 Good morning. Welcome to CMC Markets on Friday the 11th of February and this quick look at the week ahead beginning the 14th of February me and me Michael Hueson and It's certainly been a week for numbers this week. We've seen some Good earnings. We've seen some bad earnings. We've seen Inflation numbers that have come in above expectations and we've seen a market reaction that Initially saw markets trend higher in the first part of the week and as we head into the weekend. We're seeing markets that are Spooked by a very high US CPI reading or January So as we look ahead to the upcoming week, the focus is going to remain on inflation particularly with respect to UK CPI We've also got a whole host of other data out of the UK in the coming week. Namely unemployment wages and retail sales As well as the latest Fed minutes and the Fed minutes are particularly topical But they're also going to be dated Given the fact that they happened before this week's US CPI reading which Was how should we say a little bit of a surprise to the upside? for most of this week we saw US markets sort of trending higher on an expectation that We might see the US inflation US inflation might be slowing You know, we can we can sort of see that play out in the early part of this week with a slow move higher And obviously this is the move post CPI And this is where we are currently now above the 200 day moving average on the S&P 500 And it's interesting to note that the rally that we saw In the early part of this week ran into problems at around about the 4595 4600 level so that's going to be a key level and even though we've seen Yield spike quite significantly over the course of the past 24 hours we can see that played out here in This spread chart that I've done between the US 10 year and the US 2 year. So the 10 year is a 199 62 Hit 2% yesterday went up to as high as 205 it has since come back And we've also got the US 2 year which is currently at 158 57 it went above 160 yesterday and has since slipped back And of course what we've also seen is a narrowing of the yield curve. We've seen a sharp Narrowing of interest rate differentials between the 10 year and a 2 year Over the course of the past few months and that's reflected in this down channel here now an awful lot of people have suggested that If the yield curve flattens and Potentially goes inverted like it did back in 2019. That's a signal of recession Well, we weren't in recession in 2019 So sometimes the yield curve inverting doesn't necessarily mean that we're heading towards recession What is essentially I think reflecting is concerned that the Fed might React too aggressively to yesterday's numbers Now depending on who you talk to You know the inflation is either transitory or it isn't the ECB think that inflation is transitory It's interesting to note that this week the CB president Christine Lagarde dialed back Some of the hawkishness from last week's press conference when she said that a rate rise was well When she refused to repeat her comments in December The rate rise was unlikely in 2022 Nonetheless, we've seen the European Union downgrade their economic growth forecasts for this year As well as revising upward their inflation forecasts, but they still Seem to be of the opinion That inflation is likely to be more transitory than not and that there's no comparison When compared to the US economy and certainly I think in terms of the GDP numbers. She's probably right But as I said in my video last week Inflation is anything but transitory Certainly by the looks of some of the inflation prints that we're seeing in some parts of the euro area Baltic states for example, CPI is above 10 percent France, it's a 3.8 and yet somehow ECB thinks that miraculously Inflation will fall back to the 2% target In the early part of next year. Well, I guess we shall see without them doing anything Well bond markets certainly aren't reflecting the fact that the ECB is going to do nothing this year And even though we've had some dovish commentary coming out from various other ECB policy makers I think that's more of an attempt to try and cap the rise and Peripheral yields that it is any expectation that we won't see a rate hike From the ECB this year and let's not forget. They're at minus 50 basis points. So That I think is the The the key thing that I'm looking at over the course of the next few days What was particularly interesting? I think with respect to yesterday's CPI numbers Which was a 40 year high for the US Was that the core prices the core prices took the scales at 6% so that's stripping out Food and energy, which is obviously the hottest components if you actually look at the numbers internally Away from used car and petrol prices, which were both up 40% year to date We still saw double digit price rises in domestic gas meat dairy Fish and fruit so rather begs the question is why the Fed is still adding to its balance sheet even now you heard talk On Thursday of Bullard saying that maybe they should have an emergency rate meeting So hike rates before the 16th of March, which is when they're due to have the next policy decision I mean really is he serious? I mean that suggests to me that he's been spooked by Those inflation numbers seven and a half percent You know, what's it gonna change, you know, we are now heading into the 14th of February The week beginning the 14th of February and he's talking about emergency rate hike Why don't you just telegraph to the markets? You're absolutely terrified of what's going on. It's not particularly helpful And you'd have to stop QE as well and seeing as QE is ending in March anyway What would the point be it basically hiking rates by 50 basis points or 25 basis points four weeks before you're going to do So anyway, so I think we can basically draw a line under any prospect Whatsoever that the Fed will call