After an awful start it looked at one point as if European markets, and the FTSE100 would be able to recover most of their losses yesterday, before Fed chair Jay Powell upset the apple cart, by saying it was time to retire the word "transitory" from the central bank lexicon, when it came to describing inflation.
This unexpected turn sent the US dollar briefly higher, and saw equities roll back, as Powell went on to say that the Fed would use the central banks tools to stop more inflation becoming more entrenched, and that the tapering program could probably proceed more quickly.
Powell’s comments also briefly pulled US yields off their lows and breathed fresh life into the prospect that the Fed could accelerate the tapering process when it meets in December, despite the various concerns over the new Omicron variant, with US markets also finishing the day sharply lower, with the S&P500 joining the Dow in finishing the month lower, and its second monthly decline this year.
Having finished November on a choppy note, today’s European open looks set to be a positive one, despite Powell’s sudden shift with the focus, apart from virus concerns, whether they be Delta or Omicron, on the latest manufacturing PMIs, and latest US economic numbers, and a Fed that seems keen to pursue tapering come what may.
While it’s become increasingly apparent that we’ve seen peak PMI in Europe over the past few months, it’s also been surprising that the numbers have remained in expansion territory when related industrial and manufacturing production numbers have come in so poor.
Germany which has a huge automotive industry and where its biggest market in China has seen a big slowdown has seen resilient PMI numbers, despite weak factory orders data.
With infection rates in Germany starting to head higher, there is increasing anxiety about the need for further lockdowns, which could hit services sector activity as well, but probably not until December. Manufacturing PMI is expected to slip back from 57.8 to 57.6.
In France, manufacturing is expected to pick up to 54.6. Italy on the other hand has been a standout performer rising to 61.1 in October, which suggests we could see a lower number when the numbers are released later this morning.
It’s also quite clear in the latest flash PMI numbers that the UK economy appears to be performing at a slightly better rate than its European counterparts, even without the questions surrounding the efficacy of the manufacturing numbers which appear to overstate the health of the UK manufacturing sector. Manufacturing PMI is expected to pick up modestly from 57.8 in October to 58.2.
It’s also a big week for the US economy with the November ADP payrolls report setting us up for Friday’s non-farm payrolls report. Both reports are expected to be very resilient given how weekly jobless claims have come down to their lowest levels since 1969.
Expectations are for a number in the region of 500k, and with the Federal Reserve looking beyond concerns about the Omicron variant and focussing on inflation risk, as well as the strength of the economy, further indications of economic resilience could see yields as well as the US dollar rise further.
The latest ISM manufacturing survey will also be closely watched, specifically prices paid, which has been trending near record highs, and the employment component.
EURUSD – A big range yesterday saw the euro slip back from the 1.1385 level, with larger resistance at the 1.1420 area. The key support remains around last week’s lows at 1.1185, as well as the 1.1160 level. A move through 1.1420 argues for a move back to the 1.1520 level.
GBPUSD – Slid back to the bottom of the channel below 1.3200 before rebounding. Support remains around the 1.3160 area, which should act as a floor. We need to recover back above the 1.3400 level to stabilise and move towards the 1.3500 level.
EURGBP – Continues to advance, breaking above the 50-day MA at 0.8500, and on course for the 0.8560 area and the 200-day MA. Support now comes in at the 0.8480 area.
USDJPY – Slipped back to the 112.50 level before rebounding, however its currently struggling below the 114.00 area, keeping the risk of further losses on the table towards the 111.80 area.
FTSE100 is expected to open 64 points higher at 7,123.
DAX is expected to open 134 points higher at 15,234.
CAC40 is expected to open 69 points higher at 6,790.
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