After four days of gains US markets threatened to slide back yesterday as retail stocks got battered after retail bellwether Macy’s issued a profits warning for revenues and profits for 2018. This had the effect of creating a ripple out selling wave across the sector as Kohl’s, Nordstrom, Abercrombie and Target all followed suit, falling sharply. The retail sector has come under pressure on both sides of the Atlantic this week as investors become anxious about the sustainability of retailer’s margins as consumers continue to drive a hard bargain when it comes to price.
All the while President Trump continues to dig his heels in over the government shutdown, which the longer it goes on will raise concerns that the current rebound may start to run out of steam as investors worry that the stalemate will start to hit consumer confidence.
Despite these lingering concerns US markets managed to close higher for the fifth day in a row, helped once more by a series of Fed speakers that the central bank would be patient when it came monetary policy. St. Louis Fed President James Bullard, Chicago Fed’s Charles Evans and Richmond Fed’s Thomas Barkin were all cautious, and while Fed chair Jay Powell was slightly more hawkish in his comments yesterday, which pushed the US dollar back up, it would appear that the Fed is likely to err much more to the dovish side this year in a manner that has been articulated in a much more explicit fashion, than previously in the past couple of days.
European markets underwent a more subdued session, eventually finishing slightly higher as they consolidated the gains seen over the past week or so. This morning’s open looks set to see a fairly flat to positive start as we come to the end of the first full trading week of 2019.
The FTSE100 in particular has looked strong, on course to post its third successive weekly gain, while the DAX has also performed well, despite announcements of thousands of job losses across the auto sector as Ford and Jaguar Land Rover reported that they would be reducing their workforce across Europe in response to a sharp slowdown in car sales particularly in China, which earlier this week reported its first decline in auto sales in twenty years.
It is unlikely that these companies will be the last to do so given that all the major auto manufacturers are facing similar challenges around diesel emissions, the move to hybrid and electric cars, and slowdowns in consumer spending.
Political noise around Brexit continues to add to the uncertainty but it is still by no means the markets main concern for the moment as investors strive to make sense of the next move in the US, China trade story, and how the outlook for further US rate rises is likely to play out, against a backdrop of a slowing global economy.
Concerns about a slowdown in the UK economy will focus on a different sector today with the release of the latest manufacturing and industrial production numbers for November. We’ve already seen some ugly numbers out from Germany and France this week raising concerns that Germany could fall into recession in Q4. If the weak economic environment in Europe is any guide the UK could well cop some of the fallout from that, with the sharp decline in oil prices also weighing on the UK oil and gas sector.
UK industrial production is expected to rise 0.3%, while manufacturing production is expected to rise 0.4% after some sharp declines in October. It should be remembered that similar positive projections were expected for this week’s German and French numbers so a sharp miss to the downside can’t be ruled out. Monthly GDP is expected to come in unchanged at 0.1% for November, with the rolling three-month average expected to slip back to 0.3% from 0.4%.
Today’s latest US CPI numbers for December, should make interesting reading given the sharp declines seen in both EU and Chinese inflation readings seen this week. While a lot of recent data releases are being delayed due to the ongoing US government shutdown the inflation numbers will be available, which means that the Federal Reserve will be able to get an insight into how recent movements in oil prices, which have eased inflationary pressures globally, has affected the US economy. This was a major concern amongst a few FOMC policymakers at the meeting in December and today’s numbers are likely to confirm those worries, if as expected, prices drop sharply from the 2.2% seen in November, with expectations of a fall to 1.9%.
EURUSD – pushed above the 1.1500 area earlier this week but ran out of steam at the 1.1570 area before slipping back. We could still head towards the 1.1600 level, and potentially the 200-day MA at 1.1640, if we can hold above the 1.1420 area or Tuesday’s low.
GBPUSD – the pound continues to struggle just shy of the 1.2820 area, which it needs to overcome to signal the potential for further gains. We have interim support at 1.2680. A move below 1.2400 retargets the 2016 lows near the 1.2000 area.
EURGBP – the 0.9100 level remains a key resistance area despite a brief spike to 0.9120 last week. Bias remains for a move back below 0.8920 towards the 0.8820 level as the broad range of 0.8700/0.9100 that has held sway for the last four months remains intact.
USDJPY – while below the 109.20 area the US dollar is susceptible to a move back towards the 107.50 area, and back down towards the 106.00 area, towards the lows at 104.60. We need to recover back through the 109.20 area to argue for a return to the 110.30 area.