Germany’s IFO set to weaken further, as Jackson Hole kicks off

OWhile the FTSE100 fell for the third straight day, the DAX and CAC40 broke their own 3-day streak of back to back losses with a modest gain during a subdued trading session.

US markets also managed to pull off a modest gain yesterday, but it’s worth noting that the main action of the day took place in the bond market with a strong sell-off in short-term bonds and a sharp rise in yields at 2 years. in the UK, Germany and the US, with the UK and US yield curves inverting sharply.

Today’s economic record should show the latest adjustments to German and US Q2 GDP, but on a more up-to-date note we also have Germany’s IFO Business Survey for August, which shouldn’t be a positive reading, as we look ahead to a slightly higher european open,

After the weakness seen in German flash PMIs this week, today’s IFO survey is likely to paint a bleak picture for the German economy in terms of the current economic climate, as well as business expectations.

With services and manufacturing shrinking, and energy prices reaching extremely high levels, as Russia continues to weaponize the flow of gas via Nord Stream 1, it would be surprising if we did not see no further deterioration in these key economic indicators.

In July, the IFO business climate fell back to its lowest levels since June 2020, as the economy began to reopen from the Covid lockdown. With all the problems facing the German economy alongside the falling river levels on the Rhine, it will probably come as no surprise to see further deterioration here, the only question being by how much.

Economic expectations are also likely to see a further decline from July’s 80.3.

Before the release of the IFO figures, we will have the final update on the performance of the German economy in the second quarter, with no expected change from the initial estimate of 0%.

Later today we will also have the latest overview of the US economy and the latest revision to second quarter GDP, which should see the initial contraction of -0.9% revised slightly higher to -0.7%. , with personal consumption expected to see a 0.5% rise from 1% to 1.5%. These numbers won’t tell us anything we don’t already know about the US economy, in that while the GDP numbers indicate that the US is in a technical recession, the labor market tells a different story.

Over the past month, weekly jobless claims have fallen from 261,000 to 250,000, suggesting that after weeks of increases the labor market still looks as tight as a drum. and this week’s numbers should hold at or around those levels.

The Jackson Hole symposium also kicks off today, with a focus on a speech by Federal Reserve Chairman Jay Powell, whose markets have become increasingly jittery over the past few days, and who has seen the bond yields rise sharply with the expectation that it will deliver. belligerent message.

Titled “Reassessing Constraints on Economics and Politics,” the symposium will be scrutinized for evidence of the Federal Reserve’s intent from its September meeting, 50bps or 75bps, as well as the intent of other central banks more broadly at a time when inflation expectations soar amid concerns about the risks of excessive monetary policy tightening at a time of many challenges facing the global economy .

EUR/USD – managed to hold above the 0.9900 level yesterday, but the bias remains for a move towards the 0.9620 area, all below 1.0220. We also have major trendline resistance from the January highs at 1.0280.

GBP/USD – has held above this week’s lows in the 1.1718 area but rallies remain weak. The bias remains to the downside towards the March 2020 containment lows at 1.1500. Resistance is coming in at the 1.1980 area.

EUR/GBP – found support just above the 0.8400 area where we have trendline support from recent lows. We also have resistance in the 0.8510 area and the 50-day MA.

USD/JPY – holding above cloud support in the 137.10 area yesterday, but needs to overcome the highs this week at the 137.70 level, to open the 139.40 area and previous highs. Major support comes in at the 50-day SMA at 135.70.

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James R. Rhodes