but still declined by -4.4%, with the latest inflation numbers for August due this weekend.     This morning's trade numbers for August did show an improvement on the July figures but given how poor these were it was a low bar. Imports declined by -8.8%, an improvement on the -12.4% decline in July, while exports fell -7.3%, which was a significant improvement on the -14.5% seen in July. While this is encouraging, demand for Chinese goods was still weak from an international, as well as domestic perspective. The pound was the worst performer yesterday after Bank of England governor Andrew Bailey gave every indication that the Bank of England might have concerns over further tightening measures, given worries about transmission lags. With Deputy Governor Ben Broadbent and Chief economist Huw Pill also indicating that they think monetary policy is already restrictive enough, the markets could be being lined up for a pause later this month.     With Asia markets also slipping back, European markets look set to open lower, with German industrial production data for July set to show similar weakness as factory orders yesterday, albeit with a more modest decline of -0.4%.      EUR/USD – this week's slide below the August lows has seen the euro slip lower with the May lows at 1.0635 the next target. Resistance now comes in at the 1.0780 area, and behind that at the 1.0945/50.     GBP/USD – remains under pressure with the 200-day SMA the next target at the 1.2400 area. Only a move back above the 1.2630/40 area, and behind that the highs last week at 1.2750/60.         EUR/GBP – squeezed back to the 50-day SMA having found a short-term base at 0.8520 area. We have resistance at the 0.8570/80 area, as well as the 0.8620/30 area.     USD/JPY – remains on course for the 150.00 area, despite a brief sell-off to 147.00 yesterday. Only a move below last week's low at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 18 points lower at 7,408     DAX is expected to open 45 points lower at 15,696     CAC40 is expected to open 19 points lower at 7,175
European Markets Anticipate Lower Open Amid Rate Hike Concerns

European Markets Anticipate Lower Open Amid Rate Hike Concerns

Michael Hewson Michael Hewson 25.09.2023 11:29
Lower open expected for European markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Last week the FTSE100 pushed up to its best level since late May before finishing the week slightly lower. Unlike its peers in the US and in Europe the FTSE100 is on course to finish the month higher, while the Nasdaq 100, S&P500 and DAX all look set to close out the month lower.     US markets have looked particularly vulnerable after last week's hawkish Fed meeting saw the US central bank revised up its Fed Funds target rate for 2024 to 5.1% from 4.6%, as a more resilient US economy reinforced the higher for longer mantra, which in turn served to push US 2-year yields to their highest levels since 2006 and 10-year yields to their highest levels since 2007.       The Fed also kept the prospect of another rate hike in November very much on the table with Governor Michelle Bowman and Susan Collins of the Boston Fed reinforcing that messaging over the weekend.     German and French yields have also pushed higher in the last 2 weeks in the wake of the ECB's surprise decision to hike rates by 25bps despite increasing evidence that the economy in Europe is struggling significantly. Unsurprisingly this decision weighed on markets in Europe which slid back sharply last week.    We also saw the S&P500 close at its lowest level since 9th June at the end of last week, as well as closing below its 100-day SMA for the first time since March. The Nasdaq 100 also finished the week below its 100-day SMA for the first time since 19th January in a sign that the upward momentum that has been the hallmark of the US markets' resilience may be starting to break down.     The outperformance of the FTSE100, which has struggled to push higher this year, can partly be explained by the fact that the Bank of England is probably done when it comes to raising rates, after last week's finely balanced decision to call a pause to the current rate hiking cycle. This realisation that additional rate hikes could do more harm than good in the face of a squeezed consumer has seen UK gilt yields plunge in the last 2-weeks with the UK 2-year yield slipping to its lowest since mid-June and offering some welcome relief to mortgage holders and the banks and real estate sector in the process.   This weakness in yields has unsurprisingly hurt the pound which looks set to be the worst performing G8 currency this month and on course for its biggest monthly decline since August last year.     The extent of this weakness particularly against the euro seems a little overdone given the weakness in the European economy could force the ECB into a rate cut sooner than perhaps it would like given the dire performance being seen in some of the recent PMI numbers.     The problem facing all the central banks is the rise in the oil price which if it continues unchecked could choke off any semblance of a rebound in economic activity. With Brent crude prices at 10-month highs and core inflation still uncomfortably high the price for keeping a lid on inflation could well see current interest rate levels remain higher for a lot longer. This is especially true in the UK, where while we may have averted the worst of what markets were pricing for UK rates, when the terminal rate was being priced at 6%, we could find that it could be a very long time before rates come down even a little.     Nonetheless stock markets do appear to be pricing in the very real prospect of a prolonged period of low growth, and high inflation, or stagflation and even possibly recession. Recent economic data is already flashing warning signs to this effect with this morning's German IFO data for September set to reinforce this with further weakness towards last years low point of 85.2 expected in the business climate number. Current assessment is set to also weaken further towards August 2020 levels of economic activity. This week's inflation data is expected to underpin the challenges facing central banks with the latest numbers from Australia, as well as core PCE \Deflator from the US as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday, and which could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further.     European markets look set to open lower this morning after the weak finish seen on Friday in the US.      EUR/USD – currently finding some support at the 1.0615 area, with a break below 1.0600 retargeting a return to the March lows at 1.0515. We did see a rebound to the 1.0740 area last week but we need to see a move back above 1.0780 to stabilise and minimise the risk of further losses to the lows this year at 1.0480.   GBP/USD – has slipped below the May lows at 1.2295 and could well sink further towards the 1.2190 area on the way to a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently retesting the 200-day SMA at 0.8720, with a break above this key resistance arguing for a move back to the 0.8800 area. Support at the 0.8670 area.   USD/JPY – continues to squeeze higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.   FTSE100 is expected to open 21 points lower at 7,662   DAX is expected to open 30 points lower at 15,527   CAC40 is expected to open 22 points lower at 7,162 Email
Asia Weakness Sets Tone for Lower European Open on 26th September 2023