an emergency rate meeting and do an emergency rate hike I think that's highly unlikely Because it would send them they would send the message That the central bank is panicking and I don't think that's a message They really want to be sending not to the markets anyway not to anybody for that matter so the s&p 200 day moving average these lows here are likely to be very important when US markets open later today What was particularly notable? Was the 200 day moving average on the NASDAQ which held Quite nicely, but again, you see we've seen very we've seen some very decent up moves this week But again, we've run foul of that 15,000 level. So Again, this is the key level on the upside for the NASDAQ coinciding with those key levels that I outlined on The s&p 500 for me if we're going to see further gains on US markets We need to break that top there Otherwise, there is a risk that we could break towards the downside and revisit the January lows now I have been impressed by the resilience of US markets relative to concerns about high levels of inflation and I think that's just the markets are starting to get used to the idea The rates are going to have to rise and and ultimately some of what we've seen this week with respect to earnings Actually has hasn't been too bad You look at the unemployment numbers the unemployment numbers are still very very low and I know there are concerns about Unemployment going up Well, it could well go up, but you need to work through the vacancies first 10 million in the US 1 million in the UK So I think it's unlikely that unemployment will start to go up given the number of vacancies currently available in the in in the US and UK economy now, of course those vacancies could disappear But at the moment they are still there and we've got UK data coming up in the next few days Which should give us an indication of the health of the UK labor market FTSE 100 has had a fairly decent week this week Once again trending higher made another two and a half year to two year high earlier today Well on course for my target of seven thousand eight hundred and again once again Very much a case of by the dips higher lows higher highs. We have seen a little bit of a pullback today But overall, you know while we're still in this uptrend We remain very much a case of by the dip now we could slip back down Certainly, we did that the last time that we saw that here We could we'll see a similar fallback to seven thousand four hundred, but overall I still remain broadly positive on the FTSE 100 And I see no reason to change that and perversely if you get if you get significant further weakness in US markets that could actually see Capital flows move into Europe and the UK because they're much cheaper markets relative To the more overvalued areas within the US So you could see money come out of the US and come into Europe and the UK Where the stock valuations are much for own company valuations are much more realistic So again backs here same old same old we're in a range I really don't see that changing the big support level is in and around 15,000 So definitely going to keep keep an eye on that going forward So looking at the data and it's very much a UK centric week as we look ahead We've got UK unemployment and average earnings on the 15th of February And that fell back to its lowest level unemployment for back to its lowest level since July 2020 In the three months to November and falling to 4.1% The biggest problem here is the lacklustre wage growth that we've been seeing and That contrasts with the much more positive wage growth that we've been seeing in the US Wage growth in the US is at 5.7% I mean, it's still below the inflation rate of 7.5, but nonetheless it is at a much higher level and it's rising It went up from 4.9 to 5.7 So it's going in the right direction. The biggest concern in the UK is that wage growth is falling And that is that is a trend that we really need to see some evidence of a change in given the fact that we've got Potential tax rises coming in April Everyone is feeling the pinch at the moment companies have been able to pass on price rises But that may not continue to be the case As we head into March, April and May So certainly we'll be keeping an eye out on for evidence of a bottoming In the decline that we've been seeing in wages and real wages are declining at the moment relative to inflation But certainly in December, the number of vacancies increased rising to 1.25 million But the labour force is a little bit smaller than it was pre-pandemic So that will be significant. It'll be significant in terms of retail sales, which are due out on the Friday the 18th And in the wake of the government's rollout plan B restrictions In December, we saw a massive slump in retail sales Minus 3.6% But it didn't have a big effect on fourth quarter GDP We still saw a 1% expansion In fourth quarter GDP In the numbers that were released this morning More importantly, manufacturing held up fairly well as did construction So The hope is that we'll see a little bit of a rebound in UK retail sales For January certainly I think in terms of the Numbers that we saw from the British retail consortium earlier this week that We did see a little bit of a rebound on the back of sales of homeware and electronics Food sales did slip back But you would expect that given the fact that food sales food sales would have picked up Leading into Christmas and New Year. So that would be, you know, a perfectly normal state of affairs So the expectation is for UK retail sales to see a See a rebound of around about 0.9% for January However, with consumer confidence still remaining fairly fragile Obviously, you've got rising prices in the shops As well, which is likely to constrain incomes That that is that is potentially going to act as a little bit of a break on spending as we head