 Good morning. Welcome to CMC Markets on Friday the 12th of August and this quick look at the week ahead beginning the 15th of August with me Michael Huston It's been a fairly positive week for equity markets. The S&P 500 It's broken above four thousand two hundred the NASDAQ appears to be breaking out and certainly European markets are also looking Fairly resilient on a day-to-day and a week-to-week basis. Yes, there has been some disappointment with some earnings numbers, but I think by and large over the course of the past few days The the numbers have been probably better than perhaps markets that had originally anticipated as we as we came into This earning season. Yeah, if you miss then generally you get punished quite severely We're certainly seeing that in some of the price action, but generally Markets are looking fairly resilient even as US 10 year yields appear to have broken out to the upside. We can see that in This US 10 year yield chart. This is the chart. I've been looking at for quite some time Looking for evidence of a topping in US yields. I'm still pretty much in that camp after this week's CPI numbers out of the US which fell back Quite a bit more than markets had anticipated a large part of that decrease in prices Was primarily due to a decline in energy prices notably gasoline prices, but Certainly, I think the sharp fall that we also saw in PPI US PPI for July would appear to suggest those June numbers We're a little bit of an outlier and it does appear to be a Hope now that we've probably seen peak US CPI the key question now is how quickly Those inflationary pressures diminish and I think that's why you've seen a succession of Fed speakers this week Push back on the rate cut narrative for 2023. I mean to be quite honest. I think Any prospect of a rate cut in 2023 is really pie in the sky if you've got a central bank that is in inflation mandated 2% And you've got headline inflation in and around 9% or 8 and a half percent It's highly unlikely to fall back to target In the space of 12 months unless you have a significant depression And at the moment the US economy is not really showing any signs of that that doesn't necessarily mean to say that it's going to happen But certainly I think if you look at the numbers and the Fed has said that it is very much Data dependent not one piece of data dependent, but data dependent more broadly Then I think we're likely to continue to see Rate hikes into the autumn 50 basis points now for September Given that slightly weaker number We do still have one payrolls report on one CPI number due between now and the next Fed meeting Obviously, we also have Jackson Hole later this month, but but ultimately I think I think the base case now is for 50 basis points in September from the Federal Reserve as we look ahead to next week and the latest Fed minutes I Think those will be particularly interesting in the context of those power comments about where the neutral rate Is two and a half percent? There's been significant pushback on that and I think You know the Fed speakers that we've heard so far even from the likes of Minneapolis Fed President Neil Kashkari Would appear to suggest that the Fed is in no mood to soften It's tone when it comes to getting inflation under control So really it's about wrestling the narrative back from markets who seem to think that we're going to get rate hikes rate hikes rate cuts in 2023 I think that's unlikely You know, I think for me, where is the new baseline? Where's the new median for headline inflation? It's not going to be two percent It's probably going to be around about four or five percent and then it's really a question of how do we get it back down to 2% as we go into as we go into the winter and come out the other side one notable thing I think as we look ahead to the new week is European inflation and UK inflation and the focus I think for the upcoming week is going to be very much on the UK economy UK CPI we've got UK unemployment. We've got UK retail sales We also have China and US retail sales But I think they'll be slightly lesser of important in terms of the focus on the UK after second-quarter GDP GDP showed the UK economy contracted by 0.1% in Q2 some of the more How do we say it? You know sort of a pessimistic Expectations for June monthly June GDP of minus 1.2% didn't come to pass We got minus 0.6 and even though manufacturing production and industrial production were disappointing in June They were revised higher in May. So all in all when all things are considered for Q2 a 0.1% contraction is certainly not the disaster that an awful lot of people were painting it out to That's not to say the UK economy doesn't I think This week has been very much a case of Resilience as opposed to recession So let's look at the FTSE 100 FTSE 100 Is still looking fairly well supported Certainly very much buy-on dips, but again, it's very much range bound So I don't think there's really too much we can deduce from the price action when it comes to The FTSE 100 certainly I think the slow glacial rise back to the highs is certainly not Out of the realms of possibility if we also look at say for example the the DAX We are still very much in the downtrend that we've been in pretty much since those peaks back at the beginning of the year We are currently pushing up against this resistance level here 13,7800 7 at 13,780 even easy for me to say but also this trend line From the peaks through here So we've certainly got potential for a little bit more upside towards 14,000 on the German DAX despite concerns about the Rhine being closed to Freight traffic because of the low levels and also The high levels of gas prices that are probably going to cause US inflation and European and UK inflation to diverge Yes diverge while you're starting to see elements of Peak US inflation as a consequence of lower oil prices, but also lower natural gas prices because they have their own Source of natural gas unlike the UK in Europe where we have to source our supplies externally That's likely to mean that inflation here on Mainland Europe and the UK is likely to remain an awful lot stickier as we head into Q3 and certainly that is the expectation as we look ahead to the UK inflation numbers which to do out later next week Seeing some decent breakouts on US markets We've seen 4,200 we're above that now But we still very much remain in the downtrend again that we've been in since those peaks Earlier this year and as well as the 200 day moving average So we are climbing a wall of worry people don't like this rally But the rally is happening nonetheless, and I think that's why it's happening people don't like