Asia Weakness Sets Tone for Lower European Open on 26th September 2023

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.09.2023 14:41
05:40BST Tuesday 26th September 2023 Asia weakness set to see lower European open By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a poor start to the week yesterday as concerns around sticky inflation, and low growth (stagflation), or recession served to push yields higher, pushing the DAX to its lowest levels since late March, pushing both it and the CAC 40 below the important technical level of the 200-day SMA. Recent economic data is already flashing warning signs over possible stagnation, especially in Europe while US data is proving to be more resilient.   Worries over the property sector in China didn't help sentiment yesterday after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt, prompting weakness in basic resources. The increase in yields manifested itself in German and French 10-year yields, both of which rose to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40, while the FTSE100 slipped to a one week low.   US markets initially opened lower in the face of a similar rise in yields with the S&P500 opening at a 3-month low, as US 10-year yields continued to push to fresh 16-year highs above 4.5%. These initial losses didn't last as US stocks closed higher for the first time in 5 days. The US dollar also made new highs for the year, rising to its best level since 30th November last year as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the US economy. The focus this week is on the latest inflation figures from Australia, as well as the core PCE Deflator from the US, as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday. This could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further to a record high.   On the data front today the focus will be on US consumer confidence for September, after the sharp fall from July's 117.00 to August's 106.10. Expectations are for a more modest slowdown to 105.50 on the back of the continued rise in gasoline prices which has taken place since the June lows. The late rebound in US markets doesn't look set to translate into today's European open with Asia markets also sliding back on the same combination of stagflation concerns and reports that Chinese property company Evergrande missed a debt payment.   Another warning from ratings agency Moody's about the impact of another government shutdown on the US economy, and its credit rating, didn't help the overall mood, while Minneapolis Fed President Neel Kashkari said he expects another Fed rate rise before the end of the year helping to further boost the US dollar as well as yields.     EUR/USD – slid below the 1.0600 level yesterday potentially opening the prospect of further losses towards the March lows at 1.0515. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.      GBP/USD – slipped to the 1.2190 area, and has since rebounded, however the bias remains for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently have resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.     USD/JPY – has continued to climb higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.     FTSE100 is expected to open at 7,624     DAX is expected to open at 15,405     CAC40 is expected to open at 7,124  
Equity Markets Weighed Down by Firmer Yields and Stagflation Concerns

Equity Markets Weighed Down by Firmer Yields and Stagflation Concerns

ING Economics ING Economics 27.09.2023 13:03
Firmer yields continue to weigh on equity markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent another negative session yesterday, with the DAX and CAC 40 slipping to their lowest levels in 6-months, as firmer yields and stagflation concerns kept markets on the back foot. We could also be seeing the result of technical effects after both the French and German benchmarks fell below their respective 200-day SMA's earlier this week.     US markets also slipped back with the S&P500 and Nasdaq 100 closing at their lowest levels since early June, after US consumer confidence slowed more than expected in September, and new home sales slipped to a 5-month low.     This weakness looks set to continue this morning with another soft start for European markets, with Asia markets also on the back foot.  Yields on US treasuries have continued to push higher, with a $48bn 2-year treasury auction achieving its highest yield since 2006, while the US dollar index closed at its highest level since November last year.   The rise in the US dollar, along with yields appears to speak to an expectation that sticky inflation will be sustained, keeping rates higher for longer, particularly since oil and gasoline prices appear to be showing little sign of drifting back from their recent highs.    The rise in the US dollar is also causing problems for the Bank of Japan after Japanese finance minister Suzuki said that he viewed recent currency moves on the currency with a high sense of urgency. Suzuki went on to say that appropriate action would be taken against rapid FX moves. Unfortunately for the Japanese government momentum is in the US dollars favour while the Bank of Japan continues to argue the case for further easing.   The very prospect of stickier US inflation will mean that Fed will err more towards higher US rates for longer which means the line of least resistance is for USD/JPY to move through 150 and on to last year's peak at 152.00, unless the BoJ suddenly reverses course.   The Fed isn't being helped by concerns that the trickledown effect of the ironically named inflation reduction act fiscal stimulus is making the Federal Reserve's job much more difficult in pulling inflation back to target in the coming months.         EUR/USD – remains under pressure with the March lows at 1.0515 the next support, along with the lows this year at 1.0480. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.    GBP/USD – slipped below the 1.2190 area, with the bias remaining for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – continues to find resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.   USD/JPY – continues to creep towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.   FTSE100 is expected to open 9 points lower at 7,616   DAX is expected to open 26 points lower at 15,230   CAC40 is expected to open 4 points lower at 7,070
EUR: Persistent Pressure from Back-End Yield Premium

Market Insights: Weekly Jobless Claims Set the Stage for Tomorrow's US Payrolls Report

8 eightcap 8 eightcap 05.10.2023 08:20
Weekly jobless claims set to tee up tomorrow's US payrolls report By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets stabilised somewhat yesterday, although the FTSE100 slid for the third day in succession due to a sharp slide in commodity prices, which weighed on the big caps of basic resources and energy. There was a respite in the big surge we've seen in bond yields, which retreated from intraday and multiyear highs after the September ADP jobs report saw its weakest monthly job gain since January 2021, of 89k. This stabilisation in yields helped temper the downside for US markets, with the S&P500 rebounding from its 200-day SMA, which has acted as a key support area in the past couple of trading days. The retreat in yields also helped US markets rebound and close higher on the day, breaking a 3-day losing streak, with the biggest decline coming with a 10-point fall in the 2-year yield.     This rebound in US markets has translated into a rebound in Asia markets and looks set to translate into a positive start for European markets this morning as we look ahead to the latest German trade import and export data for August, as well as French industrial and manufacturing production data, all of which are forecast to show weak economic performance for both. German exports are forecast to decline by -0.6%, with imports expected to rise by 0.5%, while in France manufacturing output is expected to decline by 0.4%.     The US dollar fell victim to some modest profit taking, slipping back from 10-month highs as yields declined across the board. The US labour market is set to remain in the spotlight today, as well as tomorrow when we get the September non-farm payrolls report, which after yesterday's slowdown in the ADP numbers, could set the seal on another rate hike in November, or keep markets guessing ahead of next week's CPI report.     Before that, later today we get the latest weekly jobless claims numbers which are expected to show that claims increased slightly from 204k to 210k. Continuing claims are forecast to remain steady at 1.67m.       EUR/USD – the next support remains at the 1.0400 level which is 50% pullback of the 0.9535/1.1275 up move, followed by 1.0200. To stabilise we need to move through 1.0620 for a retest of the 1.0740 area.       GBP/USD – strong rebound yesterday from the 1.2030/40 area with support below that at the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145. We need to overcome the 1.2300 area to signal a move back the 1.2430 area and 200-day SMA.        EUR/GBP – still range bound with resistance at the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.     USD/JPY – made a 12-month high of 150.16 earlier this week before plunging to 147.35 on the back of possible intervention from the Bank of Japan. With no confirmation that intervention took place, any further moves higher could be choppy. Below 147.30 signals the top is in.     FTSE100 is expected to open 32 points higher at 7,444     DAX is expected to open 62 points higher at 15,162     CAC40 is expected to open 30 points higher at 7,026  
Rates Spark: Unbroken Momentum in Bear Steepening as Shutdown Aversion Fuels Yields