towards the end of the tax year CPI CPI I think is going to be the hot button issue For this week because it could give us a forward indication Of what the Bank of England might decide to do in March given the fact that four MPC members voted for 50 basis points at the last meeting rather than the 25 that we actually got So a really strong reading here Could actually tip the scales for a potential another 25 basis points In March and certainly if you look at the UK two-year guilt Mark is surprising in quite a bit more than that over the course Of the next year or so the UK two-year guilt yield is at a 10-year high It's a 10-year high So certainly I think They're the markets are pricing in quite an aggressive Place of tightening now whether or not we get that is another matter But certainly I think in terms of where the guilt yield is We're certainly looking at at least another 1% Which to my mind seems a little bit much Just to just as a reminder the base rate was at 0.75% Before the Bank of England cut rates Pre-pandemic so they'd only be restoring it back to where it was in January 2020 Nonetheless, what are we expecting For CPI we saw 5.4% in December up from 5.1% in November and On the RPI measure prices rose even faster rising to 7.5% so 7.5% RPI In December got 7.5 7.5% US CPI in January and the UK economy grew 7.5% in 2021 So the number of the week is 7.5% nonetheless The most notable takeaway that I took from those December numbers was a sharp rise in food non-alcoholic drinks along with increases in the prices of clothing and household goods so I think The supply chain disruptions we've been hearing about for several months are starting to filter down into the shops now This is unlikely to be the end of it given the Bank of England expects CPI to peak at 7.25% Probably in April Which is likely to push the RPI up to over 9% now this week's generally numbers are expected to see UK CPI coming in at 5.5% And core prices to rise to 4.3% Don't be surprised that comes in higher because we underestimated US CPI on Thursday this week So it stands to reason that economists are potentially underestimating the impact Of price rises coming through in the January numbers So a strong number in January Could mean the Bank of England It probably wouldn't take much To tip the balance from four to five or six voting for a 25 basis point rate hike in March So looking at cable we can see from these two converging lines here That we've got decent resistance in an around 13670 That trend line From the highs through here still remains fairly intact. We've also got the 200 day moving average So the barrier for further sterling gains Is quite significant when we look at this cable chart here Having said that you're basically trying to price the Bank of England against the Federal Reserve And that's why you're getting this price compression You've got the push pull of US and UK rates Obviously the UK economy And the effect that potential rate rises could have on that But overall we're still pretty much in a fairly decent range decent support 13420 Um resistance up around 136 I don't expect that to change any time soon Oh, obviously if we do get a breakout then the breakout is likely to see us trade lower Euro sterling fairly solid support at 8,280 We can see that here Going all the way back. That's a huge level Um, we rallied really strongly in the wake of the Lagarde press conference last week But we haven't been able to follow those gains through as the ECB have once again talked to the prospect of a rate hike Or multiple rate hikes down Now that means that we could find significant support around about 8370 on the Euro sterling, but that doesn't necessarily mean that we can't trend lower That does tend to be the line of least resistance when it comes to further euro sterling Losses, but we still remain very much in the realms of sell the rally for euro sterling So I still expect to see that to start to creep back Towards those lows that we saw back in January Fed minutes Um, let's look at the dollar index because that's going to be particularly interesting And it's still very much in cases by the dip when it comes to the dollar index and I think the problem with this the problem with this week's Fed minutes is the fact that There's been an awful lot of chit chat If you want to call it that Of the appetite amongst various Fed officials for the likelihood of a 50 basis points Rate rise in March as well as the prospect of a ride an increase in rates at every single meeting Mark is surprising six or seven rate hikes this year So I'll be looking for The thinking of FOMC members on that with a caveat that obviously this was before um The cpi reading that we saw Um earlier this week. So it's really difficult to gauge how much We can take from these latest Fed minutes given these given the data that we've seen since then notably payrolls Which were really strong With decent wage growth and the cpi Now we do have us retail sales Coming up and it'll be very interesting to see whether or not Um that the end of year weakness that we saw in December Translates into a new year rebound US retail sales have been trending much better relative to Retail sales here in the UK simply because US consumers got an awful lot more fiscal help From the US government and an awful lot of them. I think are still living off that that's not gonna That's not gonna last forever But nonetheless I think the US economy is in a slightly better state. So for example in terms of consumer spending than the UK one so retail sales We could see A rebound of 1.7 certainly. That's what markets are expecting Bigger question is whether or not that's what we'll get given the fact that consumer confidence remains so weak But again with consumer confidence and retail sales What people say how people say they feel Is not really directly correlated