Yesterday’s stock market session was a much more orderly affair, with a positive finish for Europe as well as US markets, which were aided by some dovish commentary from New York Federal Reserve president, John Williams. His stance on tapering and rate rises stands in contrast to the more hawkish tone of his St Louis Fed counterpart, James Bullard, and helped the Nasdaq make a new record high, while the S&P 500 was back within touching distance of its own record high set last week.
We’ve heard a lot about inflation risks over the course of the past few days, and it's certainly true that there are concerns about how transitory it might be, but yesterday’s comments from Williams show that the Fed also has concerns about the labour market and the lack of a rebound in the participation rate, despite record vacancy rates. If Williams is concerned about this, he's unlikely to be the only one, which would suggest that while Bullard may want to taper early, he’ll have to convince quite a few others, in addition to Robert Kaplan of the Dallas Fed, to get his wish. Given the current mood music from other Fed members, that doesn’t look likely.
With markets in the US recovering their equilibrium as well as a positive Asia session, today’s European open looks set to be a positive one, with the main focus on the latest flash purchasing manager index (PMI) data for June. With the Bank of England set to announce its latest policy decision tomorrow, and markets still off balance from last week’s unexpected shift on the Federal Reserve’s policy timeline, economic data now more than ever will become important as markets look towards the timing of a tapering or paring back of monthly bond purchases. Today’s flash PMIs from the UK, France and Germany will give further insight into the reopening progress of the three biggest economies in Europe.
In May, the reopening of the UK economy took another leg to the upside, building on the resilience in the April numbers, as optimism rose over a Q2 economic rebound that continues to gain traction. The May UK composite PMI hit a record high, along with prices paid, showing that while prices are looking a little on the hot side, they aren’t for now acting as a brake on the 'reopening trade'. The manufacturing sector appears to have been leading this rebound, however as the recent industrial production and manufacturing data for April from the ONS showed, a decent PMI number doesn’t always translate into positive economic activity, with declines seen in both of the readings from these official numbers.
The May services PMIs also painted a robust picture, with services activity hitting a 24-year high at 62.9, while manufacturing rose to 65.6, a record high. UK companies were reporting higher demand for both goods and services, which in turn was seeing some cost-push inflation, while the jobs market was also looking strong, with firms being encouraged to take on extra staff at a rate not seen in over three-and-a-half years. All in all, optimism was high, with the only question being whether or not what we are seeing is sustainable.
Today’s June numbers are likely to be similarly positive, however with the extension of some restrictions into July, we can expect a bit of a slowdown after the impressive readings from May. Expectations are for manufacturing to slip back to 64, and services to 62.8, however attention should be paid to prices paid for signs of additional inflationary pass-through.
Moving on to France and Germany, we’re also seeing improvements here, particularly in services PMIs, although the picture is patchier. Manufacturing continues to stand apart, with both Germany and France maintaining recent resilience in May, with only a modest softening to 64.4, although France rose to 59.4. Services still remain very much the laggard, and while there have been attempts at reopening some parts of their economy, the high levels of infection still continue to act as a drag. Fortunately, the vaccination programme, particularly in Germany, is starting to gain traction, and that helped economic activity improve in May to 52.8, a trend that is expected to continue in June with a rise to 55.7. Similarly in France, after a weak April, there was a decent rebound to 56.6 in May, and this trend is expected to continue in June with a rise to 59.5.
EUR/USD – consolidating above the 1.1850 area, which if sustained could well see a move back to the 200-day MA. We appeared to get a key day reversal on Monday with a return to the 1.2000 area a distinct possibility. Below 1.1840 suggests a move to the 1.1704 level.
GBP/USD – Monday’s rebound from the 1.3790 area looks like a key day reversal, suggesting the potential for a rebound to the 1.4000 area initially, as well as the 1.4080 area. A break below 1.3780 suggests the potential for a move back to the March and April lows at 1.3670.
EUR/GBP – currently looking a little soft but still holding above support at the 0.8540/50 area, with resistance at the highs of the last few days at 0.8600. A break below 0.8540/50 opens up the recent lows at 0.8480.
USD/JPY – rebounded off trend line support at 109.70 on Monday, but needs to move above 110.80 to maintain upwards momentum. A move below trend line support now at 109.70 opens a move back towards the 108.60 area on a break below 109.20.