Yield Pressure Weighs on Markets: European and Asian Markets Slip as US Economy Remains in Focus

Michael Hewson Michael Hewson 05.10.2023 08:28
Yield pressure continues to drag on equity markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets got off to a poor start to the new quarter and the week yesterday, as higher yields and a stronger US dollar helped to keep investors on the back foot. The FTSE100 had a particularly disappointing day, slipping below last week's low to its lowest level since 13th September, with all sectors sinking into negative territory. We've seen similar price action in Asia markets which have also come under pressure with the Nikkei 225 slipping to 4-month lows, while the RBA kept rates unchanged at 4.1%. This weakness looks set to see markets in Europe continue the negative theme of yesterday and open lower.     The weekend agreement by US lawmakers to fund the government until 17th November, while kicking that problem into the long grass, has merely served to refocus investor attention on the resilience of the US economy. The agreement also shifted the odds towards another rate hike from the Federal Reserve in just under a months' time given that economic activity in the manufacturing sector appears to have bottomed out in the short term.     Yields in US treasuries, as well as UK gilts rose sharply on the day helping to act as a drag on equity markets, with the long end of the curve rising much more sharply as markets looked to price in the prospect of at least one more rate hike from both the Federal Reserve and the Bank of England, as well as the prospect that rates are likely to stay at current levels for some time to come. The rise in the US 10-year yield saw it finish at its highest level in 16 years, while the 30-year yield closed at a 13-year high, as fresh comments from various Fed officials made the case for additional rate hikes, with Fed governor Michelle Bowman remaining hawkish in comments made at a banking conference in Banff yesterday. Cleveland Fed President Loretta Mester adopted a similar view at a local business event. US markets also underwent what can only be described as a choppy session with the Nasdaq 100 managing to put in a strong session driven mainly by strong gains in the big cap giants of Nvidia, Alphabet, Microsoft and Meta Platforms, even as over half the index constituents finished the day in negative territory, while the Russell 2000 finished at a 4-month low, suggesting that for all the bullishness around the other major US indices, confidence at the small business level is slightly more fragile.     This divergence could well become even more apparent if yields as well as the US dollar continue their relentless climb, and the inversion continues to unwind in the most painful of fashions, as long term yields rise sharply.    This was a message that Fed chairman Jay Powell received loud and clear from small business leaders at a roundtable in Pennsylvania yesterday, when he was assailed from all sides over the impact that inflation, high interest rates, and labour shortages were having on their businesses, as well as other challenges facing the US economy, as interest rates reset to more normal levels.     Yesterday's ISM manufacturing survey for September appeared to show that these challenges might be abating, with prices paid slowing and hiring picking up, with this week's various jobs data hoping to reinforce this trend. Today's JOLTS report for August is expected to show that vacancy rates remained steady at 8.83m, unchanged from July as the US labour market continued to show its resilience.          EUR/USD – slipped back towards the 1.0480 lows of last week. A move below 1.0480 has the potential to retarget parity. The main resistance remains back at the 1.0740 area, which we need to get above to stabilise and minimise the risk of further weakness.       GBP/USD – slipped below the lows of last week at 1.2110 keeping the risk very much tilted towards the 1.2000 area, while below resistance at the 1.2300 area in the short term. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.         EUR/GBP – bias remains lower while below the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.     USD/JPY – bias remains for a move towards the 150.00 area, with a move above the 150.20 area targeting the potential for a move towards last year's peak at 152.00.   FTSE100 is expected to open 24 points lower at 7,486     DAX is expected to open 120 points lower at 15,127   CAC40 is expected to open 50 points lower at 7,018  
Not much relief, after all: Markets React to Political Uncertainties and Hawkish Fed Rhetoric - 05.10.2023

Not much relief, after all: Markets React to Political Uncertainties and Hawkish Fed Rhetoric

Markus Helsing Markus Helsing 05.10.2023 08:31
Not much relief, after all By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Relief that came with the news of a temporary avoidance of a potential government shutdown remained short lived. Sentiment in stocks markets turned rapidly sour, both in Europe and in the US, while the US treasury yields didn't even react positively to the no shutdown news in the first place. The selloff in the US 10-year bonds accelerated instead; the 10-year yield hit the 4.70% mark, whereas the 2-year yield remained steady-ish at around the 5.10% level, as the Federal Reserve (Fed) Chair Jerome Powell didn't say much regarding the future of the monetary policy yesterday, but his colleagues continued to sound hawkish. Fed's Michelle Bowman said that multiple more interest rate hikes could be needed to tame inflation, while Micheal Barr repeated that the rates are likely restrictive enough, but they should stay higher for longer. Sufficiently hawkish words combined to a set of still-contracting-but-better-than-expected manufacturing PMI data justified the positive pressure on US sovereigns.   The gap between the US 2 and 10-year yields is now closing, but not necessarily for 'good' reasons. Normally, you would've expected the short-term yields to ease more rapidly than the long-term yields when approaching the end of a tightening cycle, with the expectations of future rate cuts kicking in. But what we see today is bear steepening where the 10-year yield accelerates faster than the 2-year yield. The  latter suggests rising inflation expectations where investors prefer to buy short-term papers and to wait for the rate hikes to end before returning to long-term papers. The US political uncertainties and a potential government shutdown before the end of the year, and an eventual US credit downgrade likely add an additional downside pressure in long dated US papers.   The rising yields do no good to stocks. But interestingly, yesterday, the S&P5500 closed flat but the more rate-sensitive Nasdaq stocks were up. The US dollar index extended gains past the 107 level; the index has now recovered half of losses it recorded since a year ago, when the dollar depreciation had started.   The AUDUSD extended losses to the lowest levels since last November as the Reserve Bank of Australia (RBA) maintained its policy rate unchanged at the first meeting under its new Governor Michelle Bullock. This is the 4th consecutive month pause for the RBA. The bank said that there may be more tightening in the horizon to bring inflation back to the 2-3% range (inflation currently stands at 5.2%). But the fact that Australians biggest trading partner, China, is not doing well, the fact that real estate market in Australia is battered by rising rates and the fact that the Chinese property crisis is now taking a toll on Australia's steel exports toward China are factors that could keep Australian growth below target and prevent the RBA from hiking further. If China doesn't get well soon, Australia will see its iron ore revenues, among others, melt in the next few years, and that's negative for the Aussie in the medium run.  Elsewhere, the EURUSD sank below the 1.05 level on the back of accelerated dollar purchases and softening European Central Bank (ECB) expectations following last week's lower-than-expected inflation figures. Cable slipped below a critical Fibonacci support yesterday, and is headed toward the 1.20 psychological mark. The weakening pound is not bad news for the British FTSE100, as around 80% of the FTSE100 companies' revenues come from abroad, and they are dollar denominated. Plus, cheaper sterling makes the energy-rich FTSE100 more affordable for foreign investors. Even though FTSE100 fell with sliding oil prices yesterday - and this year's performance is less than ideal compared to European and American - London's stock market is closing the gap with Paris, and rising oil prices and waning appetite for luxury stuff could well offer London its status of Europe's biggest stock market, yet again.  Speaking of oil prices, crude oil sank below $90pb level yesterday, partly due to the overbought market conditions that resulted from a more than a 40% rally since end of June, and partly because the 'higher for longer rates' expectations increased odds for recession.    
Not much relief, after all: Markets React to Political Uncertainties and Hawkish Fed Rhetoric - 05.10.2023

