Markets in Europe have continued to edge higher this week, albeit on quite low volume, helped by a much more benign risk environment. The deferral of Brexit until the end of October, the EU Commission authorising the beginning of trade talks with the US has meant that a lot of the imminent tail risk has gone away in the short term, and with some evidence of an improvement in economic data, we’ve seen equity markets continue to make fresh six-month highs.
US markets also closed higher, helped in no small part by earnings reports that have come in slightly better than expected, however it does need to be said that in some cases we did have a very low bar, after the sharp downgrades we saw at the end of last year.
This morning’s China data was expected to show some early evidence that the slowdown that we’ve seen in the last few months is starting to show signs of turning around. The sharp drop in imports in the last few months would appear to suggest that internal demand is still struggling a little, and retail sales so far this year have been underwhelming, compared to the end of last year.
Against this weaker backdrop it makes it all the more surprising that we’ve seen better than expected economic activity in March from this morning’s Chinese data. Chinese Q1 GDP came in at 6.4% beating estimates of 6.3%, and matching the 6.4% in Q4 while the Lunar New Year slowdown in industrial production in February of 5.3%, saw a huge rebound to 8.5%.
Retail sales for March also picked up, coming in at 8.7% a decent jump from 8.2%. While it would be easy to be cynical about these numbers, and I am, there is evidence that March did see a rebound in economic activity in March even though the trade numbers don’t appear to reflect that. Asia markets would appear to reflect some of that scepticism, trading a little mixed this morning, and this look set to translate into a mixed to flat European open.
While Brexit talks have continued to remain stalled, with the pound finding it difficult to rebound with any conviction, the UK economy has continued to show some decent resilience. Yesterday’s wages numbers, excluding bonuses, for the three months to February showed a modest decline from 3.5% to 3.4%, while the unemployment rate remained steady at a 45-year low.
More importantly the number in work rose to a new record high of 37.2m people, with a lot of the growth coming from women, who accounted for 80% of the total increase of 179k jobs added in the three-month period.
With wages growth at ten-year highs consumers will be hoping that inflation pressures continue to remain soft, having seen headline CPI slip back over the last few months to as low as 1.8% at the beginning of the year. We have seen a modest rebound in the last couple of months, to 2%, though core prices have been more subdued, with the main price rises coming in the form of oil price rises filtering through.
Of wider concern is that recent council tax rises, as well as the rise in fuel bills could see headline CPI head back above 2% in the coming months, with an expectation that we could see just such a move in today’s March numbers. Current estimates suggest a move up from 1.9% to 2%, while RPI is expected to rise to 2.6%.
While inflation in the UK appears to have found a short-term base, there doesn’t appear to be any evidence that EU inflation is set to do the same. Today’s final EU CPI number for March is expected to confirm headline inflation at 1.4%, with core prices at 0.8%.
This is likely to be a concern for ECB policymakers, particularly since there appear to be splits amongst governing council members as to the merits of what is known as sub-zero tiering in what is seen as an attempt to offset the debilitating effects of negative interest rates on European banks profitability.
EURUSD – the failure to run up through the 1.1325/40 resistance area has seen the euro slip back, and while this level caps the risk remains of a return to the big support level back at the 1.1180 area, with a break targeting the 1 1000 level.
GBPUSD – still finding it difficult to rally after failing at the 1.3135 area earlier this week. The larger resistance level still sits up near 1.3170. The key support remains back at the 200-day MA and 1.2960 area. Below 1.2960 opens up the 1.2800 area.
EURGBP – currently finding it difficult to move with any conviction beyond the 0.8650/60 area with a break arguing for a move towards the 0.8720 level. While below here the bias remains for a move back to the recent lows at 0.8500.
USDJPY – trying to edge higher but needs to move beyond the 112.20 area to argue for further gains, towards 113.00. While below the 112.30 area the bias is for a move back below the 111.20 area towards the 110.20 level.
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