European markets got off to a rocky start to the week yesterday, weighed down by concerns over a sharp slowdown in the Chinese economy. With Chinese authorities seemingly intent on pursuing a zero Covid strategy there is increasing scepticism that subsequent economic data will be any better in the coming months.
US markets initially carried on the negative vibe, opening lower, however we managed to get a late day rebound off the lows, which helped to pull the S&P500 and Dow off their lows of the day, with the S&P500 making yet another record high in the process, as we look ahead to today’s retail sales numbers for July.
While US markets appear able to shrug off most of the negative news, recent data does appear to show that some parts of the US economy are suffering a crisis of confidence.
The reaction to Friday’s sharp drop in University of Michigan confidence to a ten-year low was in sharp contrast to the recent broader US consumer confidence levels which in July saw a return to levels last seen pre-pandemic, a number that came out less than three weeks ago. They can’t both be right, which suggests that one of them is an outlier.
Despite a rebound in US markets and another record close for the S&P500 markets here in Europe look set for a slightly negative start, with the main focus set to be on the latest UK unemployment numbers, and US retail sales for July.
The unemployment picture for the UK economy has improved significantly over the last few months, a trend that has been no better illustrated than with the sharp decline seen in the claimant count rate since March, when it was at 7.2%. Since then, we’ve seen a sharp decline, falling to 5.8% in June, as businesses continue to reopen, even with the delay to reopening to July 19th. Monthly claims are expected to fall by another 84k, down slightly from the 115k decline seen in June.
The ILO unemployment rate for May saw a slight increase to 4.8%, which was probably as a consequence of some furloughed employees being released, with the scheme still disguising the full effects of the pandemic. It is set to remain unchanged at 4.8% for the three months to June, while wages growth is expected to see an increase from 6.6% to 7.3%.
Now that we have the furlough scheme starting to wind down and businesses having to contribute more to the scheme, we could well start to see further convergence between the monthly claim’s numbers, and the ILO measure of unemployment. This could see the ILO measure edge higher, as struggling businesses decide to let any remaining employees go, suggesting that the next few months could be difficult ones for the labour market.
Nonetheless, while the risks remain to the upside the outlook for unemployment continues to look more positive than negative, with a lot of unfilled positions available for those who want them. The Bank of England also seems more optimistic about the labour market than it was at the beginning of the year adjusting its outlook for unemployment to 5.2% for this year, and then down to 4.7% in the second quarter of 2022.
We also have US retail sales for July later and these could go either way. These numbers have been quite difficult to predict this year, up one month and down the next. In June we were expected to see a decline of -0.5% and ended up with a gain of 0.6%.
This suggests that the recovery in consumption is patchy at best and while the summer months have seen holiday and theme parks reopen, we’ve seen the price of used cars soar, which may well have impacted sales in other areas. As such this unpredictable pattern is quite likely to continue into September.
On the plus side the jobs market appears to be recovering strongly with 2m people returning to the workforce in June and July.
There is little doubt that US consumer spending has been supported by the two fiscal packages that were delivered in January and March, and continue to be so, although an improving economy did see US consumer confidence in July back to levels last seen pre-pandemic.
Whether this translates into another positive month for US retail sales remains to be seen, however the surprise rebound in June could well be tempered by a modest slowdown in July with expectations of a -0.2% decline, as higher prices deter discretionary spending.
EURUSD – spent most of yesterday treading water above 1.1750, having rallied off the 1.1700 level last week, we need to push back through the 1.1830 area to retarget the 1.1900 area. A move below 1.1700 retargets the 1.1600 area.
GBPUSD – recovered from just above the 1.3780 support level last week, but needs to get above the 50-day MA and 1.3870/80 area, to target a return to the 1.3950 area. Support remains back down at the 1.3780/90 area.
EURGBP – continues to struggle near to the 0.8520 area, after the rebound off the 0.8450 level last week. While below 0.8510/20 we still have the potential to move lower towards the 2020 lows at 0.8280. The euro needs to recover back above the 0.8520 level to stabilise and squeeze back towards 0.8580.
USDJPY – having failed at the 110.80 level we’ve continued to decline with support now down at last week’s low at 108.75. A move below 108.70 targets the 108.20 area.
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