European markets just about managed to eke out a gain yesterday, but it was hard going, with the FTSE100 outperforming largely due to outperformance in health care.
With diplomatic efforts ongoing in the hope of preventing a further escalation of the crisis, the news that President Biden is going to Israel later this week, means it’s unlikely that we’ll see Israel mount an incursion into Gaza in the short term. That said the horrific bombing of the Gaza hospital overnight has complicated matters with a number of leaders cancelling their meetings with the US President amidst claim and counter claim as to whose responsibility the blast was, sending oil prices sharply higher.
US markets finished a choppy session largely unchanged, initially opening sharply lower, then rebounding, despite a sharp move higher in yields after retail sales in September came in well above expectations, rising 0.7%. The August sales numbers were also revised up as well.
Despite the rise in yields, which saw the US 2-year yield move above 5.2% for the first time since 2006, investors took the view that, with rates at current levels and the US consumer still looking resilient, the prospect of another rate hike, probably isn’t the end of the world, thus limiting the downside for US markets.
This morning’s European open looks set to be a positive one with Asia markets having to absorb the latest economic numbers from China.
The last 3 months has seen little indication that the Chinese economy would see a significant improvement on its Q2 GDP numbers of 0.8%, given the direction of travel of both industrial production and retail sales data, both of which have struggled over the quarter, particularly consumer spending.
Today’s Q3 GDP numbers would appear to run counter to that, reinforcing the scepticism about the accuracy of Chinese economic numbers, especially GDP, there is little doubt that the Chinese economy is being hit by a slowdown in global, as well as domestic demand if recent trade data has been any sort of guide.
China Q3 GDP came in at 1.3%, well above expectations of 0.9%, while Q2 was revised lower to 0.5%, while September retail sales rose by 5.5%, beating expectations of 4.9%, and industrial production came in at 4.5%.
This morning’s industrial production numbers were pretty much in line with previous months remaining steady, however, there was a modest improvement in retail sales, which runs counter to the narrative from a lot of high-profile retail companies that Chinese demand for luxury goods has been waning in recent months.
Consumer spending has been where the real weakness lies sharply down from Q2, Q3 has seen retail sales slow sharply, with gains of 2.5% and 4.6% in July and August, rounded off by 5.5% in today’s September numbers. While today’s numbers do suggest a modest improvement in Q3 the extent of the rebound does raise questions given the weakness of recent trade data as well as PMIs.
As we look towards today’s data releases we have UK CPI for September, along with the final readings for EU CPI.
Starting with the UK, the Bank of England caught a lot of people on the wrong foot when they decided by a narrow majority to keep interest rates unchanged at 5.25% last month.
The main reason why they decided to call a halt to 14 successive rate rises may well have been the sharp slowdown in core CPI that we saw in data released the day before, as well as concern that the UK economy has yet to feel the full effects of the previous rate hikes, and that more time is needed to assess the full pass-through effects.
It’s about time this penny dropped given the challenges facing the UK economy and its good that the MPC has finally woken up to this, although there are differing views amongst MPC members of how much has trickled down with arch dove Swathi Dhingra arguing that only 25% of the impact has been felt.
In August, core CPI slowed from 6.9% to 6.2% while headline CPI slipped to 6.7% when most people had been expecting an increase. This trend of slower inflation is expected to continue today with September CPI inflation set to slow 6.6% and core inflation forecast to slow to 6% from 6.2%.
One of the major leading indicators in recent months for a slowdown in inflation has been the slowdowns being seen in the headline PPI numbers since the start of the year, although there is evidence that these are starting to bottom out and pick up again.
Nonetheless, these have been in negative territory for both input and output prices over the last 2-months, which ought to bode well for further weakness in CPI inflation going forward, although higher fuel prices are likely to keep underlying inflation sticky.
Further evidence of slowing inflation should make life easier for the Bank of England when they meet in just over two weeks’ time, in terms of keeping rates on hold, with new forecasts due at the November meeting we could well find that the central bank is done and from here on in the main question will be how long rates are likely to stay at current levels.
EU CPI for September is expected to be confirmed as slowing to 4.3% from 5.2% in August while core prices are expected to slow to 4.5% from 5.3%, also reinforcing the idea that the ECB is done when it comes to further rate hikes.
EUR/USD – Looking to retest the highs from last week to open a retest of the 1.0740 area. The main support remains at the October lows at 1.0450, as well as the 1.0400 area which is 50% retracement of the 0.9535/1.1275 up move.
GBP/USD – Struggling to rally for the moment and needs to rise above the 1.2340 area to unlock a move to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area, 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.
EUR/GBP – Edging back towards the September highs and the 200-day SMA between the 0.8700 and 0.8720 area. Still have trend line support from the August lows, now at 0.8625 and which is currently intersecting just above at the 50 and 100-day SMA.
USD/JPY – Dipped to the 148.75 area yesterday but continues to find itself capped at the highs this month at 150.16, with a break of 150.30 targeting a move towards 152.20.
FTSE 100 is expected to open 10 points higher at 7,685.
DAX is expected to open 8 points higher at 15,259.
CAC40 is expected to open unchanged at 7,029.
