 Good morning, welcome to CMC Markets on Friday the 17th of February and this quick look at the week ahead beginning at 20th of February with me, Michael Houston. It's certainly been one of those weeks where it's been difficult to determine a direction, unless you're looking at the FTSE 100 or the Cat Caron, both of which have made new record highs this week. And I haven't changed my mind about the FTSE 100. I still think there's potential for further upside there. But I think what we have seen this week is a little bit of a change to the cosy consensus that developed around the 25 basis point rate hike from the Federal Reserve consensus. And the fact that disinflation was likely to be a one way route to the downside. This week's data have really, I think, prompted an awful lot more uncertainty about the stickiness of inflation. I think that's no better illustrated in this week's US CPI numbers, but more importantly than that in the PPI numbers that we saw earlier this week. If we if we look back at first and foremost at the CPI numbers for January US CPI numbers for January, they came in slightly above expectations of 6.4%. It was still a modest decline from December's 6.5%, but it was above expectations of 6.2%. Core prices were also stickier than expected, slipping from 5.7% to 5.6% due to upward revisions to previous months. Month on month numbers were in line with expectations, but I think one thing is apparent. While inflation is coming down, it's coming down slower than expected. And that won't give the Fed confidence that it is on top of the inflation problem. And that really extends also to the PPI numbers that came out in January as well, not only on month on month, but on year on year. December also saw upward revisions to the underlying numbers on both headline and core. So year on year PPI came in at 6%, that was down from an upwardly revised 6.5% and well above forecast of a drop to 5.4%. I mean, that's a big forecast drop, which ultimately didn't come in. Core came in at 5.4%, which was also well above forecast of 4.9%. Now, a large part of the reason for the stickiness, the increased stickiness on US PPI was higher energy costs, gasoline, natural gas. And while we saw a really, really decent retail sales numbers out of the US January numbers, a rise of 3%, that came off the back of two successive months of 1% decline. So November and December ended really poorly. In the US, we've seen a fairly decent rebound or more than decent rebound in January. And I think the bigger question is whether or not that's sustainable. When you look at weekly jobless claims consistently below 200,000. And you've got to argue essentially that the US economy is much more resilient than was thought to be the case at the end of last year. That would mean that wage growth is likely to be an awful lot stickier. And average weekly earnings, average hourly earnings are probably not a good benchmark when measuring US wage inflation. And that the Fed will probably need to go a lot longer than markets are pricing in or have been pricing in. And that's no better illustrated in this US two-year yield chart. We've broken above that cozy consensus of between 4.5% over the past few days. Let me just zoom that in a bit for you. There we go. This was the range bottom of the range. It's around about 4%. Obviously that was the payrolls numbers, which sort of the big jump higher ever since then we've seen US economic data surprise to the upside. And we've now broken about 4.5%. And we could well be heading back to 4.8%. So as we look ahead to next week, as well as looking back at this week's numbers. I think the thinking is now starting to shift. And we've got Fed minutes, which are due out on the 22nd of February. Now, if you cast your mind back to Powell's press conference, he seemed very coy about what was discussed at the meeting when it comes to differences of opinion, perceptions of how long rates were likely to stay at current levels. He didn't really push back at markets pricing of where rates were likely to go about financial conditions. He was directly asked if he felt that financial conditions were too loose. And he said that they were no looser than they were at the end of December, which to my mind was complete nonsense. They were much looser than they were at the end of December. I said September to November, December. I mean, this is the end of this is all the big round about mid January. And as you can see, they're probably the loosest they've ever been in terms of the two year yield. Since the payrolls numbers, we've seen US two years move back to where they were at the beginning of November. So we've seen a significant tightening of rates. And now the bond market appears to be pricing a much more hawkish Fed, even if equity markets are not. What's also happened since then is that Loretta Mester of the Cleveland Fed has said that she saw a compelling case for a 50 basis point rate move at the last meeting. Now that's really unexpected development because Powell's press conference certainly gave no indication. The Fed members were sort of leaning in any way hawkish and that there was any significant division. Now, Mester is not a voting member. So her views on where rates might go or that they're not going to have that much of an influence. But if she's thinking that, then who else was potentially thinking that and certainly Neil Kashkari, who is a voting member, has been quite vocal in recent weeks about the need for a Fed funds rate of above 5.25%. So that would suggest that perhaps her view is not an isolated