While European markets saw a broadly positive session yesterday, US markets turned tail and slumped after the European close, after Fed chair Jay Powell laid out the case for a possible 50bps rate hike at next month's May meeting of the Federal Reserve.
This seems a rather strange reaction given that nothing he said yesterday was in any way surprising. A 50bps rate hike is already priced in, as well as the prospect that we could well see another one soon afterwards.
Powell’s comments that “there’s something in the idea of front loading” aren’t new. They’ve been trailed by pretty much every single member of the FOMC over the past few days, so for markets to take fright about something they know is coming, comes across as trying to find a narrative to justify a price move.
That said the tone of his remarks could have been taken that while markets aren’t concerned about a 50bps hike in May, they are concerned that the Fed might go harder for longer, that is another two 50 basis points hikes subsequently by the end of the summer.
That might help explain why US stock markets abruptly turned around, but the price action also offers clues when you see that both the S&P500 and Nasdaq 100 couldn’t break above the highs of last week, with the S&P500 unable to move above 4,500 and the Nasdaq failing at 14,300, last night’s move suggests an element of a technical reversal, due to a lack of follow through buying to the upside.
US 10-year yields rebounded, closing 6 bps higher, however they remain below the highs for this week, although we did see another surge in the 2-year yield, trading up to 2.72%.
Nonetheless the selloff in US markets last night means we can expect to see a sharply lower European open later this morning, after Asia markets saw similar sharp declines, with the main focus on the UK retail sales for March, as well as the latest flash PMIs for April from France, Germany and the UK.
UK consumer spending got off to a strong start in January, after the -0.4% slowdown seen in December.
Not only did fuel sales recover, but we also saw a strong rebound in household goods and furniture, with high street sales showing a decent pickup, as 2022 got off to a decent start with a 1.9% rise.
This slowed in February as retail sales slipped back by -0.3%. On the plus side we saw non-food sales post a decent gain with clothing sales rising 13.2%, while fuel sales also rose as the relaxing of Plan B restrictions saw an uplift to travel.
Online sales fell back as did food store sales as more people went out to bars and restaurants. On an annualised basis sales rose by 7%.
The decline in February was a little surprising given that other retail sales measures have looked more resilient with BRC retail sales numbers for February looking strong.
The picture for today’s numbers is likely to be equally as challenging, especially with consumer confidence falling through the floor, and sliding to its lowest levels since July 2008 when the GFk data for April was released earlier this morning.
The latest BRC retail sales numbers for March showed that like for like sales declined -0.4% in a sign that consumers were already starting to hold back, and it’s quite likely we’ll see a similarly negative number later this morning, with expectations of a decline of -0.4%, or possibly even worse, if you can extrapolate anything from the recent numbers that we saw from Netflix earlier this week.
One of the more puzzling aspects of recent PMI numbers is how resilient they have looked when compared to the corresponding manufacturing and industrial production numbers and various business surveys, which have shown marked slowdowns across the board due to rising cost pressures and supply chain disruptions, in both manufacturing, as well as services activity.
In March we saw manufacturing activity for Germany slow to 56.9 from 58.4, and France to 54.7 from 57.2, which are fairly decent numbers, which some have suggested could be down to manufacturers restocking inventory in order to get ahead of sharp increases in prices in April, along with a similar pattern playing out on the services sector.
This sounds plausible; however, it therefore begs the question whether this can be sustained into April and given the further squeezes being seen in energy prices one has to question whether a decent Q1 performance can be sustained into Q2.
Today’s April flash PMIs for France are expected to see a slowdown in manufacturing to 53.7, and 56.5 for services, while German manufacturing is expected to slow to 54.5, while services is expected to come in at 55.3.
In the UK it’s expected to be a similar story with manufacturing expected to come in at 54, and services to slow from 62.6 to 60, with particular attention to be focussed on input costs as price rises kick in at the start of the new tax year.
We also heard from ECB President Christine Lagarde yesterday as she capped off a couple of days of some rather hawkish comments from the likes of Belgium’s Pierre Wunsch, and ECB vice president Luis De Guindos who followed on from Latvia’s Martin Kazaks by arguing that a July rate rise was on the table. She didn’t come across as anywhere near as hawkish as her colleagues, pointing to the June meeting as the moment to decide on next steps, and lightly pushing back on the idea of a fixed point.
Bank of England governor Andrew Bailey also played a straight bat, but he did give the impression that another rate rise was coming in May, given concerns about how inflation was starting to bed in, however he didn’t have the air of a man ready to give a strong steer on a 50bps move, although he did acknowledge the tightness of the labour market, where we are quite likely to see further welcome upward pressure on wages in the months ahead.
This shouldn’t be something the Bank of England should be too worried about, given where CPI is right now. If anything, higher wages should act as a buffer to a slowdown in consumer spending by easing some of the worst effects of the current cost of living crisis.
EUR/USD – broke above the 1.0830 area and headed up to 1.0935 before sliding back again in what looks like a classic short squeeze. Below 1.0750 targets a move towards the March 2020 lows at 1.0635.
GBP/USD – the pound ran out of steam at 1.3090 yesterday but needs to move above 1.3150 to stabilise and target a move towards 1.3300. A break below 1.2950 argues for a move towards 1.2800.
EUR/GBP – squeezed back to 0.8367 yesterday before slipping back. Bias remains for a move lower towards the 0.8200 area and March lows, while unable to overcome 0.8380.
USD/JPY – currently have resistance at the highs this week at 129.40. If we can’t get back above 129.00, we could slip back towards the 125.80 area in the short term, as profit taking kicks in. The main support lies all the way back down near the 124.70/80 area.