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US markets, and yields slide on rising recession concerns

Most of the economic data seen this week has pointed to the prospect of a slowdown playing out in the manufacturing sector, which in turn has served to act as a drag on equity markets, despite a decline in yields, as markets look to central banks signalling a pause and possible reversal on recent rate hikes.

Yesterday’s mixed session for European markets saw both the DAX and FTSE100 slide back from their intraday highs, after weak US data prompted concerns that the US economy was starting to show signs of weakness.

The slide in the US JOLTS vacancies data prompted a sharp decline in US yields, but also pulled US stocks lower across the board, bringing an end to four successive days of gains, as concerns over a recession increased.

Asia markets also slid back after the RBNZ unexpectedly hiked rates by 50bps instead of the 25bps widely expected, apparently diverging away from other central banks who appear to be considering slowing, and even pausing their rate hiking cycles.

Despite concerns over recession mounting in the manufacturing sector, if one was to look elsewhere, a different trend has been playing out in services, which has been one of steady improvement over the past few months, despite trends in rising prices.

While manufacturing has been struggling, and is in large part contracting, services activity has been picking up across the board, whether it be in the US, Europe, or the UK.

Energy prices have also been falling, notably petrol prices as well as that of natural gas, consumers have had more disposable income than expected. This has had the effect of exerting upward pressure on services inflation which is prompting concerns over stickier than expected prices.

As we look back at the end of Q1 the latest March services numbers are expected to point to economic activity that has seen a significant pick up since the end of last year, although France could well see some negative impact given the recent social unrest.

In the March flash numbers France services PMI improved to 55.5, which seems rather odd given the unrest. Germany has also been improving with the flash numbers rising to 53.9 from 50.9, while in the UK this is expected to slow to 52.8, from 53.5.

Italy and Spain are also expected to show improvements, with Italy set to rise to 53.7 from 51.6, while Spain is expected to rise to 57.6 from 56.7 in February. These sorts of numbers don’t scream economic slowdown, and heading into the summer months it’s hard to see Spain and Italy seeing much of a tail off as the tourist season gets under way.

Given this week’s weak US manufacturing ISM report, all eyes will be on today’s March services ISM survey, and more notably to the prices paid and employment components, which in the manufacturing survey slowed sharply.

Headline services ISM is expected to slow to 54.4 from 55.1, while in February both prices paid, and employment components were strong at 65.6 and 54 respectively.

Any sharp slowdowns from the February numbers could well signal the beginning of a loosening in the US labour market, but with jobless claims still trending below 200k any slowdown could take a while to manifest itself. We should also be aware of the ADP employment report for March which is expected to show jobs growth slowed to 210k from 242k in February, as we look towards Friday’s non-farm payrolls report.   

EUR/USD – looks set for a move towards the 1.1030 area having broken above the 1.0930 area. A fairly decent uptrend from the March lows is unfolding with support at 1.0830, with interim support at 1.0920.

GBP/USD – broke above the range highs at 1.2450 yesterday and could well see further gains towards 1.2660 area in the short term. Support at 1.2420 needs to hold in the short term for this to unfold. Below 1.2400 argues a move back towards 1.2270. 

EUR/GBP – slipped back to trend line support at the 0.8720/30 area before rebounding yesterday. Still has resistance at the 50-day SMA. On the upside we have trend line resistance at the 0.8870/80 area.

USD/JPY – has continued to slide away from the highs this week at the 133.80 area, with the move below the 132.00 area opening up the risk of a move lower and a return to the 130.00 area. A move above 134.00 opens up the 136.00 area.


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