Yesterday saw another strong down day for European markets, and even though we have seen new record highs for the DAX and Stoxx600 this week, the overall direction of travel for stocks over the past few weeks has been rather uncertain.
The lack of follow-through on this week’s new highs in Europe, as well as the US, appears to speak to uncertainty about a trifecta of factors, the continued increase in virus cases, the pace of recovery which appears to be slowing, and the concerns that the rise in inflation may well not be as transitory as central bankers would like.
We’ve seen this week two central banks start to pare back the scope of their asset purchase programs, with the Reserve Bank of New Zealand and the Bank of Canada announcing changes to that effect.
For now, the Federal Reserve, and in particular Fed chair Jay Powell, has insisted that the Fed is a long way from seeing “substantial progress” when thinking about altering monetary policy. Bond markets appear to buying it for now, but given the strength of recent inflation data you have to ask for how long this can continue?
Furthermore, it’s hard to quantify what the Fed means by “substantial further progress” as what you think it means could well change as circumstances dictate. Central bankers appear to be flying by the seats of their pants. There is the prospect that they are underestimating how much inflation is transitory and over estimating full employment levels.
While it is apparent that US participation is about 7m lower than pre-pandemic, a good number of these workers may well have retired early, and dropped out of the labour force completely. Over 9m vacancies tells us the labour market has some slack in it but we’ll only know how much when all the stimulus benefits expire in September.
Two Bank of England officials, Deputy Governor Dave Ramsden, and external MPC member Michael Saunders have also articulated their unease at what appears to be happening with inflation, saying that the case for considering the paring back of some stimulus measures was rising.
Yesterday’s unemployment numbers only serve to reinforce those concerns, particularly since there appears to be up to 1m vacancies which UK business is struggling to fill, as the economy starts to reopen.
This inability to fill these positions could well lead to wage inflation on both sides of the Atlantic, and it this mismatch in the labour market where we could well see the effects of higher inflation, as benefits and furlough comes to an end.
European markets look set to open slightly higher in the wake of yesterday’s declines, after the Bank of Japan left monetary policy unchanged and Asia markets finished the week slightly weaker.
Today’s main event is the latest US retail sales numbers for June, which are likely to see an improvement from the declines in May, but also speak to a reluctance of US consumers to spend all of their stimulus payments at once.
US consumer spending has been fairly stop-start this year, with the significant amounts of fiscal stimulus, helping to drive a rebound in consumption, but the recovery has been patchy with significant numbers of US consumers choosing not to spend all of their stimulus windfalls.
This is borne out by recent personal spending data which apart from a couple of decent months has been fairly muted.
May retail sales saw a decline of -1.3%, a much bigger decline than expected, following on from a 0.9% rise in April.
This year alone we’ve seen two negative months and three positive months, with the two strong positive months driven by the stimulus payments that were delivered in January and March.
This appears to be a confidence thing for US consumers, and while we are seeing an improvement in the labour market, and consumer confidence remains high, the lower-than-expected number of job gains in the monthly payrolls numbers does raise questions as to what is going on in the US economy.
Home sales have been weak and prices are rising across a range of products. Against this backdrop and with inflationary pressures rising we could see another weak figure when today’s June figures get published.
While the US is doing well on the vaccine rollout plans and the reopening of the economy, with theme and holiday parks also reopening, the rise in cases that we are now seeing, appears to be feeding into an overriding feeling of caution around consumer spending patterns which appears to be tempering retail sales.
Higher fuel prices probably aren’t helping either with an expectation of a decline of -0.5% for June.
EURUSD – we still need to move through the 1.1880 level to signal further gains. A move below the lows this week at 1.1770 has the potential to open up the April lows at 1.1712. We need to see a move back above the 1.1880 level to signal a return to the 1.1975 area. A move below 1.1700 reopens the 1.1612 area.
GBPUSD – currently range trading between the lows this week at 1.3800 and 1.3900 area. A break below 1.3800 opens up a move towards last week’s low at 1.3730. Resistance remains at the 1.3920 level and the highs this week. Above 1.3920 retargets the 1.4000 area.
EURGBP – appears to be in a short squeeze after failing to break below 0.8500 earlier this week. We could head back towards the 0.8600 area. Nonetheless it doesn’t change the fact that the bias remains for a move towards the 0.8480 area.
USDJPY – after three days of gains off last week’s lows at 109.53 the US dollar has slipped back from the 110.70 level, and is now starting to look vulnerable. Support remains back at daily cloud support now at 109.50. A break above 110.70 targets the 111.20 area.