Over the last couple of weeks European markets have struggled to move meaningfully in either direction, contained by a stabilisation in commodity prices, slightly less concern about the Chinese economy, and commitments to slightly looser policy from the Bank of Japan, European Central Bank and the Peoples Bank of China.
Despite all of these factors, which has seen stocks trade near multi week highs investors appear reluctant to take that extra step of optimism, and start buying again with conviction, as the recent rebound in commodity markets has started to run out of steam. This has meant that European stock markets have stayed stuck, albeit in a fairly wide range, with a slightly higher open expected today as investors return from their Easter break.
Last week we heard a lot of hawkish rhetoric from a succession of Federal Reserve policymakers, about the potential for a move on rates in April, with most citing the strength of the US economy, and potential concerns about rising inflation, concerns that don’t appear to be shared by bond markets, or investors in general. What was all the more puzzling was that last week’s chatter was completely at odds with the recent dovish narrative of the most recent March FOMC meeting.
While on the employment front, prospects continue to look fairly positive and recent manufacturing data do appear to suggest that the worst could well be behind the US economy, spending patterns continue to look weak, while there remains scant evidence of the inflationary pressure that these hawkish Fed policymakers appear so worried about.
Ultimately if the Fed is data dependant as they claim then for all the bluster about an increase in rates and “April being a live meeting” it is hard to see how a rate rise can be justified based on yesterday’s data.
Not only was yesterday’s February core PCE inflation data weaker than expected, dropping back to 1.7% year on year, with the monthly number dropping to 0.1% from 0.3%, but the latest personal spending data for both February and January also came in at 0.1%, with the January number being revised sharply lower from 0.5%.
These inflation numbers are particularly important given that the core PCE numbers are the Fed’s preferred measure of inflation targeting, and in this context yesterday’s weaker than expected numbers make last week’s hawkish chatter all the more bewildering.
This would hardly suggest that the US consumer is in decent health and more or less underscores the recent weakness seen in the most recent retail sales and durable goods numbers.
Given all of these factors it will be of particular interest to note whether Fed chair Janet Yellen carries on with last week’s hawkish bias in scheduled comments later today when she attends a lunch at the Economic Club in New York.
Bond markets appear to have already drawn their own conclusions assigning only a 6% chance of a rate rise when the FOMC meets next month.
As far as this week is concerned the main focus as we come to the end of the quarter, on Thursday will be on Friday’s US payrolls report, with the main focus once again expected to be on wages growth.
EURUSD – despite six successive down days after peaking below the February highs at 1.1380, the euro has been unable to get near to, or below the 200 day MA at 1.1050, which remains a key support with only a move below 1.1030 arguing for a move towards 1.0800.
GBPUSD – despite a slide back to 1.4060 the pound has rebounded strongly which suggests that we could be seeing a potential base forming. A move below 1.4050 argues for a move towards the recent lows at 1.3835, while a move back above 1.4280 suggests a return towards 1.4500.
EURGBP – the inability to break conclusively above the 200 week MA at 0.7935, has seen the euro slide back, which keeps the bias towards the downside. A weekly close above 0.7935 suggests a move towards 0.8100, while a failure argues for a drift back down towards 0.7820.
USDJPY – the US dollar continues to edge higher but the bias for a move lower remains intact while below the 114.80 area.
Source: CMCMarkets.
