European markets lost ground for the third day in a row yesterday, with the DAX languishing near six-month lows, while the FTSE 100 struggled, slipping to its lowest level in almost two weeks.
US markets fared little better with the S&P 500 and Nasdaq 100 slipping to three-month lows, before rebounding to close slightly higher on the day, while Asia markets have also continued to struggle on concerns over China’s property sector.
The wider concern however is how quickly inflationary pressures can recede at a time when oil prices continue to push higher, with Brent crude oil prices moving ever closer to $100 a barrel, and what effect this 30% move off the summer lows will have on the global economy, consumer consumption patterns and more importantly company profit margins.
Today’s European open looks set to see a modest rebound, largely due to position adjustment as we head towards the end of the week, month, and quarter tomorrow. The main focus today is on the latest German and Spain inflation numbers for September, which could see a sharp slowdown in the annual rate.
Earlier this month the European Central Bank took the surprise decision to go ahead with another 25bps rate rise in the face of overwhelming evidence that the economy across Europe is slowing sharply, even as inflation has been shown to slowing sharply in recent months. Despite concerns that the ECB has once again set itself up for another policy mistake, the hawks on the governing council carried the day, even as the ECB president Christine Lagarde made the case that it would probably be the last in the current cycle. Only time will tell how much of a policy mistake this turns out to be, but today’s German flash CPI for September could well reinforce this feeling that perhaps the ECB could have exercised a little more patience.
Expectations are for headline CPI in Germany to slow from 6.4% to 4.5%, which in turn is likely to translate into a similarly sharp slowdown in tomorrow’s EU flash CPI numbers, at a time when both manufacturing and services PMIs are both deep in contraction territory.
We also have the final numbers for US Q2 GDP, as well as the latest weekly jobless claims numbers, which are expected to increase to 215,000 from 201,000. After a slowdown to 2% at the start of the year, the US economy looked set to see a strong improvement in Q2 after the initial iteration of Q2 GDP came in at 2.4%, despite a slowdown in personal consumption to 1.6%. The second revision to Q2 GDP threw a bit of a curveball to that after a surprise downgrade to 2.1%, when expectations had been for an upgrade to 2.5%. Today’s final adjustment is expected to see this upgraded to 2.2%, with the downward revision coming about due to a fall in inventory levels, which declined by $1.8bn instead of an increase, while business spending was also reduced on equipment and IP products.
Core prices also slowed for the quarter, coming down to 3.7% in a welcome move that helped make the argument for a pause in the rate-hiking cycle when the US Federal Reserve met earlier this month.
EUR/USD – found support just above the lows of this year at the 1.0480 area. A move below 1.0480 retargets 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 – bias remains for a retest of the 1.2000 area, with 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 – failed to overcome the 0.8700 area yesterday 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 pullback. Support now at the 0.8620 area.
USD/JPY – still on course for the 150.00 area with support currently at the lows last week at 147.20/30. A break above 150.00 retargets last year’s higher at 152.00. Major support currently at the 146.00 area.
