European and US markets once again set new record highs yesterday, while at the same time still managing to close out the day mixed.
In Europe, the DAX and EuroStoxx 50 set new record highs, before retreating, with the DAX finishing the day modestly lower, while in the US both the Nasdaq and S&P 500 set new records, although the Dow and Russell 2000 finished lower.
With the US Federal Reserve set to announce its latest decision tomorrow, markets appear to be taking the line of least resistance, which is a slow incremental move higher with a “two steps forward and one step back” approach, over the past week or so.
Today’s European open looks set to play out in a similar fashion, with a modestly positive open, with the main focus, apart from the FOMC conclusion tomorrow, on today’s UK unemployment numbers and US retail sales and PPI for May. Yesterday, the FTSE 100 also hit its best levels in over a year, despite weakness in travel and leisure stocks.
The pound has remained fairly well supported in recent weeks, despite the renewal of tensions over the Northern Ireland protocol. The markets main focus appears to be not the hot air being generated over that, than with the overall reopening of the UK economy. The data focus is set to remain on the number of people still furloughed, and the pace of reduction as the economy moves forward with its reopening process, with today’s April numbers set to mark a further decline for the UK ILO unemployment rate to 4.7%.
In March, UK ILO unemployment slipped back to 4.8%, having been as high as 5.1% back in December. It remains clear that the government furlough scheme is continuing to disguise the underlying effects of the pandemic, which means the very real effects on the UK labour market won’t start to be seen until Q3 at the earliest, as the furlough scheme starts its wind-down process. For now, the outlook remains positive, despite yesterday’s four-week extension to restrictions, a trend that is likely to continue to manifest itself in the latest monthly jobless claims numbers which fell again in April to 7.2%, and could well fall nearer to the 7% level today, as more businesses reopen, and the economy returns to a much higher level of economic activity.
While the outlook for unemployment appears more positive as we head into the summer months, that doesn’t mean it can’t go higher. A lot of jobs that were around over a year ago, may still not come back, and now that next week’s June reopening date has slipped, we could see more businesses could fall by the wayside. The Bank of England has already indicated that it expects unemployment to go higher, but not by as much as they thought in February, when their projections were for a peak of 7.7%. This was adjusted lower at the last inflation report, to 5.2% for this year, and then down to 4.7% in the second quarter of 2022.
After a weak end to 2020, US consumer spending has seen a fairly stop start rebound this year, with the significant amounts of fiscal stimulus, helping to drive a rebound in consumption. In January we got the first down-payment in the form of a new $900bn stimulus plan that was agreed at the end of last year, thus prompting a big rebound in January retail sales of 7.6%, to a seven-month high, and while the February numbers saw a fall of 2.7%, the new stimulus payments that were signed off in March of $1.9trn saw another big lift for March consumer spending, with the best performance since April last year, when the US came out of its first lockdown, rising 10.7%.
Unsurprisingly, after such a strong March, the April numbers fell back sharply to 0%, missing the consensus for a rise of 1.1%. Having seen the lower-than-expected job gains in the monthly non-farm payrolls numbers, this comes across as pretty much in line with expectations, and with inflationary pressures rising we could see another weak figure when today's May figures get published.
While the US is doing well on vaccine rollout plans and the reopening of the economy, with theme and holiday parks also reopening, there still seems to be an overriding feeling of caution around consumer spending patterns, which appears to be tempering retail sales. Higher fuel prices probably aren’t helping, with an expectation of a decline of -0.7% expected.
With inflation at multi-year highs, today’s PPI numbers for May could also offer a further glimpse into the inflationary impulse of the US economy. Often a leading indicator of future CPI numbers, they have already proved to be reasonably accurate so far. Today’s headline PPI is expected to stay at 6.2%, however core prices are expected to rise further from 4.1% to 4.8%, which would be additional food for thought for the members of the FOMC when they sit down and start their deliberations later today.
EUR/USD – the slight downside bias remains after last week’s failure at the 1.2200 area. We do appear to have found some support at the 50-day MA at 1.2090 with wider support at the 1.2050 level. A break below 1.2050 could well open a move towards 1.1850.
GBP/USD – managed to hold above the 1.4070 area yesterday. While above this support keeps the bias for a move higher through the 1.4200 area, with broader resistance at 1.4240. A move through the 1.4240 area targets the 2018 peaks at 1.4375.
EUR/GBP – the failure at the 0.8640 area last week keeps the bias towards the downside. While below this resistance level the bias remains to the downside and a retest of the 0.8560 area. A break below 0.8550 opens up the recent lows at 0.8480.
USD/JPY – having recovered back above 110 yesterday we need to move up through 110.40 to target the 111.00 area. A move below trend line support now at 109.50 opens a move back towards the 108.60 area on a break below 109.20.
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