Not much relief, after all: Markets React to Political Uncertainties and Hawkish Fed Rhetoric - 05.10.2023

Markus Helsing Markus Helsing 05.10.2023 08:31
Not much relief, after all By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Relief that came with the news of a temporary avoidance of a potential government shutdown remained short lived. Sentiment in stocks markets turned rapidly sour, both in Europe and in the US, while the US treasury yields didn't even react positively to the no shutdown news in the first place. The selloff in the US 10-year bonds accelerated instead; the 10-year yield hit the 4.70% mark, whereas the 2-year yield remained steady-ish at around the 5.10% level, as the Federal Reserve (Fed) Chair Jerome Powell didn't say much regarding the future of the monetary policy yesterday, but his colleagues continued to sound hawkish. Fed's Michelle Bowman said that multiple more interest rate hikes could be needed to tame inflation, while Micheal Barr repeated that the rates are likely restrictive enough, but they should stay higher for longer. Sufficiently hawkish words combined to a set of still-contracting-but-better-than-expected manufacturing PMI data justified the positive pressure on US sovereigns.   The gap between the US 2 and 10-year yields is now closing, but not necessarily for 'good' reasons. Normally, you would've expected the short-term yields to ease more rapidly than the long-term yields when approaching the end of a tightening cycle, with the expectations of future rate cuts kicking in. But what we see today is bear steepening where the 10-year yield accelerates faster than the 2-year yield. The  latter suggests rising inflation expectations where investors prefer to buy short-term papers and to wait for the rate hikes to end before returning to long-term papers. The US political uncertainties and a potential government shutdown before the end of the year, and an eventual US credit downgrade likely add an additional downside pressure in long dated US papers.   The rising yields do no good to stocks. But interestingly, yesterday, the S&P5500 closed flat but the more rate-sensitive Nasdaq stocks were up. The US dollar index extended gains past the 107 level; the index has now recovered half of losses it recorded since a year ago, when the dollar depreciation had started.   The AUDUSD extended losses to the lowest levels since last November as the Reserve Bank of Australia (RBA) maintained its policy rate unchanged at the first meeting under its new Governor Michelle Bullock. This is the 4th consecutive month pause for the RBA. The bank said that there may be more tightening in the horizon to bring inflation back to the 2-3% range (inflation currently stands at 5.2%). But the fact that Australians biggest trading partner, China, is not doing well, the fact that real estate market in Australia is battered by rising rates and the fact that the Chinese property crisis is now taking a toll on Australia's steel exports toward China are factors that could keep Australian growth below target and prevent the RBA from hiking further. If China doesn't get well soon, Australia will see its iron ore revenues, among others, melt in the next few years, and that's negative for the Aussie in the medium run.  Elsewhere, the EURUSD sank below the 1.05 level on the back of accelerated dollar purchases and softening European Central Bank (ECB) expectations following last week's lower-than-expected inflation figures. Cable slipped below a critical Fibonacci support yesterday, and is headed toward the 1.20 psychological mark. The weakening pound is not bad news for the British FTSE100, as around 80% of the FTSE100 companies' revenues come from abroad, and they are dollar denominated. Plus, cheaper sterling makes the energy-rich FTSE100 more affordable for foreign investors. Even though FTSE100 fell with sliding oil prices yesterday - and this year's performance is less than ideal compared to European and American - London's stock market is closing the gap with Paris, and rising oil prices and waning appetite for luxury stuff could well offer London its status of Europe's biggest stock market, yet again.  Speaking of oil prices, crude oil sank below $90pb level yesterday, partly due to the overbought market conditions that resulted from a more than a 40% rally since end of June, and partly because the 'higher for longer rates' expectations increased odds for recession.    
How Forex Traders Use ISM Data

Tensions in the Middle East to Impact European Market Open; US Markets Finish Higher Despite Global Concerns"

