After starting the first part of last week fretting about rising prices and sharply higher inflation, financial markets stabilised towards the end of the week as some of these concerns subsided.
In an extremely fickle environment, markets are continuing to wrestle with the dilemma of whether the current bout of rising inflation prints is transitory in nature, or a harbinger of a much more persistent trend of price increases. It was certainly a week of two halves, with the late week rebound helping to wipe out a good proportion of last week's losses, though it wasn’t enough to prevent the biggest weekly loss since February for US stocks. European markets fared rather better, with only a modest loss, while the DAX managed to finish an extremely choppy week in positive territory, while the FTSE 100 posted its first weekly loss since mid-April.
The turnaround in sentiment was helped to some extent by sharp fall in commodity prices, with the CRB index posting its biggest one-day fall since 18 March, on the back of a broad-based decline across the commodity space. US retail sales also came in significantly below expectations in April, adding to the sentiment that concerns about pent-up demand driving a rise in inflationary pressure appear a little premature.
The reality is that while the sharp rises being seen in the headline consumer price index (CPI) appear exceptional when viewed through the lens of the last decade, the increase in prices needs to be set within the context of the sharp deflationary shock seen just over a year ago. There was always likely to be a sharp rebound as businesses and supply chains readjust to the new reality that is likely to unfold over the next few months due to the pandemic, which means that there are likely to be further bumps along the way. In times such as there is little historical precedent for trying to view the sorts of economic dislocations we are seeing right now through the lens of a normal economic cycle.
As we look ahead to this week, this morning’s latest retail sales and industrial production numbers from China for April, are a further testament to that, with markets here in Europe set to open flat to slightly higher on the back of last week's positive US finish. Markets in Asia have been mixed as coronavirus infection rates there have started to show signs of edging back up again.
As far as China’s economy is concerned, we’ve already a modest rebound in Q1, helped by a slow but cautious rebound in consumer spending. Over the last 12 months the Chinese consumer has struggled to return to the levels of spending we saw at the end of 2019, however there had been encouraging signs of a pickup in recent months. In March retail sales showed an increase of 34.2% year on year; well above expectations, however, it needs to be remembered that a year ago the same numbers fell -15.7% in the aftermath of the February lockdown of the entire economy. As a result, these March numbers would have had an enormous skew, even if they were still pretty decent. Industrial production was also strong for the same reason, rising 14.1%.
This skew is also apparent in today’s April numbers, however a rise of 17.7%, suggests there is still a significant degree of caution amongst Chinese consumers despite there having been no second wave of coronavirus, unlike the rest of Asia. Last year China retail sales saw a decline of -7.5% in April, with expectations that we’d see a rise of 25%. This shortfall appears to be being felt in sectors like travel and leisure, which like everywhere else in the world, has struggled throughout the pandemic. Similarly industrial production was weaker a year ago rising 3.9%, after a -1.1% decline in March, while today’s April industrial production number saw a rise of 9.8%.
As we look ahead to this week, the main focus will be on the UK economy as it embarks on the next stage of the easing of economic restrictions, against a backdrop of concern over rising cases of the Indian variant of coronavirus. Last week we saw further signs of a rebound in business and consumer confidence as the next stage of the economic reopening came into view, however this could well be tempered by concerns about the small outbreaks of the Indian variant, which might threaten the easing timetable and the next stage of reopening next month. We will also be seeing the latest unemployment, inflation and retail sales numbers for April, with the inflation numbers likely to be of particular interest given the sharp increases seen in China and US data last week.
We’ll also be hearing from a range of US and UK central bank officials later today, with Federal Reserve vice-chair Richard Clarida set to speak at an Atlanta Fed event alongside Raphael Bostic. Bank of England MPC members Silvana Tenreyro and Dr Gertjan Vlieghe, plus outgoing chief economist Andrew Haldane, are also due to be speaking at various events throughout the day.
EUR/USD – rebounded from the 1.2050 area last week and appears to be set for a retest of the 1.2180 area. A break above 1.2180 retargets the high this year at 1.2345. Support remains back at the 1.2040 area, with further support at 1.1980.
GBP/USD – while 1.4020 holds the bias remains for a retest of the recent peaks at 1.4180, and the high this year at 1.4240. Below 1.4000 undermines and argues for a move back to 1.3920.
EUR/GBP – last week’s low at 0.8560 has so far seen a push back towards the 0.8620/30 area. A move through here targets 0.8680. The bias remains for further losses, and a return to 0.8560 while below 0.8640.
USD/JPY – currently has resistance at the 109.80 area, with a break targeting 110.20. Trend line support from the January lows now comes in at 108.25. A move below 108.00 opens up the prospect of a move back towards 106.80.