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Recession concerns spook markets, ahead of US payrolls

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What a difference a day makes? Having rallied strongly in the aftermath of the Federal Reserve’s decision to hike rates by 50bps on Wednesday evening, and not go harder, US stock markets went into full reversal mode yesterday, dragging European markets down with them.

Bond yields also shot back up, with the US 10 year closing above 3% for the first time since 2018.

It’s not immediately obvious what the catalyst was for yesterday’s reversal, however the losses seemed to gain traction after the Bank of England proffered a gloomy outlook for the UK economy in the aftermath of its decision to hike rates by 25bps to 1%, sending the pound sharply lower in the process. Whereas Chairman Powell of the Fed adopted a sombre but optimistic tone that the Fed could achieve a soft landing, Bailey was much gloomier about the outlook as the Bank of England downgraded the outlook for the UK economy to a contraction in 2023.  

This gloomy stagflation/recessionary outlook may well have prompted investors to reassess the initial optimism of central bankers, on either side of the Atlantic to engineer a soft landing for the wider global economy, at a time when growth is already slowing, and prices are still climbing.

Yesterday’s sell off was led by the Nasdaq 100, which, having rallied 3% on Wednesday, closed lower by 5.1%, dragging the rest of the US market down with it, with consumer discretionary the worst performers.

Consequently, today’s European open is set to be a slightly weaker one ahead of today’s US jobs report for April, as financial markets become increasingly concerned about the outlook for the US economy, as well as the wider global economy.

Earlier this week the latest ISM manufacturing and services reports showed that prices paid inflation was still strong, while the employment components were showing signs of early-stage weakness.

This seems rather counter intuitive when you consider that the March jobs report was a strong one across the board, with 431k jobs added in March, slightly below expectations of 490k.

The slight shortfall was more than offset by an upward revision to the February number of 678k to 750k, while the unemployment rate fell to 3.6% from 3.8%.

Adding fuel to the fire was a rise in the participation rate to 62.4% while the rise in average hourly earnings pushed up from 5.2% to 5.6% and the highest level since May 2020.

Since then, there has been little sign that the US economy has shown any signs of slowing with the latest surveys still showing fairly strong demand, although pricing pressures have started to turn higher again which could start to weigh on consumer sentiment.

This week’s JOLTS numbers for March showed that vacancies in the US are at record levels of 11.2m, while the number of unemployed persons in March fell to 6m persons, according to the Bureau for Labour Statistics, that’s a ratio of 1.9 jobs for every person looking for work.

Today’s April jobs report is expected to continue to show strong hiring trends given weekly jobless claims are still at levels last seen in the late 1960’s, with expectations for 380k jobs to be added with the unemployment rate expected to remain steady at 3.6%.

Against this sort of tight labour market, it is quite surprising that wages growth is still on the low side at 5.6%, especially when you consider Q1 unit labour costs are running at 11.6%.

As an interesting aside, it’s also worth keeping an eye on the March consumer credit numbers, which are due later this evening, after February’s blow out number saw a big surge in borrowing to $41.8bn, from a figure of $8.9bn in January.

Credit card lending contributed $18bn of that amount, a sixfold increase on the January number of $3.1bn, which is lousy timing given that interest rates are starting to rise quite sharply, at a time when credit card balances make up a total of over $1trn.  

The big increase in lending also begs the question as to whether all that fiscal stimulus money the US government doled out in 2021 has been spent?

Today’s consumer credit number for March could be a double-edged sword, a weak number could indicate a US consumer starting to cut back sharply, or another big number could signal a sign of higher borrowing at a time when rates are rising, and the economy is slowing.        

EUR/USD – slid back sharply from the 1.0640 level yesterday and looks set for a retest of the lows at 1.0470, opening the prospect of further losses towards the 2017 lows at 1.0340. To stabilise we need to get back above the 1.0650 level to signal a move back towards 1.0820.   

GBP/USD – the failure to move above the 1.2630/40 area prompted a sharp reversal with the break of the 1.2450 area triggering further weakness towards the next target which sits at the 1.2250 area and on towards the 1.2000 level.

EUR/GBP – has broken through the 0.8470/80 area and above the 200-day MA, to its highest levels this year. Next resistance comes in at 0.8600 area and December highs. Support lies back at the 0.8470/80 area.

USD/JPY – rallied strongly from the 128.65 area and back above 129.80 and through the 130.00 level again. The move towards 135.00 is still on the cards but we need to see a move through 131.25.

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