view. And certainly James Bullard of the St. Louis Fed was also not a voting member this year and said that he could he could certainly consider a 50 basis point rate hike in March after having seen a slowdown to 25 in January. So these could all be trial balloons. These could all be just jaw boning rates higher to try and tighten financial conditions in light of the recent stickiness of those CPI and PPI numbers. Certainly it's having an effect. We can certainly see that in the US two year yield. And certainly also see it in the way UK guilt yields are pricing higher, even though UK inflation did see a big drop in this week's numbers to 10.1%. And again, that had the market starting to price out the possibility that the Bank of England might hike rates again in March. Now, let's get real. The Bank of England will probably still have to hike rates in March. Why? Because if they don't, the pound will go lower and inflation will become much stickier. They're in a whole of their own making here. They were behind the curve when it came to initially hiking rates. And now if they are to keep a floor under the pound and try and keep downward pressure on inflation, they are going to have to keep hiking. If the Fed keeps hiking, there's no two ways about it. One of the main channels for inflation within the UK is the value of sterling. And there's no way around that. You can't sugarcoat that. It is a fact. And the fact is that the pound is much lower now than it was 12 months ago. So there is a significant upward draft on inflation through the exchange rate mechanism of sterling. So the Bank of England will probably have to go by 25 basis points to 4.25% and potentially go even higher. Particularly when you look at wages, which are trending in the private sector of over 7%, likely to go higher because of recent new pay rounds, which have seen 18% for bus drivers. So the market is once again underpricing the risks of a Bank of England rate hike and the Bank of England potentially being more aggressive. So inflation is not going away. And while rates continue to go higher, I think there's a fairly decent chance that the FTSE 100 will continue to outperform because of a value as opposed to growth. The economic data has been better than expected. And we have seen the FTSE 100 hit my initial 8000 target. We're above that. I still think we can continue to go higher on the FTSE 100. We're certainly in the up, we're still, we're in the same uptrend that we've been in since the October lows. Again, if we get any dips back, we should find support in an around 78, 87,900. But for the moment, the trend is your friend. So don't fight it. Look to buy into weakness and stop, you know, try and avoid if you can to pick the top. DAX, again, that's traded sideways this week. It's been pretty uneventful. It's underperformed relative to the FTSE 100 and the Cat Caron. Nonetheless, we're still very much in an uptrend and the DAX should continue to slowly work its way higher. If we look at the Cat Caron, that briefly hit, sorry, wrong chart, that briefly hit a record high earlier this week. Just a marginal record high, I might add. That was the previous record high, 73, 85.4, 73, 87, 73, 88. So it's a marginal record high. But ultimately, the likelihood is that while the trend is in place, then we are very much in by the dip mode. US markets on the other hand, different story entirely. Let's look at the NASDAQ to begin with. Again, the NASDAQ is holding below the key resistance level at 12,850. It's still chopping around. And while it may not come crashing off, I think it's going to struggle at current levels, particularly if US data continues to surprise to the upside. I think the key support on the NASDAQ is essentially going to be these lows from the 10th of February last Friday, which was 12,200. So keep an eye on those lows there. S&P 500 similarly struggling just above 4,150 and then around 4,180. There are their abouts. It's slightly more, it's slightly more jaggedy in terms of the moves, but the bottom of the range at the moment is around about 40,50. But certainly there is also bigger support in and around this 4,000 area, 3,998, 4,000. But if we do break below there, then we could start to sink back towards this trend line support from the lows back in October. So essentially we're still in an uptrend for US markets. It's just that upside is going to continue to be slightly contained while the dollar is strong and the yields are reaching higher. Okay, so those are those are the key. Those are the key indices. EUR a dollar strong dollar. Push EUR a dollar lower. We've rolled over 50 day moving average. We found resistance in and around this 108 area 10780. As you can see that low there that peak there and that peak there has managed to contain the upside. The next support area comes in around about 1061010580. I think the key level that I'm targeting is really the lows this year at around about 10480. I think we can potentially slip back there. If we if we look at these series of lows through here, there's certainly fairly decent support in and around the 200 day moving average, as well as this trend line here. So is that there is scope for us to move lower on EUR a dollar, not massively so I might add. Certainly I think this scope for us to drift back down towards this trend line in this period of dollar strength as we head towards that next fed meeting in March. Now I mean the ECB is still talking tough when it comes to rate policy. That's helping EUR sterling. But sterling is obviously suffering on the back of the