It’s set up to be a mixed week for markets in Europe, with gains for the FTSE 100 and the CAC 40, with the French index achieving a new record high, while the UK index looks set to gain a foothold back above the 7,900 level for the first time since the March meltdown in the banking sector.
Concerns over the economic outlook appear to be acting as more of a drag on the DAX, even though it still managed to make a fresh 12-month high earlier in the week.
Today’s economic data from Europe and the UK continues to point to a divergence between manufacturing and services when it comes to economic activity. In France, the unrest over pension reform has seen manufacturing PMI activity slump to 45.5, due to lower output, even as service sector activity has improved to 56.3. Inflationary pressures do appear to be easing in manufacturing, however these are being offset by rising price pressures in services.
It’s a similar story in Germany, with manufacturing activity slipping to 44, along with easing price pressures. Services activity on the other hand improved to a 12-month high, although pricing pressures remained elevated. All in all, this comes across as a glass-half-full story for both when it comes to Q1 GDP, given that services on balance make up a much greater proportion of economic activity for both. There is a chance that Germany may avoid a recession on the basis of the PMI numbers this quarter.
Moving on to the UK, after a disappointing end to 2022, consumer spending has picked up since the start of the year. In January retail sales rose 0.9%, while the expectation was that we’d see a slowdown in February in the face of soaring food price inflation. What we in fact saw was a better-than-expected rise of 1.1%, although volumes were down from the year before with consumers having to contend with having to pay higher prices to get the same thing.
The broader picture for consumer spending is still subdued but it has been notable that Gfk consumer confidence has been improving from the record lows seen at the end of last year, rising to -30 in April, and its highest level since February 2022. What is also helping is that having seen such a bleak autumn, energy prices have fallen faster than expected, and consumers have slightly more disposable incomes to spend on treats like short breaks, and looking further ahead, spending money on a summer break. This also appears to have been reflected in this week’s numbers from Jet2 and easyJet.
Today’s March retail sales numbers have seen a bit of a slowdown, declining more than expected at -0.9%, with the wet weather during the month acting as a broader drag on spending. Some fresh food shortages also meant slightly slower grocery sales. On a three-month basis, sales volumes rose by 0.6%, in a sign that should be positive for Q1 GDP, while the value of sales also rose, albeit at a faster pace due to higher prices, due to food price inflation which is just shy of 20%.
Against this backdrop its more than likely the Bank of England will have to raise rates by another 25bps when they meet next in early May. The pound is slightly weaker but that’s more to do with a stronger US dollar than any underlying weakness as a result of disappointing retail sales.
On the flash PMI front for April, it’s been a similar story to France and Germany; weaker in manufacturing, slipping to 46.6, and an improvement in services to 54.9. This doesn’t change the outlook materially when it comes the next move from the Bank of England next month, especially with headline CPI still above 10%, however as the effects of the energy price cap roll off in Q2, the headline number could come down closer to core prices quite quickly by the start of Q3.
On the currencies front, the Japanese yen is outperforming ahead of next week’s Bank of Japan rate decision after the latest March CPI numbers came in at 3.2%, however core prices edged higher from 3.5% to 3.8%. There still appears to be an expectation that there won’t be any change to the central bank’s yield curve control policy for new central bank governor Kazuo Ueda’s first meeting at the helm. This complacency increases the risk of a surprise tweak, or the openness to one given rising core prices.
The US dollar is also recovering some of its recent lost ground as it looks to stop a run of five consecutive weekly losses, with the biggest gains coming against the commodity currencies of the Norwegian Krone, Australian and Canadian dollar on the back of lower oil and metals prices. This weakness in commodities is weighing on the mining sector today, while defensives are helping the FTSE 100 to outperform as we head into the weekend.
The Just Eat Takeaway share price has seen a volatile few days, jumping around significantly in the wake of earnings news released earlier in the week. Wednesday’s gains haven’t been sustained and the underlying has been oscillating in a range of close to 7%, with resulting price action sufficient to drive one-day vol to 99.12% against 79.48% for the month.
The numbers from AT&T yesterday also rattled the market, with the stock losing more than 10% in the wake of the release. While headline earnings came in ahead of expectations, a significant decline in free cashflow for the quarter appears to have hit sentiment, even though the company is confident that this is down to timing and the full-year figure will still hit expectations. Arguably this is underlining the skittish nature of equity markets right now, with one-day vol coming in at 53.71% against 28.35% for the month.
CMC’s proprietary basket of eurozone car manufacturers saw significant selling pressure on Thursday, with Mercedes and Porsche coming under pressure. The underlying basket gave back the gains accrued over the last couple of weeks, with one-day vol coming in at 38.8% against 31.75% for the month.
And sugar saw another active session with the underlying finally powering through the 25-cent mark that had been repeatedly providing resistance, closing at 25.63 cents per pound. One day vol printed 42.99% against 38.33% for the month.