European equity markets had a slow start to the week yesterday, closing slightly higher with the FTSE100 underperforming on concerns over weak demand from China.
US markets were also resilient with the S&P500 and Dow both hitting new highs for 2023 as investors looked cautiously ahead to this week’s central bank meetings from the Federal Reserve, European Central Bank and Bank of England and their respective outlooks for interest rate policy into 2024.
Asian markets have continued yesterday’s positive tone, with the momentum set to continue into today’s European open.
With the Federal Reserve set to begin its two-day meeting later today, and the Bank of England set to decide on interest rates on Thursday, today’s UK wage data and US CPI numbers could go some way to shaping how policymakers react when they deliver their monetary policy guidance later this week.
We start with the latest UK wage numbers for the 3 months to October, where wages have been trending higher by more than 8% over the past 3 months when bonuses are included.
Some at the Bank of England have fretted about this high level of wage growth, but they really shouldn’t given how much inflation has eaten into consumers’ pay packets over the past 2 years.
All that is happening now is that some of the purchasing power that has been lost over the last few months is slowly being clawed back, and for the most part it will take years to get back to pre-pandemic levels. The central bank must be careful not to overreact to a phenomenon that it was too slow to respond to on the way in.
With food prices only recently falling below 10% for the first time in over a year, it can hardly be a wage-price spiral if consumers finally see the price-wage ratio starting to turn positive in their favor. Wages excluding bonuses are expected to slow from 7.7% to 7.4%, which may not be enough to reverse the calls for further rate hikes from the 3 hawks on the MPC, Mann, Haskel and Greene.
Later this afternoon, we’ll see if the slowdown in US CPI seen in October has continued into November.
US inflation fell from 3.7% to 3.2% in October, reversing a trend that had seen inflation fall to 3% in June before rising in subsequent months.
Core CPI, however, was more stable, decelerating at a more modest pace to 4%. More importantly, super-core inflation, which is closely monitored by the Fed, has also slowed, and with the risk of a US government shutdown postponed until January next year, the economic risks to the US economy appear to have diminished further.
There have been some concerns that the resilience of the US economy could delay the return to the 2% target, but the latest PPI data show little sign of inflationary pressure from business costs.
These also slowed sharply in October to -0.5%, dragging down final demand from 2.2% to 1.3%, a sign that we could see further downside in US CPI, with the potential to fall below 3% before the end of the year.
Headline CPI is expected to slow to 3.1% in November, with core prices holding steady at 4%.
EUR/USD – Holding above the 200-day SMA for now, the pair stopped last week at 1.0724, with a break below 1.0700 targeting the prospect of further losses towards the November lows at 1.0520. We need to see a move back through 1.0830 to stabilize.
GBP/USD – Tight range but holding above the 200-day SMA for now, with only a break below 1.2460 signaling a broader test of the 1.2350 area. Resistance currently at 1.2620.
EUR/GBP – Still range trading between the 0.8590 area and the lows at 0.8545/50. 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 – After last week’s test of the 200-day SMA at 142.50, we’ve seen a solid rebound with the move above 146.20 arguing for a move back towards 148.20.
The FTSE100 is expected to open 13 points higher at 7,558.
DAX is expected to open 51 points higher at 16,845.
CAC40 is expected to open 18 points higher at 7,569.
