As we come to the end of the month as well as the quarter it is perhaps worth reflecting on the fact that it’s been a fairly decent period for equity markets, despite the lockdowns across Europe and in the UK, although there has been mixed progress on the vaccine rollout, with the UK excelling and the rest of Europe appearing to do their level best to mess it up.
Despite the divergent progress being made between Europe and the UK, it is European markets that have performed the better, though that could well change if Europe doesn’t get its act together in Q2.
Yesterday markets in Europe saw records broken with the DAX closing at a record high, while the FTSE100 lagged behind, while US markets sank back, posting modest losses, although the Russell 2000 managed to claw back half of its losses from Monday. The US 10-year yield continued to rise for all the right reasons, hitting a 14-month high, as economic data continued to look solid.
This weak finish is likely to see European markets open slightly lower this morning, after a weaker Asia session, as we get set to run the rule over more economic data, some dated, in the case of the UK, while the latest Chinese PMI’s showed the Chinese economy was expanding quite nicely, particularly in services, which showed a big jump to 56.3. The US ADP employment report, due out later could also offer up further evidence of a booming US economy if the numbers in any way reflect the huge surge, we saw in US consumer confidence in March.
This afternoon’s numbers could well be an important leading indicator on Friday’s upcoming non-farm payrolls report, where we’ve seen a number of forecasters suggest we might see up to 900k new jobs added. While this may be on the optimistic side of forecasts any sort of bumper number will test the Fed’s narrative that a booming jobs market isn’t an inflation risk.
In February 117k new jobs were added to the ADP numbers, the second consecutive month of gains, and a slightly more modest number than the NFP February report a couple of days later. This might suggest the potential for an upward revision to the February numbers, while today’s March numbers are forecast to see another 550k jobs added to the headline number.
Before that we’ll be getting confirmation of the latest revisions for UK Q4 GDP which is expected to confirm the economy grew by 1% in the last quarter of 2020, thus avoiding the prospect of a double dip recession. When these numbers initially came out all of the headlines focussed on the fact that the UK economy saw its worst annual contraction since 1709 at -9.9%.
While this is obviously an awful number it also suggests we’ll see a strong bounce back if and when it comes.
Services did most of the heavy lifting in Q4 with an expansion of 0.6%, while government spending rose 6.4%. Private consumption was much more subdued contracting 0.2%, compared to a 19.5% expansion in Q3, but that shouldn’t be too much of a surprise given the various restrictions that had been in place across the country over the period of Q4.
All in all, these numbers shouldn’t offer too much in the way of surprises given that the markets main focus is now on the upcoming reopening of shops in less than two weeks, and the fact that the Q1 contraction is now likely to be a shallower one that the -4% that was being predicted at the beginning of the year.
The sharp rise in UK gilt yields in the last few weeks is reflective of rising market optimism of a strong economic rebound heading into year end, along with the Bank of England revising its growth forecasts upwards for this year, at its recent meeting. The central bank's biggest problem is now having to temper market optimism over any economic rebound, as it is pushing longer term rates sharply higher.
On the inflation front we can expect to see the preliminary EU CPI numbers for March show a sharp rise in headline CPI to 1.5% from the 0.9% we saw in February, with the bulk of the rise expected to be driven by energy prices, and the fact that this time last year most of the economies in Europe locked down, knocking prices sharply lower creating a much larger base effect for this year. This was reflected in yesterday’s German numbers, and could well ripple out further as we head further into 2021.
Core CPI is expected to also see an increase, with a rise to 1.4% from 0.9%.
EURUSD – with the 1.1750 area giving way the bias remains for a move towards the previous lows at 1.1615. The 1.1870 area still remains the key resistance on any pullback.
GBPUSD – having failed to push above the 50-day MA earlier this week the pound has slipped back and could well retest the lows at 1.3670. We need to push back and close above 1.3850 to reopen the 1.3920 area. A move back below 1.3670 argues for a move towards 1.3560.
EURGBP – made a marginal new low at 0.8506 earlier this week, before squeezing back to close above the 0.8530 area, however the bias still remains for a move lower while below 0.8570. A close below 0.8500 opens up the potential for a retest of the 0.8400 area, as well as the lows last year at 0.8280.
USDJPY – finally broke through the 110.00 area and the highest levels in a year, with the potential that a move through 110.50, could well see a move towards 111.20. The 109.20 area remains a key support for this current move higher.