Yesterday saw a modest stabilisation in European markets after 3-days of losses, although the performance of the FTSE100 left a lot to be desired, lagging the rest of Europe with modest weakness in utilities and consumer staples acting as a drag on the UK blue-chip index.
US markets on the other hand were much more resilient across the board, led by the Nasdaq 100 and strong gains in semiconductors even as US yields continued to edge higher.
The resilience of the US economy once again came to the fore as US weekly jobless claims, fell to their lowest levels since September 2022, and building permits and housing starts came in better than expected for December, helping to keep the US dollar near to 5-week highs.
All in all, it’s still been a difficult week for markets in Europe, despite yesterday’s rebound with the focus today returning to the UK economy, after the negative reaction to this week’s December inflation numbers which prompted UK gilt yields to surge to one-month highs, as traders pushed out the likelihood of an early rate cut from the Bank of England into Q3.
Today’s retail sales numbers for December could take some of the edge of this week’s surge in yields, although judging by some of the retail updates we’ve seen so far this year, the UK consumer was able to spend in the lead-up to Christmas, albeit in a discerning manner.
Nonetheless we are unlikely to see the sort of performance we saw in November when various Black Friday deals, helped to bring forward some pre-Christmas spending to generate a gain of 1.3%, after October saw a flat month of 0%.
Expectations are for December to see a decline of -0.5%, with clothing and general merchandise likely to be a weak spot, with food and drink sales likely to take some of the edge off, although the wet weather could well have kept a lot of people at home.
Today’s retail sales numbers ought to offer a good indication as to whether the UK economy managed to avoid a Q4 recession and a second successive quarterly contraction, after the -0.1% decline in Q3.
We’ve also heard from various ECB policymakers this week, pushing back on the likelihood of early rate cuts from the European Central Bank when they meet just under a week from now, dismissing concerns about disinflation.
This lack of concern is likely to ring rather hollow when looked through the lens of PPI inflation in Germany which has been in deflation for most of last year. December PPI is expected to see a -0.4% decline month on month and -8% year on year.
The ECB like the Bank of England is suffering from the same problem worrying more about services inflation, which is still elevated, unlike goods inflation where there isn’t any.
With all central bank rate cut bets being pushed out into the summer months, today’s University of Michigan inflation expectations could show whether consumers are becoming less concerned about rising prices. In the month of December 1 year inflation expectations fell from 4.5% to 3.1% and are expected to remain at 3.1% in today’s January numbers. A number below 3% could see some of the edge taken off this week’s sharp rise in yields, where we’ve seen the US 2-year yield rebound over 20bps, with most of that gain happening on Wednesday.
Last night’s solid US session along with a rebound in oil prices looks set to translate into a positive open for European markets, although any gains today are unlikely to reverse what looks set to be another weekly decline for European markets.
EUR/USD – found support at the 200-day SMA at 1.0840 over the last couple of days. A break below here and the 1.0800 level targets the 1.0720 area. The main resistance remains at 1.1000.
GBP/USD – currently holding above the 1.2590/1.2600 area and 50-day SMA which is keeping the upside potential intact. We need to get above the highs last week at 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550.
EUR/GBP – continues to drift lower drifting towards the main support at the December lows at 0.8545. 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 – finding a bit of a barrier at the 148.50 level with further gains towards 150.00 a real possibility. Pullbacks likely to find support at the 146.75 level cloud support as well as the 50-day SMA and the highs last week at 146.40.
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