Spanish economy set to shrink further, ahead of US GDP and ADP

Equity markets have once again remained immune to the economic malaise displayed by the broader economic data in the US and Europe, yesterday pushing to new multi month highs.

Yesterday we saw Spanish retail sales show a massive fall of 10.7% while US consumer confidence dropped sharply in January from 66 to 58.5 its lowest level in over a year, over concerns about higher taxes as a result of the fiscal cliff deal.

It remains to be seen what will derail the current market rally as the on-going disconnect between equity market performance and the broader economy continues to diverge.

While EU policymakers continue to proclaim the worst of the European crisis lies behind us the economic data continues to paint a rather different story.

This reality is set to be borne out further today with the release of the latest Spanish Q4 GDP which is set to show a fall of 0.6%, double the 0.3% decline seen in Q3. With unemployment already at record levels the fall in economic activity is set reinforce the downward spiral in the Spanish economy.

Eurozone consumer confidence is expected to remain firmly negative at -23.9 for January.

In the UK data out this morning is expected to show slightly easier credit conditions with mortgage approvals set to edge up to 55k, while consumer credit is also expected to recover in December after a contraction in November.

In the US it seems unlikely that today's economic data will derail the slow push higher on US equity markets with the latest Q4 GDP numbers expected to show a sharp drop from Q3's 3.1% to 1.1%. A large part of this fall will undoubtedly be attributed to the fallout from Hurricane Sandy as well as uncertainty brought on by the political logjam that was the fiscal cliff negotiations.

The latest ADP employment report for January is also set to show a sharp fall in new jobs from 215k in December to 163k. This in itself will reinforce perceptions that US monetary policy will remain accommodative for the foreseeable future with the latest FOMC meeting not expected to provide too many surprises.

Anyone expecting any surprises from today's meeting is likely to be disappointed, and it is likely that we will have to wait for the minutes in two weeks’ time to establish how the new voting members feel about the time span of the current stimulus program. As a reminder the previous minutes showed a three way split on stimulus duration, and given recent comments from new members George and Bullard the current FOMC could be a touch more hawkish than the last.

EURUSD – the 200 week MA at 1.3530 is the next key obstacle to further gains, after yesterday’s move to 1.3500. Above the 200 week MA targets 1.3835, the 61.8% retracement level of the 1.4940/1.2045 down move. Pullbacks should find support at 1.3400, while below that we have the 1.3250 level the January lows. The long term support line from the 1.2045 lows now comes in at 1.3100 which remains the key level on the downside. .

GBPUSD – we saw a solid rebound off 1.5680 the 61.8% retracement of the 1.5270/1.6380 up move yesterday. There is also long term trend line support at 1.5630 from the 2009 lows at 1.3500, a break of which opens up the 2 year range lows at 1.5270. The pound needs to get back above 1.5830 to target the 200 day MA at 1.5910 which is now the larger resistance.

EURGBP – the pound continues to lose ground pushing beyond the 200 week MA finding resistance at 0.8580, 61.8% retracement level of the down move from 0.9085 to the lows at 0.7755. We also have resistance at 0.8600 trend line resistance from the 0.9805 highs. The 0.8425 level should now act as support on any pullbacks. Long term trend line support at 0.8115 comes in from the 0.7755 lows.

USDJPY – the US dollar appears to be treading water just below last week’s highs at 91.20. The 94.00 level remains the key long term objective but the risk remains for a sharp pullback, with the 90.30 level initial support. Key support remains all the way back at the 87.50 level.