After seven weeks of gains European equity markets got off to a subdued start to the week, despite rising optimism that the US and China appear to be making progress on their protracted trade negotiations.
While US markets finished the day higher, markets in Europe finished the day lower after comments from Bank of France governor Villeroy de Galhau that an ECB rate rise would come soon after the asset purchase programme has ended, prompting some profit taking, as well as helping push bond yields higher.
The Chinese economy appears to be giving off mixed signals after a soft start to the year with the latest industrial production and retail sales numbers for April coming in at 7% and 9.4% respectively. The retail sales numbers were particularly disappointing, matching a one year low as consumer spending slowed down after a strong February and March. Industrial production was better showing a strong rebound from 6% to 7%, however fixed asset investment year to date was also weaker, down from 7.5% to 7%, the lowest level since 1999.
On the data front the latest preliminary German Q1 GDP numbers are expected to show a modest slowdown to 0.4% from 0.6% in Q4.
Last week the Bank of England in its latest inflation report adjusted its inflation, growth and wages forecasts lower over the next 12 months. The growth forecast was lowered to 1.4% from 1.7%, while the wage growth outlook was cut from 3% to 2.75% Policymakers also suggested that price pressure was subsiding and could well subside much faster than originally forecast in their February update.
It is true that CPI has fallen from 3.1% to levels of 2.5% in the latest March numbers, but it still seems rather early to predict that the recent upward pressure on prices is likely to ebb given that we in the April numbers alone we’ve seen council tax go up, pension contributions increase on an annualised basis, while petrol prices have risen from £1.20 a litre at the beginning of the year to about £1.25 now.
There are also a few utility price rises from the energy suppliers also scheduled to trickle down over the next few weeks and months. This makes it even more important that wages data can hold up in the comings weeks and months despite the Bank of England’s pessimism.
Most of the headlines in the past few months have been about job losses in retail as well as construction yet thus far the unemployment numbers have continued to come down, at 4.2% last month, and it is expected to stay at this level in the latest March numbers.
On the wages front for the three months to March weekly earnings including bonuses are expected to rise to 2.9%, however on the headline numbers we are expecting to see a fall to 2.6% from 2.8%.
This fall certainly doesn’t tie in with some of the employer business surveys we are seeing which suggests wages are rising on the back of a tightening labour market.
Up until recent retail sales growth in the US was subdued but we saw a nice rebound in the March numbers of 0.6% and some of this momentum is expected to carry over into the April numbers with a gain of 0.3% expected. The rebound in consumer sentiment has been because wages are now starting to show signs of picking up, particularly with an unemployment rate now below 4%.
This rather overlooks the fact that US gasoline prices are now around $3 a gallon, well above the levels they were at the beginning of the year, and US consumers tend to become much more price sensitive on discretionary spending when prices move through this psychological barrier, even more so at this time of year as US driving season begins in earnest.
EUR/USD – the current rebound needs to overcome the 200-day MA above the 1.2000 area to suggest a short-term base might be in, after last week’s lows at the 1.1820 level. A move through 1.2030 could trigger a move towards 1.2100. The next key support area remains down near the 1.1780 level, as well as the December lows at 1.1710.
GBP/USD – continues to hold above this year’s low at 1.3460. However, we need to overcome the 1.3620 area to stabilise and argue for a move towards 1.3720. A failure to do so invites further losses towards the 1.3300 area in the medium term.
EUR/GBP – while below last week’s high at 0.8845 and the 200-day MA at 0.8880 the risk remains for a move back towards last week’s lows at 0.8740.
USD/JPY – currently trading between the recent highs at the 110.00 level last week, which is keeping the upside contained, and support at the 108.70 level. We also have key resistance up at the 200-day MA at 110.25, with trend line resistance at 110.50 behind that.