European markets underwent their second successive daily loss yesterday, driven lower by a huge selloff in US markets after the August CPI reading saw a bigger than expected jump in core prices.

This unexpectedly high number prompted the biggest one day fall for US markets since March 2020, and while US markets did manage to recover some of those losses yesterday, it wasn’t anywhere near enough to repair the damage of the previous day.

Consequently, the negative sentiment hung over yesterday’s European session like a black cloud as investors mulled the prospect of another big rate rise from the Federal Reserve when they meet next week.

The only question now remains over whether we might see a 75bps move, or something more substantive in the form of a 100bps move.

Yesterday’s PPI number for August was slightly more encouraging in that it showed further evidence of a slowing in the pace of inflation, however its unlikely to be enough to prevent a 75bps move at the very least, with the prospect of further hawkish rhetoric when it comes to further 50bps moves in November and December.

It still seems unlikely that the Fed will go by more than 75bps at this point despite the collective freakout of the past couple of days, with the positive finish in the US last night expected to see European markets open slightly higher later this morning.  

Today’s US retail sales numbers could reinforce this hawkish narrative if we get another strong number.

The resilience of the US consumer in the face of shrinking disposable incomes has been fairly notable this year, despite high food and energy prices which appear to have had little effect on the US consumer’s willingness to go out and spend money.

US retail sales have been positive every single month this year, apart from a modest -0.1 fall in May. If higher prices are deterring consumer spending it’s not immediately obvious in the numbers we’ve seen so far this year, although we have started to see some signs of slowing. 

In July, US retail sales came in unchanged, while June was revised lower to 0.8%.

The US labour market has continued to add positions in the monthly payrolls data which suggests there is little reason to suppose that this trend of resilient retail sales won’t continue, especially in light of the sharp falls in gasoline prices that we’ve seen in the last few weeks, which has seen consumer confidence rebound.

Nonetheless expectations for today’s August numbers have been revised lower in the past few days from a rise of 0.3%, and is now expected to come in at -0.1%. These revisions could well have been down to concerns about the effect of rising food prices on other discretionary spending, as well as fragile consumer confidence and consumer credit levels which have been soaring in recent months.

At what point does the rise in consumer credit start to reach its limits and consumers start to cut back.

The strength of the labour market shows no signs of slowing, with weekly jobless claims coming back down steadily in recent weeks, with today’s numbers expected to show a number of 225k..

EUR/USD – the main resistance continues to sit at trend line resistance from the highs this year, now at around 1.0180. A break through 1.0200 is needed to signal further gains. The bias remains towards the previous lows at 0.9865, and the 0.9620 area.

GBP/USD – key support remains at the 1.1410 area, with this week’s decline from 1.1735 falling short. A move below 1.1400 targets 1.1000. We need to see a move above 1.1800 to stabilise. 

EUR/GBP – the 0.8720/30 level remains the key barrier to further gains. A move below 0.8620/30 opens up the 0.8580 area.  

USD/JPY – failed at the 145.00 area again yesterday, with the Bank of Japan pushing it lower with some rate-checking. We need to see a move below 141.00 to delay a move towards the 1998 highs at 147.70. A move below 141.00 could signal further declines towards 139.80.  

FTSE100 is expected to open 33 points higher at 7,310

DAX is expected to open 18 points higher at 13,046

CAC40 is expected to open unchanged at 6,222