fact that markets think rightly or wrongly that the ECB has more scope to raise rates than the Bank of England. And I suppose in some respects, they do. Certainly, I think we're already we already know we're getting another 50 basis points in March from the ECB because Lagarde, Madame Lagarde has said so. The bigger question is really what comes after that. But certainly I think in terms of what we're seeing in EUR sterling. The line of least resistance looking at the price action is for a potential move back to these peaks in February of around about 8980. What happens after that is anybody's guess. But if we look at the way EUR sterling has behaved over the course of the past year, it's consistently found the air very thin above 8980 and a struggle to really make any sort of tangible gains anytime that it's moved above that particular level. So I'm certainly not calling for a move much above 90, even at this stage in time. I've seen a significant shift in my bearish dolly end view. Certainly if we look at the way the price action has behaved over the course of the past few days, the bullish, the high yields that we're seeing across the US yield curve is helping push dolly end higher. Obviously, we do get a new central bank of Japan, a bank of Japan governor, the waiter in April. He's probably not likely to be as dovish as Coroda, but we are still two or three months away from his appointment. So there's certainly plenty of time in the interim for the dollar to potentially go back to the 200 day moving average, which is above 136, as well as obviously this cloud resistance here this red line here, which we can ascertain comes in. We just rolled that cursor in there. We can tell the value of that Kumo two line is 13795 that's on the left hand side of the graph. There you got a value window. Got Ichimoku Kumo one Kumo two 131 96 on the downside and 13795 on the upside. Obviously that then moves down as you move it across. But these Kumo lines generally do tend to act as fairly decent support and resistance. So, certainly, I think there's potential for us to move to the 200 day moving average of 13674 potentially 13795. If we move beyond that, but obviously these lines could start to coincide sometime next week so they could become one and the same as time goes by. So certainly keep an eye on Kumo two and the 200 day moving average when looking at dollar yen. Okay, so as I say we've got the Fed minutes on Wednesday. The interventions by Mester and Bullard make for a little bit of a change to the narrative and does and essentially raises two questions. These two questions are one is to how many other Fed members saw a compelling case for a 50 basis point move at the last meeting. Okay, and in two, how much could that have shifted over the last few weeks in light of the recent strength of us data. The minutes should answer question number one. Question number two will take a little bit longer to answer and ultimately will need to see more data but certainly in terms of labor market in terms of broader economic data, the move to lower inflation is likely to be a choppy one and likely to invite further Fed rate hikes over the course of the next few next few weeks and months, which yes will get a hike in March. It'll probably be 25 and we will probably get a hike in May and we could will see further hikes into the summer months as well. We've got the US core PCE deflator on the 24th. That's fallen back sharply in the last two months of November in December. The big question is whether that trend continues in January. So the PCE deflated could actually take some of the edge off yields. If it continues to fall, if it doesn't and does what CPI and PPI did, then obviously that will reinforce the higher yields narrative that we've seen start to play out in the US bond markets. We've also got fourth quarter GDP second iteration of fourth quarter GDP from the US. That's likely to remain unchanged at around about 2.9%. And personal consumption was a little bit disappointing at the end of last year. I think in Q1, though, that that's going to bounce back very, very strongly, particularly with respect to the US retail sales, which saw which saw a very strong bounce back in the control group, which generally is well is positive for the US economy because the control group measure of retail sales is included in US GDP calculations. So that would suggest that we're going to see a very strong Q1 if that continue if the trend continues on the back of a strong January into February and March. In terms of earnings or sorry before I mention before I say anything else we've got EU CPI. And again here, we've seen a little bit of softening there. Recent German CPI numbers would appear to suggest it's a little stickier than perhaps the ECB would like. The most recent flash numbers for January saw headline CPI fall from 9.2 to 8.5%, which was a bigger fall than expected, but core prices increased. They didn't fall they went up so they went up to 5.2% on an annualized basis from 5.1. So, again, headline pressures headline inflation is easing core is rising. And that's the key measure that we really need to be paying attention to as traders and investors. In terms of earnings this week. Banks continue. We've seen disappointing reactions to now West's latest numbers that the share price as I speak is down 6%. You can see that in this little graph here big fall there, but it's well off the lows. And the fact of the matter is I think it's that is well overdone that reaction because they posted a decent set of numbers. But in the key