ING Economics ING Economics 09.10.2023 16:13
Middle East tensions set to see lower European open US markets finished the week higher after the latest September jobs report showed the US economy added a staggering 336k jobs in September, while August was revised up to 227k, pushing long-term yields sharply higher, and the US-10 year and 30-year yield hitting fresh 16-year highs.   Having spent most of the last few weeks fretting about the prospect of another rate hike and higher rates for longer the thinking now appears to be that a resilient economy and jobs market could mean that companies will be able to deliver better revenues and earnings growth, even with yields at current levels. While that logic comes across as sound on the face of it that rather precludes the idea that rates can't go higher from here. Before the horrific events in Israel over the weekend, the market was pricing in the probable prospect that we may get another 25bps rate hike in November, however what happens if the decline in oil prices that we saw at the end of last week takes another sustained leg higher, if those events morph into a wider crisis across the Middle East?     Consumers may well be resilient now and able to absorb a few more months of rising prices, but the recent pay settlements agreed in recent weeks have yet to feed through into the wage numbers which might mean the US central bank has to raise rates by more than is currently priced.   In a sign that the US consumer is already reaching its limits when it comes to spending on credit cards, US consumer credit for August declined by -$15.6bn, the most in 3 years, against an expectation of an increase of $11.7bn. Some of that decline may be down to the resumption student loan repayments, while auto-loan payments also fell.     That said the events over the weekend and the Hamas atrocities in Israel, and the latter's reaction to them and subsequent declaration of war, have prompted a move into the US dollar, gold as well as a modest bid into bonds, as concerns over escalation risks move to front of mind. With the US Columbus Day holiday likely to keep US trading activity subdued, we expect to see European markets open modestly lower this morning, while oil prices have rebounded from the lows of last week.    For now, the market reaction has been fairly contained as we look towards this week's release of the latest Fed minutes as well as the September CPI report, but attention will never be far from events in Israel given the risk we could escalate further if Iran gets drawn into the fray, which is entirely possible if Israel decides that it bears responsibility for the attack.     EUR/USD – continues to pull away from the lows of last week, with support at the 1.0400 level which is 50% pullback of the 0.9535/1.1275 up move, followed by 1.0200. To stabilise we need to move through 1.0620 for a retest of the 1.0740 area.    GBP/USD – the rebound off the lows last week at the 1.2030/40 area, needs to overcome the 1.2300 area to signal a move back to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.       EUR/GBP – still range trading with resistance at the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.   USD/JPY – has managed to hold above the spike lows of last week. With no official confirmation that intervention took place, any further moves back to the 150.16 highs could be choppy. Below 147.30 signals the top is in and a possible move towards 145.00.   FTSE100 is expected to open unchanged at 7,494   DAX is expected to open 71 points lower at 15,158   CAC40 is expected to open 24 points lower at 7,036  
Renewable Realities: 2023 Sees a Sharp Slide as Costs Surge

US Payrolls: Key Test in a Strong Week for Stock Markets

Michael Hewson Michael Hewson 03.11.2023 14:08
US payrolls the key test in a strong week for stock markets  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw their best one-day session in 3 weeks, with the DAX closing at a two-week high, helped by a combination of some solid earnings reports, and tumbling yields on growing optimism that central banks have hit peak rates, after the Bank of England followed the Fed in holding rates at current levels. US markets saw a similarly strong session, rising for the 4th day in a row, with the S&P500 rising to a 2-week high, while US 10- and 30-year yields falling more than 25bps in the last 2 days, reinforcing the idea that the rate hike narrative of the last 18 months is now in the rear-view mirror.     Of course, this narrative will still need to be supported by the underlying economic data, and in the case of the US is likely to be subject to two-way risks given the continued resilience of the US labour market.   Today's non-farm payrolls report for October will be the first key test of that narrative in the aftermath of Wednesday's decision by the Federal Reserve to pause for the second meeting in succession, with the goldilocks scenario for markets likely to be one of a softish or neutral report.   Having seen such a strong US close, European markets look set to open higher as we look towards this afternoon's US jobs report.     Before that we get the latest PMI snapshot from the services sector for the UK economy ahead of Q3 GDP numbers which are due next week. Recent data has shown the UK economy is slowing significantly compared to the first half and with manufacturing already in contraction, the services sector is now starting to slow as well, slipping slightly into contraction over the last 3-months we can expect to see further stagnation around 49.2.   After the release of those numbers' attention will shift to the US employment report.   Weekly jobless claims fell back below 200k earlier this month for the first time since January in a sign that the US economy remains reasonably resilient, and although they've ticked up to 217k since then there has been little sign of a slowdown.   In September we saw yet another bumper payroll report with another 336k jobs added, while August was revised up to 227k, which pushed US long term yields higher on the day to new 16-year highs, although we've since slipped back sharply, due to a belief that the Federal Reserve is probably done on the rate hike front.   Wage growth was slightly softer than expected at 4.2%. Another notable factoid was a big jump in part-time positions which rose 151k and could also explain why wage growth showed little sign of racing higher. The unemployment rate remained steady at 3.8%.   This weeks ADP payrolls report for October was another weak one, coming in at 113k, only a modest improvement from the 89k in September, however there has been little to any correlation between the two reports for months now, while vacancies in the US economy have remained high, which suggests little sign that the US economy is starting slow significantly.   One thing that has been notable this year is how every single non-farm payroll report has come in above expectations, and by quite some distance. Will today's numbers be any different?  to note is There is scope for that given that the participation rate has been rising, it was at 62.4% at the start of the year and is now at 62.8%, still 0.5% below the level it was pre-pandemic.   Expectations are for today's October payrolls to come in at 185k, which has been the estimate of choice over the last 3 months.   Most of the new jobs being added have been in services over the last few months and today's ISM services data could well offer further insights into that after the payroll's numbers have been released.   ISM services employment was at 53.4 in September and is expected to rise to 53.5, while prices paid is expected to slow to 56.6 from 58.9. This is where the US labour market is most resilient, and will need to remain so in the lead-up to Christmas.   Amazon has already indicated it will be hiring up to 250 seasonal workers in the lead up to the holiday period. Will it be alone in hiring extra people, when retailers like Target are warning that US shoppers are slowing their spending plans?             EUR/USD – pushed up to the top end of its recent range, and the 1.0675 highs of this week. We continue to be range bound between the 1.0700 area and the 50-day SMA. Below 1.0520 targets the 1.0450 level   GBP/USD – pushed above the 1.2200 area yesterday, but has thus far failed to consolidate that move. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – finding support at the 0.8680 area for now, with a break targeting the 0.8620 area. We have resistance at the recent highs at 0.8740.   USD/JPY – slipped back to the 149.80 area yesterday, we still have resistance just below the highs of last year at 151.95. Still have strong support all the way back at 148.75, with a break above 152.20 targeting a move to 155.00.   FTSE100 is expected to open 33 points higher at 7,479   DAX is expected to open 79 points higher at 15,222   CAC40 is expected to open 36 points higher at 7,096  
FX Daily: Dollar's Fate Hangs on Data as Rates Decline Further

