While US markets underwent their sixth successive weekly decline, markets in Europe managed to claw their way back into positive territory, helped in some part perhaps by the strength of the US dollar, which pushed both the euro and the pound to their lowest levels since 2017 and 2020, respectively.
US markets also appear more vulnerable given that of all three central banks, the Federal Reserve appears the more determined of all the others in driving inflation lower, with a strong US dollar helping it to achieve that very goal. It is true that pressure is increasing on the European Central Bank to raise rates by the summer, but anyone who thinks they will be able to raise them much above zero is probably deluding themselves.
Even the Bank of England is facing a tricky balancing act when it comes to whether to impose further rate rises on a UK economy that appears to have ground to a halt. At the weekend, the UK central bank came under a fire of criticism from Conservative politicians on the Treasury Select Committee, criticising it for being too slow to react to the sharp rise in inflationary pressures. It is certainly true that the Bank of England was slow to recognise the tsunami of price pressures coming this way, however they haven’t been unique in that, and to its credit it did finally start to react at the end of last year, well before the Federal Reserve.
That being said, the Bank of England does have questions to answer, and when governor Andrew Bailey sits down in front of the Treasury Select Committee later today, he will certainly need to give a better account of himself than he has so far when it comes to speaking to the media, about its slow response to this current bout of inflation. Beyond that, the Bank of England also has questions about its behaviour over the last 15 years, when it was also under the stewardship of Bailey’s predecessor, Mark Carney.
The seeds of the current crisis of confidence in the Bank of England, and how monetary policy is conducted, were sewn under Carney’s stewardship, when on any number of occasions, the central bank failed to raise rates when necessary, and then also needlessly cut them again in the wake of the June 2016 Brexit vote, a move that exacerbated an unnecessary inflationary impulse on UK consumers, when it was clearly unwarranted. For several years now the Bank of England has been gripped by an unnecessary groupthink, which has paralysed its policymaking process and crowded out alternative points of view.
Politicians didn’t have anything to say about that then when it might have made a difference, so let’s not pretend that their criticism now is anything other than an attempt to shift blame from their own failings when it comes to holding the central bank to account, and in particular Bailey’s predecessor Mark Carney.
This week UK CPI inflation looks set to hit the highest level since it came into existence in 1988, at 9.1%. While part of that is the central bank’s fault, it’s not been helped by the inexplicably foolish decision by the government to raise National Insurance tax rates, something the central bank has no control over.
As far as this week is concerned, while last week’s Friday rebound was welcome, one can’t help feeling that it is no more than a bear market rally, particularly where US markets are concerned. The Nasdaq 100 is still down 24% year to date, the S&P 500 down 15% and the DAX is down 11%, while the FTSE 100 is flat on the year.
The big test for markets in Europe this week will be whether we can hold on to the gains we saw on Thursday and Friday, given that central banks are in tightening mode, and this week’s economic data is unlikely to show much in the way of improvement in the short- to medium-term.
This morning’s April retail sales and industrial production data from China are a case in point. Last week the April trade numbers showed a sharp fall in both imports and exports as transportation difficulties and port stoppages impacted the flow of goods and services, pointing to the significant disruption caused by China’s current covid policies.
In March, retail sales in China declined by -3.5%, the first decline since July 2020 and the biggest decline since April 2020, when China was coming out of its first nationwide lockdown. Today’s April numbers showed another steep decline, sliding -11.1%, an even bigger decline than the -6.6% fall that was expected. Industrial production also slowed sharply, falling -2.9%, against an expectation of a small rise of 0.5%.
These numbers are unlikely to improve significantly in the coming months given that China is unlikely to alter its zero-covid policy, given the vulnerability of its health service to too many infections, which means that after a poor Q1, Q2 could well be even worse. The poor nature of these numbers, along with the probability of how much improvement can be expected given China’s zero-covid policy, Asia markets have seen a mixed start to the week, which looks set to translate into a lower open for markets here in Europe.
EUR/USD – rebounded from just above the 2017 lows at 1.0340 last week, but bias remains lower for a move towards parity. To stabilise we need to get back above the 1.0650 level to signal a move back towards 1.0820.
GBP/USD – made another marginal new low at 1.2155 last week, with the major support back at the 1.2000/1.1980 area. We need to see a recovery back above 1.2470 to open up the 1.2600 area.
EUR/GBP – last week’s failure to hold above the 0.8600 area, and December highs has seen us slip back to the 0.8470/80 area. This sharp fake out suggests that the downside remains the weaker side, with a break below 0.8470 targeting a move towards 0.8420.
USD/JPY – the failure at the 131.35 area has the potential to ease us back towards the 126.80 area. As long as that holds then the 135.00 area target remains intact. A move below 126.80 targets the 123.00 area.