it And they're short of it and they're getting squeezed So I think there's certainly potential for a lot more legs in this particular rally going forward And there's no better illustrated than in the Nasdaq which has broken higher Even though we are still starting to see evidence of exhaustion. We've got doji's here. We've got doji there We've got doji there, but we are continuing to ratchet higher But again, we're still below the 200 day moving average as we are on the S&P. So even though we've broken above 12,900 we're now above the trend line here. This squeeze certainly has potential to go to 14,000 But there is very solid support at 13,000 going forward so That's the DAX that's the Nasdaq. That's the S&P. That's the FTSE We have seen a weaker dollar this week And I think that has helped in the overall context of the risk rally that we are currently seeing Euro dollar has broken out Ever so slightly from that 102 70 80 area and we're now pushing up against the 50 day moving average We haven't as yet been able to close above it and more importantly We haven't really been able to take out this trend line From the peaks back in February. So the euro dollar rally does look a little bit weak. It feels a little bit like a fake out You know, the big question is how much further upside is there in euro dollar Even though the dollar is currently having a little bit of a tricky week And that's certainly no better illustrated in the way that the dollars behaved against the yen We can see that in this chart over here on the daily charts We've managed to fall back to the bottom of the cloud Which is actually a fairly decent degree of support for all Of this month So that's going to be the key support going forward on dollar yen the kumo cloud If we fall below the kumo cloud, then we're probably going to fall back to around about 128 or 129 But it's certainly notable That dollar yen is finding it difficult to rally back through the 50 day moving average So I think with respect to dollar yen, we could well see a little bit of dollar strength in the short to medium term But we really do need to get back above the 50 day moving average Otherwise we run the risk of a dollar roll over. So we are starting to We do appear to be starting to Come into a period of a little bit of dollar weakness That's not helping euro dollar that much and it's certainly not helping cable either But it's certainly very interesting here that we've got the beginnings potentially of an inverse head and shoulders on this cable chart It's holding the neckline for now There are huge challenges for cable in the short to medium term I am encouraged by the fact that this pullback here didn't take out this left shoulder here Which is around about 1985. So we really want to see a move through 123 I want to see a move through 123 To target a move back to the 200 day moving average a lot I think will depend On the numbers that we get next week if we get a high cpi number That means that the bank of england is probably going to have to go by another 50 in september Certainly, I think if you look at the underlying consumption numbers, they're not great But they're not bad. There's an awful lot of doom and gloom about the next energy price cap Being raised in october there has to be a decision made on that sometime over the course of the next few weeks But I think to assume that the government will do zero In terms of mitigating the effect of that october price cap rise is to assume A complete level of incompetence that I think even as far as uk government policy is concerned Would be off the charts. Yeah, I mean, we're not well served by any of our politicians at this point in time But I certainly think that it's quite likely that we'll see some sort of fiscal help for some of the more vulnerable members of Society in terms of how they're going to be able to afford To actually pay for the energy price rises that are likely to be coming down the pipe going forward I think some form of help will be forthcoming Bank of England will probably have to go by 50 In september on the basis that the federal reserve is going to be going by 50 in any case The bigger question is what will the european central bank do? Given the challenges that it's going to be facing over the course of the next few months if as I suspect Putin starts to look at cutting the gas levels off in europe So I'm encouraged. I'm sort of slightly optimistic About further cable gains Euro dollar really needs to break above 103 50 That's I think for me is really I think the key level on euro dollar We've gone as far as 103 70 at the moment. We haven't really got back above that Looking at these these sort of lows through here as the next area Of resistance on any move higher if we can get through 103 50 60 Then there's certainly potential to come back to around about 106 without undermining the overall lower euro narrative And obviously there's this trend line here, which is worth keeping an eye out for in terms of buying dips on euro dollar So let's start obviously we've talked a little bit about uk cpi That is forecast To head towards 10 it's currently at 9.4 We did see us cpi retreat from 40 year peaks Last week this week. I don't think we're going to see the same thing manifest itself in uk cpi so The forecast is for 9.9. We could well see 10 core prices are expected to move above 6 percent and I think more than anything It's what core prices are likely to likely to do That it's probably going to be Front and center in terms of the bank of england's reaction function reaction reaction function ppi Again They're that's above 20. There's been no significant Sign that that is going to slow down So that again is likely to feed into the wider narrative. We've got unemployment numbers They're expected to remain fairly steady at 3.8 percent the The main numbers showed that hiring in the three months to may rose by 296 thousand I mean, that's a huge number And I think that was largely as a consequence of the increase in the cost of living prompting an awful lot of people To return to the workforce So there is a chance that actually unemployment could start to wedge down From 3.8 percent to 3.7 percent bonuses wages Wages including bonuses came in at 6.2 percent I think you'll find that employers are making an awful lot of one-off payments To help their workforce ride out the surge in prices and the surge in the cost of living So I think that more than anything else Is likely to be the one number that I probably watch rather than the actual 4.2 percent which which which excludes Bonuses, I think what you're going to find is that in an attempt to try and rein in Um wage