Yesterday saw a broadly positive session for European markets, with the DAX outperforming while the FTSE100 fell for the third consecutive day, in a month in which the UK benchmark has significantly underperformed the rest of its peers.
The DAX and S&P 500 look set to post their best month of gains since November last year as investors begin to price in the prospect of interest rate cuts next year in the face of sharply slowing inflation.
While previously hawkish Federal Reserve Governor Christopher Waller signaled that current monetary policy settings are sufficient to slow the economy, the latest flash CPI inflation figures from Germany and Spain released yesterday also showed that inflation in Europe is falling at an accelerated rate.
As the markets begin to price in the prospect of Fed rate cuts by May next year, it would be reasonable to ask what the price of ECB rate cuts would be given the dismal economic data coming out of Europe compared to the US.
Today we get the latest flash CPI numbers for November for France, Italy and the Euro-zone, which if they follow the trend of yesterday’s Spain and Germany, will make the threat of further rate hikes from the ECB even less credible than it already is.
France’s CPI is expected to slow from 4.5% to 4.1%, while Italy’s is expected to slow from 1.8% to 1.1%.
Last but not least, EU flash CPI is forecast to slow from 2.9% to 2.7%, but given the size of the downside surprises in the German and Spanish figures, we could well see an even weaker reading of 2.5%. Core CPI is expected to slow to 3.9% from 4.2%.
While markets are pushing back against the “higher for longer” narrative as bond yields fall sharply, there is a risk that US markets are getting ahead of themselves given the resilience of the US economy.
When the US CPI numbers for October were released a couple of weeks ago and the headline CPI slowed to 3.2%, with core prices slowing from 4.2% to 4.1%, bets on another Fed rate hike in December were scaled back sharply.
Of particular note was a similar slowdown in super-core inflation, which the Fed is paying close attention to, and which could well translate into a similar slowdown in this week’s core PCE deflator numbers.
If we see a similar trend play out in today’s core PCE deflator numbers, then it will become increasingly difficult for other Fed officials to push back on the idea that rate cuts are coming in the middle of next year.
In September, the core PCE deflator slowed to 3.7%, its lowest level in 2 years, and today’s October numbers are expected to slow further to 3.5%.
Given Waller’s comments earlier this week, the Fed’s next key challenge in the face of slowing inflation will be to rein in market expectations of rate cuts and try to support the “higher for longer” mantra that markets seem to have pulled the curtain down on in recent days.
We should also see a slowdown in personal spending from 0.7% in September to 0.2% in October, while weekly jobless claims are expected to rise from 209k to 218k.
It’s also worth watching oil prices today, as OPEC+ is set to meet to decide whether to implement further production cuts on top of those already agreed. There has been widespread disagreement over quotas among OPEC’s smaller members, who are reluctant to give up the extra barrels and the revenue that comes with them.
EUR/USD – Slipped back from the 1.1020 area yesterday with the next major resistance at the 1.1060/70 area. Currently has interim support at 1.0930 and below that in the 1.0840 area.
GBP/USD – Failed to break through the 61.8% retracement of the 1.3140/1.2035 decline at the 1.2720/30 level. 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 move lower with another lower low as we look towards the 0.8620 level. Resistance currently back at 0.8720.
USD/JPY – The pair rebounded from the 146.65 area yesterday and pushed back to the 147.90 level. The failure at the 149.70/80 level keeps the pressure on the downside with a return to this week’s lows potentially opening up a move towards 144.50.
The FTSE100 is expected to open 9 points higher at 7,432.
DAX is expected to open 36 points higher at 16,202.
CAC40 is expected to open 18 points higher at 7,285.