EUR/USD Nears 1.0660 as ECB's Lagarde Takes the Stage

ING Economics ING Economics 10.11.2023 10:05
EUR: Lagarde to speak today The dollar’s bounce sent EUR/USD back close to the 1.0660 mark, and we cannot exclude a bit more pressure as the impact of yesterday’s US bond sell-off might be felt across European markets today. The EUR-USD 2-year swap rate differential has rewidened after yesterday’s events and is now close to the 136bp pre-FOMC low. Today's focus will be on a speech by European Central Bank (ECB) President Christine Lagarde in London. A slow shift from trying to convince markets another hike is a possibility (like in the US, investors remain hard to persuade) to pushing back more directly against rate expectations may start to appear more clearly in ECB members’ remarks. The EUR OIS curve prices in a first cut between April and June. The impact on the EUR from ECB speakers has been, however, quite modest and we doubt that would change in a very short time. Elsewhere in Europe, the UK released third-quarter growth data this morning. GDP was a tad better than expected for the third quarter as a whole, coming in flat, but this was entirely due to a fall in imports. In reality, the domestic elements of GDP were negative, and strike activity earlier in the summer is a key factor. In the bigger picture, the UK economy hasn't really grown this year in level terms. Our base case is stagnation/modest growth, but a recession can't be ruled out. Ultimately, the BoE won't be paying these figures too much attention, with the focus instead on next week's services inflation and wage growth figures.
AI Fitness App Zing Coach Raises $10 Million in Series A Funding to Combat Inactivity and Build Healthy Habits

Prolonged Softness in Services PMIs Amid Unchanged RBA Rates: Insights by Michael Hewson

Michael Hewson Michael Hewson 06.12.2023 12:08
Services PMIs expected to remain soft, as RBA leaves rates unchanged By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a rather lacklustre start to the week, weighed down by a rebound in the US dollar as well as weakness in basic resources and energy prices, as investors took a pause after the gains of the past couple of weeks.  US markets fared little better, sliding back in the face of a modest rebound in yields as investors hit the pause button ahead of this week's jobs data, which is due at the end of the week, with markets in Europe set to open slightly weaker this morning.   Earlier this morning the RBA left rates on hold at 4.35% after last month's decision to raise rates by another 25bps. Despite last month's surprise decision to raise rates today's decision acknowledged that inflation was now starting to moderate in goods even as concerns remained about services inflation. Nonetheless, despite this acknowledgement that inflation appears to be slowing there was little indication that the central bank was considering another rate move in the near term. Last month's decision to raise rates was driven by concern about domestic price pressures and while today's decision to hold was a relief there was little sign that a policy change in either direction was being considered with Governor Bullock acknowledging significant uncertainties around the outlook.   Nonetheless today's decision to hold came against a backdrop of a month which has seen 2-year yields decline almost 40bps from their 4.52% peaks on the 1st November, as markets surmised the central bank is now done, with the Australian dollar falling sharply.   The recovery in US yields yesterday appeared to be because of the possibility that the declines seen over the past few days may have been a little too much too quickly, given Powell's comments on Friday last week when he pushed back on the idea that rate cuts were on the cards for the first half of 2024.   There is certainly an element of the market getting ahead of itself when you look at a US economy that grew at 5.1% in Q3 and still has an unemployment rate of 3.9%. The same sadly cannot be said for Europe where the French and German economies could well already be in recession.   While recent manufacturing PMI data in Europe suggests that economic activity might be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation. This in turn is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4.   The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have declined after Italy fell sharply in October to 47.7, while Spain was steady at 51.1, although both are expected to show slight improvements in today's November numbers with a rise to 48.3 and 51.6 respectively.   The UK economy also appears to be showing slightly more resilience where there was saw a recovery into expansion territory in the recent flash numbers to 50.5, while earlier this morning the latest British Retail Consortium retail sales numbers for November, which showed that consumers remained cautious despite the increasing number of Black Friday deals ahead of the Christmas period as retailers looked to tempt shoppers into opening their wallets. Like for like sales in November rose 2.6%, the same as the previous month, with sales of high value goods remaining soft, with consumers preferring to go with lower ticket and essential items spend of food and drink, health and personal care.      In the US we also have the latest October JOLTS job opening numbers which are expected to show vacancies slow from 9.5m to 9.3m, while the latest ISM services survey forecast to show a resilient economy.   The headline is expected to show an improvement to 52.3, with prices paid at 58 and employment improving to 51.4 from 50.2 due to additional holiday period hiring. Gold prices are also in focus after yesterday's new record high saw a sharp reversal with prices closing lower in what looks like a bull trap and could see prices pause for a period of time and retest the $2,000 an ounce in the absence of a rebound.     EUR/USD – continues to look soft dropping below the 200-day SMA at 1.0825, with a break of the 1.0800 having the potential to retest the 1.0670 area. Resistance now at the 1.0940 area, and behind that at last week's highs at 1.1015/20.   GBP/USD – the failure to move above the 1.2720/30 area has seen the pound slip back with support at the 1.2590 area currently holding. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – found support at the 0.8555 area for the moment, but while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – found some support at the 146.20 area in the short term, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 15 points lower at 7,498   DAX is expected to open 9 points higher at 16,413   CAC40 is expected to open 3 points lower at 7,329
All Eyes on US Inflation: Impact on Rate Expectations and Market Sentiment