price inflation you'll see employers making a lot of one-off Bonus payments or supplementary payments try and basically smooth out The the rises that we're currently seeing energy prices for their employees retail sales In June came in better than expected It's clear though that rising fuel prices were impacting on consumers driving habits Consumer confidence continues to remain low record lows there So I think in terms of retail sales for july I'm a little bit encouraged by the recent british retail consortium retail sales numbers Which are compared to which appear to confirm a trend of strong sales of clothing food drink and electric bands We heard from next A few weeks ago And their numbers were much better than expected and one of the notable takeaways from next's numbers Was the resilience in clothing sales because next generally don't do an awful lot of discounting And yet their numbers Were actually much better than expected because consumers went out and bought an awful lot of summer clothing Because of the heat wave in july, which obviously we're now getting a little bit here in august And also spending data from barkley card was also fairly solid at rose 7.7 in july so I think the retail sales numbers for july might Might surprise to the upside We've also got u.s retail sales Um for july U.s retail sales have been fairly resilient all year They've only posted one negative month and that was in may and that was minus 0.1 percent one of the key takeaways I've taken From u.s retail sales. It's been a big jump in u.s consumer credit a massive jump We've seen we've seen two of the highest ever Monthly numbers for u.s consumer credit this year in the six months This year we've done pretty much The whole of the numbers of 2019 in terms of u.s consumer credit in the first six months of this year So that suggests to me that u.s consumers are basically Adapting to the rising cost of living by borrowing more money So that's a worry unless inflation starts to come back, which it does appear to be starting to do in the us so in terms of Numbers that i'm paying particular attention to We've got persimmon The house builder and we've got target and war mark and i think in terms of persimmon One of the things that's really struck me about house builders is how poorly They've performed despite the fact That average selling prices are actually higher they've been managing To keep a handle on their costs and their order books are fairly solid forward sales for persimmon We're up on a year ago to the tune of 1.87 billion dollars at their most recent update There has been some problems delays in the planning system Which is delayed the construction on 120 000 plots in england But the average selling price of forward sold homes is 280 000 which is Up from the average selling price Um of 245 000 which was at the end of last year So certainly i think you know the demand is still there The big question is whether or not we can we've seen a base in terms of The share price and whether or not we're not we're going to start to see a rise I think the biggest concern is obviously rising interest rates and the effect that is likely to have on the mortgage market Now as far as the u.s consumer is concerned Walmart issued a profits warning back in may. I think you can see where that profits warning came in Um by the sharp fall in the share price Um at the end of last year Walmart predicted sales growth of four percent Which I thought at the time seemed a little bit optimistic given the fact that prices were rising now They reduced that target in may to three and a half percent as well as cutting the eps view for q2 What they said the reason for that was The consumers were spending this on high margin items and spending more on groceries now in july Walmart had more worrying news about the outlook and that prompted this fall Back here. So we've seen a fall here. That was the first profit warning and here is the second one What was notable that it was it didn't take out the lows that we saw in may and june But what they said about the outlook was that they've downgraded their operating margins and To below four percent for the rest of the year and said expel sales sales sales Sales were expected to be higher 7.5 percent for q2 and 4.5 percent for the rest of the year Spending on food and energy was now making up a much higher proportion of basket spend Leaving less money for higher value and margin items. So Big question is, you know, will will they downgrade their outlook for q3? Will they downgrade their outlook for the four year? We've also got target Target also We're slightly more pessimistic again. That was the Walmart's profit warning because ultimately anything that affects Walmart affects target Less of a reaction in terms of the one in july A little bit of a down move there, but ultimately we have seen Markets recover. We haven't closed this gap not yet So certainly I think there's potential For us to go a little bit higher simply on the basis of the fact that maybe things aren't going to be anywhere near as bad If us inflation continues to soften into the autumn. Yes, the federal reserve will continue to raise rates And certainly in the context of the fed minutes that we're expecting later this week I'll be very interested. I think in terms of The comments that pal made about where the neutral rate was he said it was around about two and a half percent um, so in terms of this week's minutes And the pushback that we've seen from people like mary daily I was san francisco fed the st. Louis fed president james bullard Um talking about a fed funds rate of three and a half to four percent It'll be interesting In terms of the wider discussion as to whether or not there was a wider discussion about where the neutral rate was And whether or not pal was freewheeling When he came to say well, we're back to within where we consider the fed one Within the range of where the fed funds rate in terms of being neutral If you've got inflation at nine percent neutral is not two and a half It's going to be four or five percent and that's certainly more in line in what People like mary daily james bullard and nil kashkari have been saying In terms of where they see the fed funds rate by the end of this year So it'll be instructive. I think in terms of the overall minutes for this week as to The tone of that particular Discussion So that's it for This week ladies and gentlemen. Thank you once again for listening. I hope you all have a great weekend. Enjoy the sunshine Make sure you've got where plenty of sunscreen and I'll speak to you all the same time same place next week Thank you very much for listening