European markets saw a strong move higher yesterday after the Bank of England and European Central Bank both raised rates by 50bps, with the DAX closing at a new 11-month high. The FTSE100 didn’t perform as well but remains within touching distance of new record highs, while the FTSE250 posted its best one-day gain since March last year.
US markets also saw a strong session with the Nasdaq 100 leading the way with gains of over 3%, although the Dow finished the day lower.
Today’s European open looks set to see a modestly softer open after some weakness in the wake of last night’s earnings numbers from Amazon, Alphabet and Apple.
While central banks would like to give the impression that they have further to when it comes to more rate rises, markets are taking the opposite view, surmising rightly or wrongly that we’re near a peak as far as rates are concerned, and even if they aren’t done yet, they are close, with bond yields falling sharply across the board.
There are certainly a lot of assumptions in what has transpired over the past couple of days, but market price action this week tells a different story to what we’ve heard from all three central banks in the last couple of days. While central banks are essentially saying they have further to go on raising rates, markets are saying we don’t believe you, and even if you do hike again, you’ll have to cut again by year end.
As the consensus continues towards a downshift in US rate rise expectations, with this week’s 25bps rate hike from the Fed likely to be the penultimate hike for the US central bank, the US labour market has continued to defy expectations even as other economic data continues to soften.
This week’s ADP employment report for January did come across a little on the soft side, however even here the economy continues to add jobs, to the tune of 106k, while the latest ISM manufacturing survey showed employment was still holding up well. Weekly jobless claims also came in lower at 183k and a new 9 month low.
The resilience of the labour market does appear to suggest that markets are underestimating how much further headroom the Federal Reserve might have when it comes to further rate hikes.
In December we saw 223k new jobs added, while the unemployment rate fell to 3.5% from 3.6% and average hourly earnings came in below expectations, rising by 4.6%, though some have put the weakness here down to the fact that the participation rate rose to 62.3%, from 62.1%.
In the ADP report wages growth is measured differently and is much higher, coming in above 7%.
There continues to be a sense that the market is extraordinarily complacent about how quickly we might see the Federal Reserve pivot when it comes to interest rates, however while the unemployment rate remains at multi year lows the US central bank has little incentive to cut rates when inflation still remains almost 3 times higher than its 2% target.
January payrolls are expected to come in at 189k, with the unemployment rate set to edge higher to 3.6%. Participation rate levels are expected to remain steady at 62.3%, and just below the 62.4% peak we saw during 2022, while average hourly earnings set to fall further to 4.3%. A strong payroll number could go some way to prompting a re-evaluation of market pricing, the prospect of rate cuts before the end of the year and prompt a rebound in the US dollar which is on course for its 4th successive weekly decline.
Before we get to the US jobs data the slightly improved economic outlook in Europe and the UK is likely to be reflected in the latest services PMI numbers from Spain, Italy, France, Germany, and the UK, which are all expected to show an improvement on the back of the recent decline in energy prices, which has eased the pressure on consumer wallets.
Spain services are expected to rise to 52.6, Italy 51, Germany 50.4, while the UK and France are expected to weaken to 48 and 49.2 due to strikes and industrial action.
EUR/USD – Pushed up through 1.0950 yesterday overshooting to the 1.1030 area before quickly reversing. The inability to hold above 1.1000 has seen the euro slip back, with support in and around the 1.0820 area. A move below 1.0800 could see a larger move towards 1.0720.
GBP/USD – Slid below the 1.2250 area opening the prospect for a steeper decline towards the 1.2170 area, and 50 day SMA. Below 1.2160 could see a move towards 1.2080.
EUR/GBP – Looks to be set for a move towards the 0.9000 area. Key support remains at the 50- and 100-day SMA which we saw earlier this month at the 0.8720/30 area. Below 0.8720 targets 0.8680.
USD/JPY – On course for a retest of the recent lows at 127.20/25. We need to see a break above 129.20 to stabilise and argue for a return to the 130.20 area.
FTSE 100 is expected to open unchanged at 7,820.
DAX is expected to open 9 points lower at 15,500.
CAC40 is expected to open 3 points lower at 7,163.
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