The stock market recovery that began with a rebound on Wall Street on Friday afternoon, continued yesterday as European markets pulled back some of their recent losses after two weeks of heavy losses.
That momentum was maintained into yesterday’s New York close as US markets closed strongly higher for the second day in succession, as sentiment began to stabilise after a tumultuous fortnight, despite bond yields showing little sign of running out of steam to the upside.
The US snapback looks set to spill over into this morning’s European open and while further gains are a welcome development, they remain small potatoes in the context of recent losses, to paraphrase out of context, recent comments by William Dudley of the New York Fed.
If anything the probability of higher yields appears to have increased after yesterday’s new US spending plans were revealed. While the overall amount of new federal spending of $200bn may not seem that much when set against the headline figure of $1.5trn, the forecast of a 10 year deficit of over $7trn when compared to a previous estimate of $3.15tn implies a barrow load of extra bond issuance which could well drive prices much lower.
US bond markets began the week on the back foot after comments at the weekend by Mick Mulvaney the White House budget director that interest rates could spike as a result of the new budget plans.
This caused US 10 year yields to head towards 2 9% for the first time in over 4 years, before slipping back later in the day. This inability to push much beyond 2.9% could help underpin the current rebound for stock markets in the short term, especially if tomorrows US CPI inflation comes in on the soft side for January.
Before we get to that we get the latest UK CPI numbers for January later this morning with predictions that we may well see headline inflation start to slide back after the 3.1% peaks seen in November. IN December CPI slowed slightly to 3%, however on the RPI measure prices ticked higher to 4.1%, further muddying the waters for consumers already struggling under the pressure of squeezed budgets.
Last week’s inflation report caught markets on the hop a little with its unexpectedly hawkish message about the prospect for interest rates, in the months ahead. The latest January PMI data would appear to show an economy that has hit a bit of a soft patch, yet for all of that, the tone of last week’s inflation report would suggest that the MPC may well be more worried about the inflation outlook than they would like to admit.
This shouldn’t really be a surprise given that in the internals of the recent PMI report showed input prices hitting an 11 month high for manufacturing.
Mr Carney’s admission that CPI might tick back higher is a reversal of the earlier position that inflation was likely to have peaked at the end of last year, and it can only be the big increases still being seen in input costs that could well be driving that change of tack.
Headline CPI is predicted to slip back to 2.9% for January, however we could see an upside surprise given that January tends to be a month when travel fares see sizeable increases, rail fares being one such example, while commodity prices are also higher than a year ago. One plus point is that the pound is now over 12% higher against the US dollar than it was in mid-January last year, which should help in keeping a lid on rising prices.
Core prices are predicted to rise to 2.6% from 2.5%, while producer input prices for January are expected to remain sticky with an expectation that they will fall back to 4.1% from 4.9%.
The Bank of England will be hoping that UK wages show the sort of resilience shown by US wages at the most recent US employment report.
Both Gertjan Vlieghe and Ian McCafferty, external members of the Bank of England Monetary Policy Committee expressed that optimism in comments made yesterday.
EURUSD – currently squeezing back up towards the 1.2330 level, but while below here the risk remains for a move back towards the 1.2160 area. We need to get back above 1.2330 to stabilise. Resistance remains back at the recent highs earlier this month just above the 1.2500 area.
GBPUSD – last week’s weak close keeps the pressure on the downside and a move towards the 1.3660 area. We need to get back above the 1.3970 area to stabilise and retarget the 1.4070 level.
EURGBP – continues to find resistance near the 0.8900 area, with a break retargeting the 0.8950 area. We have longer term support between 0.8700 and 0.8730 as well as interim support at the 0.8800 area.
USDJPY – continues to struggle to push higher with the 109.80 level a key obstacle to further gains. While below here the risk remains for a move back to last week’s low at 108.00, with a break retargeting the 107.20 area in the short term.