Most of the economic data this week out of Europe has shown that economic activity is still holding up fairly well, though there have been some weak spots, notably weak German retail sales and a rise in Italian unemployment.
The resilience of the data doesn’t appear to be tempting investors into piling back into the equity market, with both US and European markets struggling to make any sort of headway thus far this week.
This caution may well have a lot to do with rising doubts that the Trump trade may well be about to go pop, given some of this week’s events over in the US, amidst concerns over protectionism and possible trade wars.
After some decent manufacturing PMI numbers today we get the latest services PMI numbers from Spain, Italy, France and Germany, and these aren’t expected to differ too much from their December levels, with expectations of 54.7, 52.6, 53.9 and 53.2 respectively.
Recent economic data from both the UK and the US in the past few months hasn’t really shown any warning signs that either economy is likely to slow down markedly so expectations surrounding both central bank meetings this week weren’t unsurprisingly too dovish. It was therefore rather surprising that both central banks came out as neutral as they were with respect to interest rate expectations.
In the case of the US it probably isn’t as surprising given how many waves President Trump and his officials are making with respect to the strength of the US dollar, and as such caution is probably warranted, however this week’s blow out ADP employment number as well as strong manufacturing prices data suggests that the US economy may well be picking up speed.
The pound ran into a brick wall above 1.2700 yesterday sliding sharply lower after the Bank of England rather surprisingly kept its inflation forecast more or less unchanged. This was despite a hefty upgrade in its growth forecast for 2017. It would appear that the MPC is either asking us to believe that a 0.6% upward revision in GDP is unlikely to have any effect on wages or prices, in what is now a tight labour market, or it simply doesn’t want to raise rates, and admit that its actions in August were hasty. I know which option my money is on.
This week’s UK manufacturing PMI for January showed that inflationary pressures were rising quite rapidly, and while the construction sector expanded at a slightly slower rate than had been expected, the prices and employment components remained buoyant.
Today we round off the week with the latest services sector PMI numbers and these are also expected to show a slight drop off from the December numbers, with a fall to 55.8 expected from 56.2.
Of all the numbers that we’ve seen over the past few months the services PMI’s have acted as a decent barometer of how the UK economy has been performing, and given how well the sector performed over the last three months of 2016, it would not be a surprise to see a January lull.
We round off the day and the week with expectations high that today’s US employment report will blow the doors off in the same way as Wednesday’s 245k ADP number did.
These expectations aren’t unrealistic given that over the last 12 months the ADP and official NFP numbers have only deviated by more than 30k on just two occasions, with an average change of 14k over the last 12 months.
This would suggest that the 180k estimate being predicted is probably too low, with a figure in excess of 200k not being beyond the realms of possibility. Such a high number given an unemployment rate of 4.7%, would suggest that there is probably still a fair degree of slack in the jobs market.
Wages are also likely to be closely watched with a rise of 0.3% expected, with an annualised rise of 2.8%, down slightly from December’s 2.9%.
EURUSD – the euro continues to find the air a little thin above the 1.0800 area touching 1.0830 before slipping back. While above the 50 day MA at 1.0580 the risk is for a potential move through 1.0850 towards the 1.1000 area.
GBPUSD – pushed above the previous highs at 1.2675 to 1.2710 before slipping back sharply. The sharpness of the fall suggests a retest of the 1.2410 area, and 50 day MA, is possible and remains a key support. A move below 1.2400 would argue for a return to the 1.2250 area.
EURGBP – while the euro remains below the 0.8650 area the onus remains towards the downside. The 0.8570/80 area, remains the range pivot and becomes support again. A move through the 0.8470 area argues for a move back towards 0.8300.
USDJPY – the US dollar has found support down at the 112.10 on two occasions. The key resistance remains up near the 114.30 level. To stabilise we need to get back above the 114.30 area or run the risk of a deeper move towards 111.00
