European markets had a decent rebound yesterday, helped in no small part by a similarly resilient performance from US markets, with the Nasdaq hitting a two-week high, as stocks in the US broke a three-day losing streak.
Today’s European open looks set to be a cautious but positive one, and somewhat characteristic of this week where we’ve seen sharp moves higher and lower, as investors wrestle with indecision about the direction of the next move, caught between optimism over the economic reopening, and concern over central banks acting too late to address an inflationary surge.
As we look ahead to the day ahead, the main focus is set to be on the latest flash PMIs for May, from France, Germany, the UK and the US. Before that we have UK retail sales for April. UK retail sales have slowly been recovering since the big -8.2% decline seen in the January numbers, which came about as a result of the total lockdown imposed at the beginning of the year. Since then, we’ve seen a slow and steady recovery with a 2.1% rise in February, and then a 5.4% rise in March driven primarily as a result of people shopping in garden and DIY centres, resulting in a 16% rise in household goods.
March also saw a big rebound in clothing sales as consumers looked towards further easing measures in April, along with higher fuel sales as people started to move around more. The further easements seen in April are likely to see retail sales growth continue with expectations of a 4.5% rise in the monthly number, and an annualised surge to 36.8%. With respect to the annualised number, it should be remembered that retail sales fell off a cliff this time last year, so there will be considerable base effects in today’s number. The direction of travel for April retail sales is likely to be for a similarly positive number in the wake of the 12 April easing measures, something that was borne out by a big jump in the recent BRC retail sales numbers which showed a decent improvement in April.
We also have the latest flash PMIs for May which if the recent April numbers are any guide are likely to be similarly positive. The April PMIs painted a robust picture with services activity hitting a six and a half year high at 61, while manufacturing rose to 60.9, an 8-month high. UK companies were reporting higher demand for both goods and services, which in turn is causing some cost push inflation, while the jobs market is also looking good with firms being encouraged to take on extra staff at a rate not seen in over three and a half years. Today’s May flash PMIs are expected to be similarly positive with services activity expected to rise to 62.2, while manufacturing is predicted to remain steady at 60.8. All in all, optimism is high with the only question being whether or not what we are seeing is sustainable through the summer.
In Europe the picture is also starting to look a little more positive, however both France and Germany still face a number of headwinds that the UK economy has managed to overcome. Its vaccination programmes are slightly behind and their infection rates are higher. We’re starting to see slow improvements here, particularly in services PMI’s however the picture is patchy. Manufacturing continues to stand apart with both Germany and France maintaining recent resilience in April with only a modest softening to 66.2 and 58.9 respectively. 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 gaining traction, however that hasn’t stopped economic activity from slipping back in the most recent April numbers which saw modest declines to 49.9, while French economic activity improved slightly from 48.2, to 50.3. With large parts of the German economy locked down until June we may see a modest improvement but it’s not expected to be strong with a reading of 52 expected. France is expected to come in at 53, up from 50.3.
The latest US flash PMIs for May are expected to retain their recent resilience with both manufacturing and services predicted to come in at 60.8 and 62.2 respectively.
EUR/USD – still has resistance at the 1.2250 area yesterday, matching the peaks seen at the end of February. If we break above 1.2250 it opens up the prospect of a move back towards the 1.2345 level. A failure argues for a return to the 1.2040 area.
GBP/USD – still struggling to overcome the 1.4200 area, however a break above opens up the prospect of a move towards the 2018 peaks at 1.4375. A failure to overcome 1.4240 keeps the bias towards 1.4000.
EUR/GBP – continues to find itself capped at the 0.8640 area which keeps the bias towards the downside, with the potential to slip back towards the 0.8560 area on a break below 0.8600. Above 0.8640 opens up the prospect of a move towards the April highs at 0.8730.
USD/JPY – feels vulnerable to a move below trend line support from the January lows at 108.60. We need to get back above 109.80 to kick on towards 111.00. A move below 108.00 opens up the prospect of a move back towards 106.80.