with what they actually do so I'm a little bit skeptical of of the The crossover between retail sales And consumer confidence. I don't think it's always an accurate benchmark when it comes to extrapolating one number from the other In terms of earnings we've got Four companies, which I've got my eye on Natwest group of of the banking UK bank starts So we've got Natwest is the first one to kick off UK bank turning season And certainly we can see over the course of the past A few months how well the Natwest share price has done But you also have to put that in the context of the fact that it hit record lows All the way back in 2020 in the aftermath of the lockdown Certainly have been good ones for the Natwest share price We have to go back an awful long way To see where we were pre-pandemic and we're pretty much back to where we were At the end of 2019 and the general election result that we saw mid December 2019 so basically we're back where we were Just over two years ago so four year numbers for Natwest We've seen a whole host of provisions loan impairments recycled back onto the balance sheet which has helped boost their profits Net interest margins continue to struggle. They're not quite the weakest in the UK banking sector HSBC is lagged behind, but they've fallen back In q3 to 1.5 percent from 1.61 percent But shareholders will be looking for management to follow through On the pledge to distribute a minimum of 1 billion pounds per annum to shareholders from 2021 to 2023 By a combination of ordinary and special dividends now, obviously that'll be good news for the UK government Because their their stake now sits at 52.96 percent And they've reduced that ever so slightly over the course of the past 12 months and the bank has also sold off its irish loan book or is in the process of doing so to Permanent TSB for 6.4 billion euros in december now that deal was expected to take Around about 12 months to complete but nonetheless The bank has also said it plans to buy back 750 million pounds of its own shares in the second half of this year So this year this this coming week's four-year numbers certainly be interesting in terms of the payout for Natwest as it gets so it gets ready to report its full year numbers Certainly in terms of the direction of travel for the share price Things look fairly positive although a slowdown in the UK economy could impact On some of its lending patterns, but overall They've been fairly positive. We've also got the latest numbers from Wreckett Bank Kaiser I think we there's I think there's definitely a read across from unilever this week They were a little bit disappointing But one thing that I did take from the unilever numbers was the fact that they have been able to improve their or increase their prices Without having seen a significant impact on their sales growth numbers Now on a like-for-like basis nine-month revenues for Wreckett have seen a rise of 3.6 percent so looking to see that sustained into Q4 and there's also been shatter about A disposal of its infant formula business Which was said to be up for discussion as a result of pressure from shareholders over whether this business could be considered high margin enough So we could see some further evolution On the thinking of that. This is the same business that they paid 17 billion dollars for In 2017 now they're looking to offload that business. They offloaded part of it already The china business 2.2 billion dollars in september So that's quite a bit of a destruction of value When it comes to that and that's sort of reflected in the share price that we've seen over the course of the past Few months, but it is towards the lower end of its recent range so I would imagine that the bar is quite low when it comes to Wreckett Ben-Kaiser and This this week's four-year numbers. We also got the numbers from Walmart Nothing really to speak of Their costs are going to be the main issue There as they have been for pretty much every other retailer. How much more money are they having to pay their staff? How much is you know, how much more is it costing them relative to sales? Certainly Christmas period is the strongest period traditionally for retailers But having said that they have to imply an awful lot more staff um And there are tougher comparison comparatives rather if I can get my words out from 2020 but profits are still expected to come in at a fairly healthy $1.50 share But there's the key support level there on Walmart shares just below 136 135 So keep an eye on that and keep an eye for any disappointment and last but not least in video Done really really well been a big winner from the chip shortage Also It's pulled out of its deal to buy arm Not really surprised that to be quite honest. I mean, I you know, we've seen that one coming for quite some time Regulatory concerns and what have you and we've got a nice little uptrend here so we remain solidly in that and I think it's likely that We'll probably see Another decent set of numbers and they've already seen a 55% rise in the sale Of their new high spec chips for ai tasks And they've also launched a new suite of chip products called the omniverse Which is which is expected to drive revenues in this area in the coming quarters So expectations for this quarter fourth quarter Are for revenues of 7.4 billion dollars plus or minus 2% with gross margins of 65 To 67 percent So keep an eye on that support level the 200 day moving average there But expecting some fairly decent numbers from Nvidia as we look ahead towards next week One other one other one other company that is reporting is also airbnb And they will report that we were reporting their fourth quarter numbers on the 15th of february But that's it for the week ahead. Thank you very much for listening This is Michael Houston talking to you from CMC markets and have a great weekend