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EU GDP in line for a downgrade, as US retail shows signs of weakness

We saw another negative day for European stocks yesterday as investors digested another mixed day for earnings and oil price fluctuations. After two successive weeks of losses equity investors appear to be struggling for reasons to get back into the market with any conviction against a backdrop of weakening economic activity.

This week saw a trifecta of weakening industrial production data for March from Germany, France and Italy, which has raised concerns that we could well see the latest EU Q1 GDP number get revised lower later today. There was widespread optimism less than 2 weeks ago when the initial estimate of GDP came in at 0.6%, above both the US and UK numbers.

Given recent data, as well as recent downward revisions, that estimate now seems optimistic and could prompt a downward surprise to nearer 0.4%.

Before that we get to see the latest German Q1 GDP number, and this could also see the initial 0.6% estimate get nudged lower as well.

On the plus side oil prices are becoming much more resilient to anything the markets can throw at them, as they once again made new highs for the year yesterday after the IEA suggested that the market was starting to move closer to balance.

This does have its downside as the fiscal boost from lower oil prices starts to fade, and it could be this that is seeing equity markets continuing to struggle for direction, seemingly paralysed between fears about weaker earnings growth and a slowing economy on the one hand, and a realisation that central bankers may well be running out of tools to deal with the next crisis, if and when it comes, on the other.

The pound had a mixed day yesterday after the Bank of England revised down its growth forecast for the UK economy, while warning of the economic risks a vote to leave the EU might bring about.

Bank of England governor Mark Carney came in for heavy criticism for using the “R” word, or recession in the event of a vote to leave the EU.

It is not hard to feel some sympathy for Mr Carney given his position, but one can’t help feeling that his position couldn’t have been a little more nuanced. The fact is given recent data there is the possibility that parts of the economy are already sliding into recession, the manufacturing sector for example, and there are no guarantees that a vote to remain wouldn’t prevent a deeper slowdown, a scenario that wasn’t even covered.

The governor also went to great lengths to focus on the negatives of a weaker pound, ignoring the fact that the Bank of England has been battling to keep a lid on the pound for most of the last 7 years.

It also ignores the fact that two of the most recent sterling depreciations in 1992 and 2008 acted as a significant economic stabiliser and in the case of the 1992 depreciation ushered in an unprecedented and probably never to be repeated period of 15 years of positive GDP growth. While such a scenario is highly unlikely on this occasion, the predominant focus on the negatives simply invites criticism, and in some ways is likely to be self-fulfilling.

Despite assertions from Federal Reserve officials that markets are under-pricing the risks of a move higher in interest rates, the most recent economic data would appear to suggest that the US central bank would be taking a risk in implementing such a move at this stage.

The President of the Boston Fed, Eric Rosengren, traditionally viewed to be on the more dovish side of the FOMC, and a voting member reinforced his optimism about the strength of the US economy, in comments last night, warning that given recent improvements in recent economic data, the Fed should be ready to gradually normalise interest rates.  Also chipping in were Loretta Mester of the Cleveland Fed and Esther George of the Kansas City Fed, both warning of the risks of too low interest rates.

Unfortunately for them some of the more recent economic data appears to be telling a different story of weakening economic activity, along with a series of profit warnings from US retailers, Kohls, Dillards and Nordstrom being the latest, along with some evidence of the first signs of rising input prices.

We also saw weekly jobless claims come in at their highest level since July last year at 294k, rising by 20k from the previous week, while US retail sales have been pointing to weak consumer spending patterns for several months now. So far this year we’ve yet to see a positive figure. Later today we’ll be getting the latest retail sales data for April with expectations that we could well see another decline, this time of 0.3%.

EURUSD – the euro appears to have found some support at the 1.1350 area but still needs to push back through the 1.1480 level to argue for a move back towards the 1.1600 area. The major support lies back near the April lows at 1.1220.

GBPUSD – the pound did briefly push above the 1.4500 area but was unable to sustain the move, however while the short term base at 1.4360 holds the bias remains for a move higher, towards the 1.4700 area. While last week’s bearish reversal has weighed on the pound, downside should remain limited while above 1.4300.

EURGBP – still struggling to push above the 200 week MA and as such the bias remains to the downside while below 0.7950. A move below 0.7860 could well target neckline support at 0.7750 from the March lows which, if broken could trigger a sharp down move. A move and close above 0.7940 retargets the 0.8000 area.

USDJPY – the US dollar is currently finding resistance at the 109.40 area. While we could well extend up to 110.20 the bias remains for a move back towards 107.80 and back to the recent lows at 106.80, with the 200 week MA at 105.30 the major support level.

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