DAX Eyes New Record High as US ADP Report Takes Center Stage

Michael Hewson Michael Hewson 12.12.2023 12:39
DAX set to open at a new record high, US ADP report in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets saw another positive session yesterday with a new record high for the German DAX, while the FTSE100 fulfilled its role as the perennial party pooper with another disappointing session and closing lower for the second day in succession. This was mainly due to weakness in metals and energy prices with Brent crude prices closing at a 5-month low. US markets also struggled for gains with the Nasdaq 100 closing higher due to a strong performance from the Magnificent 7 led by Apple, and Nvidia, while the Russell 2000 finished the day over 1% lower, with the S&P500 and Dow closing little changed.     The indifferent finish seen in the US has been shrugged off by Asia markets with a strong session there after the Bank of Japan's latest Tankan survey showed a big improvement in manufacturers sentiment with the auto sector with the second successive month of gains as chip shortages eased.   This rebound in Asia markets looks set to filter through into this morning's European open with the DAX set to open at a new record high.   Yesterday's economic data from Europe pointed to a modest improvement in services sector economic activity, while the latest US ISM service sector numbers were a mixed bag, with the headline number coming in ahead of forecasts at 52.7. Prices paid did slow but by less than expected, coming in at 58.3 pointing to stickier than expected inflation, while the employment index edged higher to 50.7.   Today we get a look at the latest ADP payrolls report for November as an appetiser for Friday's non-farm payrolls report. We are starting see increasing evidence that the US jobs market is starting to slow, with vacancies falling to their lowest level since March 2021 and with the last two ADP reports adding a combined 202k new jobs as private sector hiring slows.   October saw 113k jobs added an improvement on September and November is expected to see an improvement on that to 130k, given that a lot of additional hiring takes place in the weeks leading up to Thanksgiving and the Christmas period so we're unlikely to see any evidence of cracking in the US labour market this side of 2024.   We also have the latest rate decision from the Bank of Canada where we aren't expecting any changes to monetary policy here with the central bank forecast to keep rates unchanged at 5%.   The last 3-months have seen no growth in the economy at all while the October jobs report saw a rise of 17.5k jobs, all of these were part time positions. On full time employment we saw the first decline in jobs growth since May with a decline of -3.3k, while unemployment rose from 5.5% to 5.7% and the highest level since January 2021. We're also starting to see inflationary pressure continue to subside with core CPI on the median slipping from 3.9% to 3.6% in October.    EUR/USD – has fallen below the 200-day SMA at 1.0825, with a fall below the 1.0800 level raising the prospect of a move towards the 50-day SMA just below the 1.0700 area. Resistance now at the 1.0940 area, and behind that at last week's highs at 1.1015/20.   GBP/USD – the failure to move above the 1.2720/30 has seen the pound slip back towards support at 1.2580/90 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – has found support at the 0.8555 area and is currently looking to recover through the 0.8600 area. While below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – currently trying to rally off the recent lows at the 146.20 area, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 25 points higher at 7,514   DAX is expected to open 56 points higher at 16,589   CAC40 is expected to open 20 points higher at 7,407
Worsening Crisis: Dutch Medicine Shortage Soars by 51% in 2023

China Trade Disappoints as Moody's Downgrade Weighs on Asia Markets: European and US Markets Show Resilience Amidst Global Economic Concerns

ING Economics ING Economics 12.12.2023 13:05
China trade disappoints, as Moody's downgrade weighs on Asia markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw another positive day yesterday, with the DAX posting another record high, while the FTSE100 broke 2 days of declines to close higher as well.   The outperformance on European markets appears to be being driven by the increasing belief that the European Central Bank may well be forced into cutting rates sharply in the early part of 2024 in response to sharply slowing inflation and a sclerotic economy.   The last few days has seen a sharp decline in bond yields reflecting an increasing belief on the part of investors that rather than higher for longer, central banks will start cutting rates as soon as Q2 next year. The shift in tone has been most notable from several ECB policymakers who have indicated that rate hikes are done.   US markets also appear to have started to run out of steam after their big November rally, as traders take stock of how resilient the US economy is.   Asia markets on the other hand have struggled with the latest set of Chinese trade numbers pointing to an economy that is still struggling, and a downgrade by Moody's on China's credit outlook, along with downgrades to banks, and other small companies which looks set to weigh in the European open this morning, in the wake of weakness in Asia markets.   In October Chinese import data broke a run of 10 consecutive negative months by rising 3% in a sign that perhaps domestic demand is returning, beating forecasts of a 5% decline.   Slightly more worrying was a bigger than expected decline in exports which fell -6.4%, the 6th month in a row they've been lower, and a worrying portend that global demand remains weak, and unlikely to pick up soon. Today's November numbers have seen imports decline by -0.6%, against an expectation of a rise to 3.9% in a sign that domestic demand is still very weak, while exports improved, rising by 0.5% a solid pick up from the -6.4% decline in October.   Yesterday's US ADP payrolls report saw jobs growth in November slow to 103k, in a further sign that the labour market is slowing, with the last 3 months showing significant evidence that hiring is slowing. This trend was also reflected in this week's fall in October job openings to 8.7m the lowest level since March 2021.   For the time being weekly jobless claims have shown little signs of increasing, trending in the low 210k for the last couple of months.   Continuing claims on the other hand have been edging higher rising to a 2-year high last week 1.93m. Today's claims numbers are expected to come in at 220k, with continuing claims set to also remain steady, ahead of tomorrow's eagerly anticipated non-farm payrolls report.   EUR/USD – continues to slip lower raising the prospect of a move towards the 50-day SMA just below the 1.0700 area. Resistance now at the 1.0825 and 200-day SMA, while above that at the 1.0940 area.   GBP/USD – remains under pressure as it continues to slip away from the 1.2720/30 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – currently trying to rally off the recent lows at the 146.20 area, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 29 points lower at 7,486   DAX is expected to open 52 points lower at 16,604   CAC40 is expected to open 24 points lower at 7,412
European Markets Rebound Amid Global Uncertainty, US PPI Miss, and Rate Cut Speculation

European Markets Rebound Amid Global Uncertainty, US PPI Miss, and Rate Cut Speculation