three numbers the share price dropped quite sharply. It's a lot higher now. So I think we could be seeing a similar sort of reaction play out this week. We've got Lloyd's banking group. Full year numbers. See if I can get my words out. Again, we've seen a little bit of a drop back today on the back of the Nat West numbers and a little bit of what I would call a sympathy move lower. But again, if if if Nat West Q4 numbers are any guide. There's only been a very modest slowdown in mortgage lending. There was a little bit of an outflow in current account balances and deposits in Q4, mainly down to the fact that I think people were dipping into their savings. But if we look at the overall direction of travel when it comes to the Lloyd's Bank share price, it's still very positive. And we saw retail sales in January come in slightly better than expected this morning. So certainly there's a decent trend line on the Lloyd's, the recent move higher in the Lloyd's Bank share price as long as we stay above that broader trend line higher than the uptrend should remain intact. And what's actually encouraging I think to me is that we've been able to hold above this series of peaks through here and about 48p. And what is also interesting about Lloyd's Bank shares is that the bank is more profitable than it's ever been over the last 10 years. And yet it's still well below the levels it was pre COVID, which suggests to me that of all the banks. There's some serious underperformance going on there, and perhaps as long as things continue to not look as bad or as dark as people think there is certainly potential for an awful lot more upside when it comes to the trend that we're currently seeing play out at the moment. Rolls Royce, another one here which has been a serial under performer has gone and started to gain traction towards the upside again, a little bit of a top here in and around 115p seen a little bit of a pause. We're currently holding above 105. I think the big question here is that, you know, what's the new CEO going to, what's the narrative the new CEO to fan. Ergen bill dick is going to be telling us now that he's got his feet under the table and replaced war on East. When he took over earlier this year he really didn't hold back. When he was talking about the challenges facing the current business he likened the company to a burning platform, his words sent shares off their recent highs you can see that there. They found a bit of a base at around about 104 and they've gone and back and retested those highs. One of the quite I mean there's no question company has its problems. Heavy reliance on its civil area aerospace division was and still is to a certain extent a notable weak spot but even here there are grounds for optimism. Airlines are returning to their pre covid flying patterns. You look at the airline numbers that we've seen this year. Easy jet Ryan air whiz air jet to two II AG British Airways. Lufthansa KLM. They're all ramping up their timetables and as long as we don't get a repeat of what we saw last summer. Then it could be a fairly good summer for airlines. Rolls Royce is one and order from Air India or Airbus is one and order for air India for a whole host of new jets powered by Rolls Royce engines. So, certainly I think in terms of what we're looking at going forward. The big question is how much bad news is already in the price. I mean look at the share price. I mean the decline has been. Well, it speaks for itself back in July August 2018. The shares were up at 343 374. They're barely below 115 now so an awful lot of the bad news is in the price. The big question is, can Rolls Royce continue to improve improve its cash flow and start to generate a consistent cash flow and a consistent profit. And I think that's what investors will be looking for when they look ahead to this week's four year numbers. So that's Rolls Royce that we're looking at for later this week and that is on the 23rd of February. Lloyd's Banking Group is on the 22nd. We've got HSBC as well on the 21st. We've also got a couple of big US earnings numbers and we've got IAG as well. We've got four year numbers from on the 24th and they've got off to a flyer this year as well as I mentioned when I was talking about Rolls Royce. So keep an eye out for their four year numbers on the 24th. Nvidia going to look at Nvidia chip maker. Again that's performed fairly well in recent days and recent weeks if I can actually get the chart to load. Let's just kill that because I don't think it wants to play. It took its time. There we go. So again that's finding a little bit of resistance at around about $230, $230. And in terms of its Q4 guidance, its Q4 guidance, revenue guidance was $6 billion plus or minus 2%. It has had its problems but I think one of the things that it should do well from is demand for higher specification AI chips. Nvidia is a key supplier in this area. Professor expected to come in at 81 cents a share and after a disappointing first half, perhaps the outlook for Nvidia could be an awful lot better than was thought to be the case when we were talking about the numbers back in Q3. Okay, so I think that's it for this week also Walmart. Don't forget Walmart, that's a good gauge of the US consumer. Keep an eye out for those numbers on the 21st Q4 full year. Given the fact that retail sales were so strong in January, perhaps we could see a decent set of numbers from Walmart. Anyway, that's it for this week, ladies and gentlemen, thank you very much for listening. This is Michael Houston talking to you from CMC Markets.