European markets had a fairly decent day yesterday, even if the FTSE100 lagged behind somewhat as investors started to drip feed money back in after the big sell-off seen towards the end of last week.
US markets also managed to shake off the torpor of the last couple of days, with their best one-day performance since March as a host of US companies managed to beat expectations on their latest quarterly earnings announcements.
After the bell Netflix (NASDAQ:NFLX) carried on the theme blowing away estimates for its Q3, coming in at $0.89c share, and adding a record number of subscribers for the quarter, bringing the total up to 130m. what was particularly encouraging was the fact that international subscribers were growing strongly, with Q4 guidance also nudged higher.
This strong finish looks set to spill over into a positive European open this morning with most eyes on today’s European Council meeting and the latest inflation numbers from the UK and EU, not to mention the latest Fed minutes.
For a long time last week the pound found some support from the belief that we might start to see the outlines of a Brexit deal, by the time we got to today’s EU council meeting which is due to convene in Brussels later today.
Markets were quickly disabused of this notion late on Sunday night, which quickly prompted a rather brief slide, and while the tone from politicians from the EU side has become much more pessimistic with European Council President Donald Tusk stating that there were no grounds for optimism around today’s meeting, and that it was up to the UK to come up with new solutions.
Good luck with that one Donald, all the while the pound has continued its rebound from its early lows on Monday.
It would appear that markets are taking the view that this is all part of the politicking, and once one deadline is reached, like a mirage in the desert, another one takes its place.
Given that nothing is agreed until everything is agreed markets can only trade on what they know, and yesterday’s jump in wages to the highest levels since January 2009 at 3.1% has raised expectations that the tight UK labour market is now starting to push wages higher at a significantly faster rate than inflation.
Last month CPI inflation experienced an unwelcome jump from 2.5% to 2.7% driven by higher energy prices, clothing and other transport and recreational culture costs. It would therefore be enormously helpful if the August inflation spike was just that, a brief spike and prices were to settle back down towards this year’s lows. Expectations are for September CPI to come in at 2.6%.
More worryingly we also saw a big jump in core prices in September, which rose from 1.9% to 2.1%, so here again the hope is that we will see a similar softening in price pressure with expectations of a modest decline to 2%. Retail prices are expected to remain steady at 3.5%.
EU inflation has been slightly softer in recent months, unlike the jump seen in EU prices and this is expected to continue with today’s final September numbers which are expected to come in at 2.1% on the headline CPI and 0.9% for core prices.
We also have the latest FOMC minutes from the September meeting when FOMC officials voted to raise rates for the third time this year. At the press conference Fed chair Jay Powell went out of his way to insist that inflationary pressure remained benign, while remaining ambiguous about the direction of travel of rates during 2019. The minutes will be doubly notable given that President Trump once again criticised the bank yesterday by saying it was the “biggest threat” to what he was doing because it was raising rates too fast, given the currently low rates of inflation. When looked through that prism it’s hard to disagree with the President even if the way he does it breaks all of the traditions of US Presidents and their relationship with the central bank.
The overall outlook showed that policymakers were projecting projected one more rate rise for this year and three for 2019, while their outlook for inflation, along with the dropping of the language that described monetary policy as accommodative, suggested that the Fed remained much closer to the end of their hiking cycle than markets had originally anticipated.
Since that meeting Fed chair Jay Powell has come across as significantly more hawkish, when in comments made earlier this month he suggested that rates were a “long way” from neutral raising the prospect that rates could go quite a bit higher in the next few months, particularly since he went on to state that interest rates were “still accommodative” even if they aren’t “extremely accommodative”
The recent decline in stock markets and rise in yields since those remarks appears to have shifted the calculus on the Fed’s thinking amongst many market participants. It will be interesting to establish whether others on the committee share the same thinking about where the so called “neutral rate”, actually is, and whether they differ from Chairman Powell over how close we are to it.
EURUSD – currently struggling to break up above the 50-day MA and the 1.1620 level in the wake of last week’s rebound from the 1.1460 area. A sustained move through the 1.1600 area retargets the 1.1720 level. The 1.1500 area is likely to act as support for pullbacks.
GBPUSD – the rebound from this week’s lows at 1.3080 level earlier this week, ran out of steam at the 1.3235 level just shy of last week’s peak at the 1.3260 level. We still remain in the uptrend from the August lows at 1.2660. We need to recover back through the 1.3260 level to open up a move towards the July peaks at 1.3360.
EURGBP – drifted back from 0.8825 earlier this week with broader resistance at the 200-day MA at 0.8840, and 0.8870, but still remains in the downtrend from August peaks. Support remains at 0.8720 and below that at 0.8640.
USDJPY – trend line support at 111.60 from the March lows currently supporting the price action after last week’s reversal from the 114.60 level. A break below 111.50 suggests the prospect of further losses towards 111.20, and even the 200-day MA at 110.35. The 114.60/70 level remains a key resistance level and obstacle to further upside.
FTSE100 is expected to open 23 points higher at 7,082
DAX is expected to open 39 points higher at 11,815
CAC40 is expected to open 11 points higher at 5,184
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