US markets once again made new record highs yesterday,
with the S&P500 briefly pushing above the 1,900 level, despite a positively dreadful retail sales figure for April.
They were helped by a continued belief that the ECB would act to ease monetary policy next month
after a disappointing German ZEW expectations survey and a further decline in Italian inflation data, which sent the FTSE100 to new 14 year highs and the DAX
back towards its record highs seen earlier this year.
This optimism was reinforced during the day on reports that the German Bundesbank was prepared to rip up decades of fiscal orthodoxy
and back negative deposit rates and purchases of packaged loans.
This apparent deviation from what has been a solidly entrenched and consistent position
did initially invite one question as to what was being put in the water in Frankfurt, but the shift in position was caveated with the conditionality that inflation projections would need to be considerably lower than they are now, which is already the ECB’s position on any easing, so there wasn’t really anything new in this.
We could get some clues with respect to inflation with the final inflation numbers for April from France and Germany
both of which are expected to be adjusted 0.2% higher to 0.9% and 1.1% respectively.
Away from Europe it is the UK economy that is expected to be the centre of attention
with the latest Bank of England quarterly inflation report
. Since the last report the UK economy has outperformed expectations, which is likely to present the central bank with some problems with respect to its guidance on the future path of interest rates.
The Governor could well be expected to face some difficult questions on whether the bank is concerned about the pace of house price inflation
, particularly outside of the London area, and what measures, if any, they intend to use to keep them in check.
The UK consumer sector in particular continues to spend money with a solid BRC retail sales number for April
showing its biggest rise since April 2011.
Against this positive backdrop it would not be surprising to see some dissent start to eke out of the committee consensus on rate policy,
especially in light of the strong rebound seen across all sectors of the UK economy. In any event the Bank is likely to upgrade its growth forecasts and downgrade its inflation forecast.
It is the inflation forecast that will give the bank leeway to keep rate rise expectations
in check, particularly if it is lowered, but recent noises being made by various MPC members would seem to suggest that we could well be much closer to some form of rate rise than markets are currently pricing in.
This morning’s UK economic data is likely to reinforce the recent recovery with the latest ILO March unemployment data
set to show a continued improvement in the labour market, with a fall to 6.8% from 6.9%,
as we fall further below the old Bank of England unemployment threshold target.
More importantly for an economy that has undergone an almost 5 year price squeeze we could see average earnings rise further above the CPI inflation rate
and move closer to the RPI rate, with a rise to 2.1% from 1.7%
Jobless claims for April are expected to decline again by 30k
, continuing the consistent declines seen in every month since July last year.
In fact over the last ten months the decline in jobless claims has averaged 30k a month
, a pretty good sign of an economy that appears to be ticking along nicely.
– the euro continued its decline yesterday falling below the 100 day MA and closing in on the April lows at 1.3675. A break below 1.3650 could well signal the completion of a double top reversal pattern and trigger further declines towards the 200 day MA at 1.3620 initially, and then the February lows at 1.3480. We need a move back through 1.3780 to stabilise and retarget 1.3850.
– currently finding some support at the 1.6820 area, but we could well see further losses towards 1.6770, the April lows, and the 50 day MA at 1.6720. We need to recover back through 1.6900 to mitigate this scenario. We also have trend line support at 1.6690 from the November lows of 1.5855.
– the euro continued its push lower yesterday hitting one year lows at 0.8134 as the pressure continues for a move towards 0.8090 and the 2013 lows. We need to see a rally beyond the 0.8250 area to diminish the downside risk and open up a retest of the 0.8300 area.
– having pushed above the 102.00 area the risk now remains for a move towards the highs this month just above the 102.80 level. The key supports on the downside remain at the March low at 101.20 as well as the 200 day MA at 101.00. We need to see a recovery back through the highs this month at the 102.80 level to suggest a move back to the highs at the beginning of April at 104.10.
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