European markets had a rather lackluster start to the week, weighed down by a rebound in the US dollar as well as weakness in commodity and energy prices as investors took a pause after the gains of recent weeks.
US markets fared little better, slipping in the face of a modest rebound in yields as investors hit the pause button ahead of this week’s employment data due at the end of the week, while European markets are set to open slightly lower this morning.
Earlier this morning, the RBA left interest rates on hold at 4.35% after last month’s decision to raise rates by a further 25bps.
Despite last month’s surprise decision to raise rates, today’s decision acknowledged that goods inflation is now starting to moderate, although concerns about services inflation remain. However, despite this acknowledgement that inflation appears to be slowing, there was little indication that the central bank was considering another rate hike in the near future. Last month’s decision to raise rates was driven by concerns about domestic price pressures, and while today’s decision to hold came as a relief, there was little indication that a change in policy in either direction was being considered, with Governor Bullock acknowledging significant uncertainty around the outlook.
Nonetheless, today’s decision to hold came against the backdrop of a month in which the 2-year yield has fallen nearly 40 basis points from its peak of 4.52% on November 1st, as markets surmised that the central bank was now done and the Australian dollar fell sharply.
Yesterday’s rebound in U.S. yields appeared to be driven by the possibility that the declines of the past few days may have been a bit too much too fast, given Powell’s comments last Friday when he backed away from the idea that rate cuts were on the cards for the first half of 2024.
There is certainly an element of the market getting ahead of itself when you look at a US economy that grew 5.1% in Q3 and still has an unemployment rate of 3.9%.
Unfortunately, the same cannot be said for Europe, where the French and German economies may already be in recession.
While the latest manufacturing PMI data in Europe suggests that economic activity may be bottoming out, the same can’t be said for the services sector, which is experiencing sticky inflation levels based on the latest inflation data. This, in turn, is leading to a continued hawkish narrative from the ECB despite mounting evidence that the bloc is already in contraction and possibly recession as well.
Recent data from the French economy showed that economic activity contracted in Q3 and there was little sign of improvement in Q4.
The latest flash PMIs showed that services activity remained stuck in the low 45’s, although economic activity does appear to be improving, rising slightly to 48.7.
The main concern is that the resilience shown by countries like Spain and Italy as their tourism season winds down appears to have waned after Italy fell sharply in October to 47.7, while Spain was steady at 51.1, although both are expected to show slight improvements in today’s November numbers, rising to 48.3 and 51.6 respectively.
The UK economy also appears to be showing a little more resilience where there was a recovery into expansion territory in the latest flash numbers to 50.5, while earlier this morning the latest British Retail Consortium retail sales figures for November showed that consumers remained cautious despite the increasing number of Black Friday deals ahead of the Christmas period as retailers looked to tempt shoppers into opening their wallets. Like-for-like sales rose 2.6% in November, the same as the previous month, with sales of big ticket items remaining weak as consumers preferred to spend on lower ticket items and essentials such as food and drink, health and personal care.
In the U.S., we also have the latest JOLTS job openings numbers for October, which are expected to show a slowdown in job openings from 9.5 million to 9.3 million, while the latest ISM services survey is expected to show a resilient economy.
The headline is expected to show an improvement to 52.3, with prices paid at 58 and employment improving to 51.4 from 50.2 due to additional holiday hiring.
Gold prices are also in focus after yesterday’s new record high saw a sharp reversal with prices closing lower in what looks like a bull trap and could see prices pause for a period of time and retest the $2,000 an ounce level in the absence of a rebound.
EUR/USD – Continues to look soft, dropping below the 200-day SMA at 1.0825, with a break of 1.0800 having the potential to retest the 1.0670 area. Resistance now in the 1.0940 area and beyond that at last week’s highs at 1.1015/20.
GBP/USD – Failure to break above the 1.2720/30 level has seen the pound slip back with support currently holding at the 1.2590 level. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and the 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.
EUR/GBP – Found support at the 0.8555 area for now, but while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520 and possibly further towards the August lows at 0.8490.
USD/JPY – Found some short-term support in the 146.20 area, with resistance now in the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with next support in the 144.50 area.
The FTSE 100 is expected to open 15 points lower at 7,498.
DAX is expected to open 9 points higher at 16,413.
CAC40 is expected to open 3 points lower at 7,329.
