The overnight session was relatively non-descript for financial markets in the bigger picture. Equity and currency markets moved sideways, as did precious metals, with only energy markets exciting as oil continued to push towards USD60.00 a barrel. That is not to say that individual corners of the financial world didn’t have busy days; Alphabet, for example, had a banner day after its results yesterday.
The loss of momentum is likely temporary, with US stimulus developments having a quiet day as the Democrats attempt to bludgeon the package through the Senate. There were some intriguing data releases overnight, and the fact that markets didn’t really react to them strongly emphasises that we all remain on stimulus watch.
Eurozone inflation outperforms
European inflation data leapt higher, with both core and headline inflation outperforming. Core Inflation YoY rose to 1.40% versus 0.90% expected. Headline Inflation YoY rose to 0.90% versus 0.50% expected. Much of the increase in core inflation can be attributed to the VAT cut’s reversal in Germany. Elsewhere, higher oil prices are making their presence felt, and this will be a continuing trend in 2021. Services prices rose, reflecting logistical logjams and higher transport costs due to energy.
Given that European growth is easing due to a pandemic induced double-dip recession, the sniff of stagflation will be turning a few more hairs grey in Frankfurt. There is, unsurprisingly though, no evidence of wage cost inflation, meaning we shouldn’t expect the inflation hunter gnomes of Northern Europe to do something stupid like tightening monetary policy. Oh wait, this is Europe. Some inflation components evidenced last night are here to stay, notably German VAT and energy prices. Bond markets didn’t blink, but the numbers are likely to keep the pressure upon the euro.
US data also outperformed overnight. Markit Services PMI rose to 583.3, while the ISM Non-Manufacturing PMI rose to 58.7, with the New Orders, and Employment sub-indexes showing impressive gains. Being an index of expectations, it does suggest that business in the US sees better times ahead, and I cannot disagree. The most notable beat was ADP Employment, which climbed to 174,000, blasting the 58,000 expectations out of the water.
The ADP number has had a strong correlation to the Non-Farm Payrolls over recent months. And that has seen markets rapidly reassessing this tomorrow’s Non-Farm Payrolls print. Expectations are rising that the Non-Farms could print around the 150,000+ mark as well, up from a 50,000 expectation as of last week. If the correlation holds this month, and assuming we have no stimulus road bumps, equity markets could be in for a strong finish to the week on the US recovery/stimulus story. US yields moved higher on the US data overnight, and that trend could also continue if we see a healthy number on Friday.
The data calendar is quiet in Asia today, which seems content to trade sideways after receiving no strong lead from the US overnight. Australia’s Trade Balance rose by more than expected to AUD 6.785 billion. The headline is flattered by lower imports, but more importantly, exports held firm at 3.0%. That suggests that despite the China trade restrictions, the Lucky Country remains lucky, and by default, so does its recovery. AUD/USD has moved slightly higher this morning but still looks vulnerable to US dollar strength.
Pan-Europe Retail Sales and Construction PMI data are expected to be weaker this afternoon for obvious reasons. Most of the attention will be on the first Bank of England rate decision for the year. We expect rates to remain unchanged at 0.10%, and for the QE target to also be unchanged at GBP875 billion. Attention will be focused on whether the BoE puts negative rates to bed and leaves it there. My distaste for negative rates is well known, but if the BoE agrees with me, it should be positive for sterling. UK data of late has shown a bulldog-like resilience despite the pandemic restrictions. The UK is also well ahead with its vaccination programme, meaning there are more than a few reasons to be positive on Boris-Britannia, at the moment.
Weekly US Initial Jobless Claims are released this evening and will generate some short-term volatility. Asia’s highlight tomorrow will be the Reserve Bank of India rate decision, coming after the fiscally expansionary budget on Monday. With inflationary forces ebbing, and a strong need to keep government borrowing costs manageable domestically – the budget threatens India’s international credit rating – the RBI may chip in with a rate cut. That should be another positive for Indian equities which have had a banner week.
Other than that, and headline risk aside, it is hurry up and wait for tomorrow night’s US Non-Farm Payrolls.
