EEuropean markets had another mixed session yesterday with the FTSE100 outperforming while the performance of US markets was about the same as on Monday, with the Russell 2000 outperforming and leaving its heavyweight peers in the S & P500 and of the Dow in its wake, although still just below the records.
What’s even more puzzling is that despite mounting evidence that inflation risks may well rise, bond yields are reversing and signaling otherwise, with the US 10-year falling back to its lowest level in 7 years.e May when the markets had to absorb the huge shortfall in April’s payrolls.
Yesterday, US job vacancies in April hit a record 9.3 million, an increase of 1 million in one month, despite an unemployment rate of 5.8%, a level well above 3 , 5% that we saw in early 2020.
This inability to fill positions in an economy that has more than 8 million fewer people in the workforce than before the pandemic, and which appears to be experiencing strong growth, means that employers may well have to increase wages significantly in order to keep up. attract these people.
This in turn could have significant consequences for inflation expectations, which are already high, especially if the US CPI approaches 5% tomorrow.
This morning’s Chinese inflation data for May is another example of mounting inflationary pressures in the global economy. In February, the headline CPI stood at -0.2%, compared to today’s figure of 1.3%, down from 0.9% in April.
In an even more stark contrast, ex-factory prices for May stood at 9%, a considerable increase from where they were at the end of last year, when they were at -0.4 %, and the highest since 2008. Although part of the increase can be attributed to base effects due to the huge drop in commodity prices that we observed in March and April of last year which has With the PPI falling by -3.7%, it is increasingly evident that various problems on the supply side are starting to create a situation where, rather than being transient, inflationary pressures could become more persistent. This is certainly something that Chinese companies are increasingly concerned about, as are Chinese authorities, given recent steps taken to curb the recent sharp rise in commodity prices.
This is a situation that central bankers seem to be remarkably relaxed or complacent about, depending on which side of the fence you are on.
The opening of the European market today promises to be still cautious, with stocks expected to pick up where they left off yesterday, gradually drifting higher due to lack of interest more than anything else, although the FTSE100 might well open lower.
The Bank of Canada is expected to meet later today and may well provide further guidance on the timing of a possible slowdown in the third quarter. The central bank should look through the rise in the CPI to 3.4%, citing it as temporary, along with the weaker performance of the economy and the job market, which it expects to improve. in the second semester.
The central bank might be referring to the recent strength of the Canadian dollar, but overall no policy changes are expected.
EURUSD – fell from 1.2200 area but remains in a narrow range with support lower at 1.2104 on Friday. Although above 1.2100 the risk remains of a return to the May highs at 1.2266 which is the next level of resistance. A move below 1.2100 opens the 1.2050 area. This year’s highs at 1.2345 remain a key level and a barrier.
GBPUSD – currently struggling to break above the 1.4200 area, with a wider resistance at 1.4240. A move into the 1.4240 area targets the 2018 peaks at 1.4375. Failure to break above 1.4240 maintains the bias towards 1.4000.
EURGBP – moved to the 0.8640 area yesterday, but although below this resistance level the bias remains on the downside and retest the 0.8560 area. A break below 0.8550 opens recent lows at 0.8480.
USDJPY – continues to abide by trendline support from this year’s lows, now at the 50 day MA at 109.15. A move below 109.10 / 20 opens a return to the 108.60 area.