Yesterday saw another weak session for markets in Europe as profit taking eased as we approach the end of the month and what has been a strong month for equity markets.
US markets also struggled initially, but found the downside limited after comments from Federal Reserve Governor Christopher Waller that monetary policy is currently well positioned to slow the economy and bring inflation back to target.
This was taken to mean that not only was the Fed done with further rate hikes, but that rate cuts could come sooner rather than later. He went on to say that if disinflation starts to become a concern, then rates could be cut in response, rather undermining the recent narrative put forward by Fed Chairman Jay Powell that rates need to stay higher for longer.
However, his comments were tempered by more hawkish comments from another Fed Governor, Michelle Bowman, who argued that further rate hikes may be needed due to the continued resilience of the US economy.
Despite this, markets focused on Waller’s comments given his previously hawkish stance on rates as a sign that the consensus on the FOMC is starting to shift, but one should also be careful not to read too much into Waller’s comments as while there may be some modest rate cuts over the next 12 months, rates are unlikely to come down anywhere near as quickly as they were raised.
A key takeaway is that there is unlikely to be a rate hike in December and the Fed is on track to be below its 5.6% target rate by the end of the year, although that was never really in doubt given the recent economic data.
In any case, yesterday’s comments saw US markets close mostly higher, although the Russell 2000 closed lower.
In Europe, inflation has also slowed sharply, and today’s German flash CPI for November could add further downside risk to yields, with German 2-year yields already close to 5-month lows.
If we see another sharp slowdown in German inflation for November, as we did in October when it fell from 4.3% to 3%, it would only add fuel to the argument that the ECB is blowing smoke when it comes to the idea that more hikes are possible. November’s CPI is expected to slow to 2.5%.
If anything, further weak numbers could mean that the ECB could end up being the first central bank to start cutting again as early as the end of Q1 next year.
Of slightly more concern yesterday was that crude oil prices ended the day sharply higher, erasing the losses of the previous two days and serving as a reminder that high energy prices may well play a role in slowing the recent decline in inflationary pressures.
The Pound has gained ground against the US Dollar and the Euro in recent days, largely due to a slight change in thinking about the UK economy and the prospect that interest rates may not be cut as quickly as the markets had originally priced in.
This assertion was reinforced yesterday by Dave Ramsden, Deputy Governor of the Bank of England, who said that inflation was becoming more “home-grown” and that interest rates would need to stay higher for some time.
Nevertheless, the improvement in recent UK economic data is likely to have more to do with lower inflation, as well as the fall in borrowing costs seen since mid-summer as mortgage rates have come down.
Today’s mortgage approvals and consumer credit figures for October may offer some hope in this regard.
The first half of this year has seen a modest improvement in mortgage approvals after hitting a low of 39.6k in January. The slowdown towards the end of last year was due to the sharp rise in interest rates, which weighed on housing demand and house prices.
As energy prices have come down, along with lower interest rates, demand for mortgages has picked up again, peaking in June as approvals rose to 54.6k.
It’s been downhill since then with the sharp rise in interest rates over the summer months causing a sharp fall which saw approvals fall to 43.3k in September, and the lowest number this year.
We have seen interest rates fall since the summer, which may provide some respite to the housing market, but recent housing data seems to suggest that consumers are holding back when it comes to buying a new home. Mortgage approvals are expected to rise slightly to 45.3k.
Net consumer credit has been a little more resilient, coming in at £1.4bn in September, which isn’t dissimilar to previous months. A similar figure is expected today.
The latest iteration of US Q3 GDP is expected to see a slight upward revision to 5%, with personal consumption remaining unchanged at 4%.
EUR/USD – Pushed through the 1.0960 area and up towards the 1.1000 area with next major resistance at the 1.1060/70 level. Upward momentum remains intact above the 1.0840 area.
GBP/USD – Pushed up to the 1.2720 area and the 61.8% retracement of the 1.3140/1.2035 decline yesterday before pulling back. Support currently at 1.2590, which is the 50% level, with further upside towards 1.3000 possible on a break above 1.2740.
EUR/GBP – Continues to drift lower with another lower low with a break below 0.8650 opening up a move towards 0.8620. Resistance currently back at 0.8720.
USD/JPY – The failure of the 149.70/80 level has seen the U.S. Dollar slip back below last week’s lows of 147.15. This break of key support and the 147.00 area could potentially open up a move towards 144.50.