ING Economics ING Economics 16.01.2024 12:12
European markets finished a choppy week with a modest rebound, with the FTSE100 breaking a 3-day losing streak, although it still fell for the second week in succession having sunk to a 3-week low midweek. US markets also had a more positive week with the S&P500 briefly pushing above the 4,800 level for the first time in 2 years.    The catalyst for Friday's push higher was a downside miss in US PPI for December which pulled forward speculation yet again about central bank rate cuts, which helped pull the US 2-year yield to its lowest level since May last year.   We also saw similar sharp declines in UK and German 2-year yields as well, although the market enthusiasm and pricing for rate cuts isn't anywhere near as aggressive as it is for the prospect of a cut in US rates. This comes across as a little bizarre given that of all the major economies now the US appears to be in much better shape, and therefore in less need of the stimulus of a rate cut. Last week's PPI numbers served to overshadow a hotter than expected CPI figure which saw headline inflation in the US push up from 3.1% to 3.4%, the second time we've seen US inflation rebound from the 3% level since June last year.     This uncertainty suggests that markets could be jumping the gun when it comes to the likelihood of March rate cuts, and it is the 2-year yield where this is being priced most aggressively. With earnings season now under way in the US with the first set of Q4 bank results garnering a rather mixed market reaction, although there was nothing significant in the numbers to suggest that the US consumer was feeling the pressure from current interest rate levels. Today the US is off for Martin Luther King Day which means markets in Europe could well be more subdued than normal, and so far this year there hasn't been that much to get particularly excited about anyway. The markets already know that the Federal Reserve is done when it comes to further rate increases, and currently have six 25bps rate cuts priced in for this year. That seems rather a lot and is more than the three the Fed have in their dot plot projections.     Nonetheless while markets in Europe and the US have got off to an uncertain start, one index that hasn't is the Nikkei 225 which has raced out of the blocks, pushing up to its highest levels in 34 years and up over 5% year to date already, and in so doing has got people speculating whether we can see a return to those 1989 peaks of 38,957. This week the focus is set to be very much on the UK economy in the wake of Friday's better than expected November GDP numbers, which raised the prospect that the economy may have avoided a technical recession at the end of last year, as a rebound in services activity saw the economy expand by 0.3%. This week we get data for wages and unemployment for November, as well as December CPI and retail sales, all of which have the potential to shift the dial on the timing of a first rate cut from the Bank of England. With inflation still almost double the Bank of England's 2% target and wage growth still upwards of 7% the idea that the central bank would look at cutting rates much before the summer seems unlikely. That said many are suggesting that inflation could be back at 2% by April, however even if that were the case we won't find out until the middle of May when the numbers are released. Against this sort of backdrop, it would be unlikely if he Bank of England were to act on rates until it sees the whites of the eyes of a lower inflation rate, especially since at the last meeting we still had 3 members of the MPC voting for a hike. It's unlikely they will vote the same way in February but nonetheless they are unlikely to go from hiking to cutting with only one meeting in between unless the wheels come off in spectacular fashion.     EUR/USD – currently looking to move higher but needs to move above the 1.1000 area to signal further gains. Short term support still at 1.0875 and the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the December peaks at 1.1140. GBP/USD – currently finding resistance at the 1.2800 area last week, slipping back to 1.2690 but remains in the wider uptrend with support just above the 1.2600 area. We need to get above 1.2800 to target the 1.3000 area. EUR/GBP – ran out of steam at the 0.8620 area last week, although we also have resistance at the 0.8670 area. Still have support just above the 0.8570/80 area, with the main support at the December lows at 0.8545. USD/JPY – ran into resistance at the 50-day SMA at 146.40 last week. Support currently at the 200-day SMA now at 143.80. We need to push above last week's high above 146.40 to keep 148.00 in sight or risk a return to 140.00. FTSE100 is expected to open 11 points higher at 7,636 DAX is expected to open 65 points higher at 16,769 CAC40 is expected to open 19 points higher at 7,484
Bank of Japan Holds Steady, UK Public Finances in Focus: Market Analysis

Bank of Japan Holds Steady, UK Public Finances in Focus: Market Analysis

Michael Hewson Michael Hewson 25.01.2024 12:31
Bank of Japan stays on hold, UK public finances in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw a cautious but broadly positive start to the week, despite weakness in basic resources which served to weigh on the FTSE100. US markets picked up where they left off on Friday with new record highs for the Dow, S&P500 and Nasdaq 100 although we did see a loss of momentum heading into the close, as US yields rebounded off their lows of the day.   The tentative nature of yesterday's gains appears to be being driven by a degree of caution ahead of some key risk events over the next couple of weeks, starting today with the latest Bank of Japan policy decision. This is set to be followed by the European Central Bank on Thursday, and then the Fed and Bank of England next week.   For most of this month central banks have been keen to reset the policy narrative when it comes to the timing of rate cuts which had markets pricing in the prospect of an early move. While US markets have managed to shrug off the prospect of a delay to possible rate cuts, markets in Europe have struggled with the concept probably due to the weakness of the underlying economy relative to how the US economy has been performing. There is a sense that the ECB is over prioritising the battle against inflation which is coming down rapidly and not seeing the damage that is being done to the wider economy by keeping rates higher than they need to be.   Today's Bank of Japan decision didn't offer up any surprises with the central bank keeping monetary policy unchanged against a backdrop that has seen market expectations of rate cuts from other central banks increase markedly since the last Fed meeting. This shift in expectations has helped to ease some of the pressure on the BoJ to look at tightening policy itself to slow the decline of its own currency. The bank also cut its inflation forecast for this year from 2.8% to 2.4%, while nudging its 2025 forecast slightly higher to 1.8%.   Asia markets have seen a more upbeat session on reports that Chinese authorities are looking at a package of stimulus measures to help stabilise the stock market, which could come as soon as next week. Despite this more positive tone European markets look set to open only modestly firmer, with the only economic data of note due today being the latest public finance data from the UK for December.  As far as UK government borrowing is concerned rising interest costs at the beginning of Q4 served to exert upward pressure on the headline numbers, pushing borrowing up to £16bn in October, the second highest October number since 1993. Since those October peaks, gilt yields have declined sharply, along with headline inflation, helping to ease borrowing costs in the mortgage market. This weakness has also come as a welcome relief to the Chancellor of the Exchequer, after UK 10-year yields fell to a low of 3.44%, down from a peak of 4.73% in October. These lower interest costs are likely to see December borrowing slow to £14.1bn, while January could see a surplus as end of year tax payments boost the numbers.     EUR/USD – currently has support at the 200-day SMA at 1.0840. A break below here and the 1.0800 level targets the 1.0720 area. Currently capped at the 50-day SMA with main resistance up at 1.1000.  GBP/USD – remains resilient with support just above the 50-day SMA and 1.2590 area. We need to get above 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550. EUR/GBP – continues to find support at the 0.8540/50 level which has held over the last 2-months. A fall through here could see further falls towards the 0.8520 area. We still have resistance at the 0.8620/25 area and the highs last week. USD/JPY – has retreated modestly from the 148.50 area but remains on course for the 150.00 level. Pullbacks likely to find support at the 146.25 level cloud support as well as the 50-day SMA. FTSE100 is expected to open 15 points higher at 7,502 DAX is expected to open unchanged at 16,683 CAC40 is expected to open 7 points higher at 7,420

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