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Services PMIs and FOMC minutes in focus

Friday’s bumper US non-farm payrolls report saw both the DAX and Stoxx600 post new record highs yesterday, following on from similarly record sessions in the US on Monday, and while the FTSE 100 continues to lag behind, the FTSE 250 was still able to close within touching distance of a record close.

China and the US aside, which have seen their services sectors hold up exceedingly well, with the US ISM services headline number hitting a record high this week, the services sector in Europe continues to bear the brunt of the global pandemic, and even where we are seeing outperformance, the jobs recovery in these sectors has struggled to match up to the headline numbers.

The latest Spain and Italy services numbers are expected to remain subdued with services activity to remain sub-50, although slightly improved from February, at 45.6 and 49.2 respectively. The slow rollout of the vaccine programme across Europe, but particularly in France and Germany is hampering economic activity in Europe’s two biggest economies, with last month’s flash PMI’s pointing to only a modest pickup from some very weak February numbers. France is expected to see a pick up from 43.6, to 47.8, while Germany is expected to rebound from 45.7 to 50.8.

If these numbers are confirmed it will also reaffirm the continued divergence between the services sector and manufacturing which continues to show fairly decent economic outperformance. With restaurants and bars in France set to remain closed for another four weeks, and Germany still in various states of tightened restrictions it is hard to see the case for any type of decent recovery in April either. Against this type of backdrop there is a very real risk that in the case of Europe’s tourism sector, we could be looking at another desperate summer season.  

Despite the positive vaccine news lifting the mood from a markets point of view, the various delays in the vaccine rollout mean that it is clear that there will be no significant uptick in economic activity until such time as restrictions start to get eased, perhaps sometime in the late spring.

In stark contrast to the problems in Europe, the UK appears to be in a much better position, as the UK economy heads towards a further unlocking next week. We’ve already seen evidence that businesses are gearing up for this economic reopening in the flash numbers we saw at the end of last month, which saw services activity surge to 56.8, a figure that should be confirmed later this morning, from 49.5 in February, and a low of 39.5 at the beginning of the year.

This rebound in activity suggests that businesses are building up inventory as well as preparing for a coiled spring rebound in Q2. Non-essential retail reopens in 5 days’ time, with pubs reopening for outdoor business as we get ready for a long-anticipated beer, as well as a haircut, though not necessarily in that order

At its most recent meeting the US Federal Reserve faced a tricky balancing act when it came to managing the message over its optimism around a US economic recovery, while at the same time not giving markets the impression that they might look to rein back on their monetary policy stimulus too soon. There was a concern that markets might take the wrong message from some Fed officials moving their dot plot estimates for a possible rate rise from 2024 into 2023, as well as 2022, on the back of optimism over upgraded economic forecasts, due to the newly signed off fiscal stimulus, and an accelerated vaccination program.

This still remains a real risk, given that four Fed officials now see a rate hike in 2022, with seven seeing a hike in 2023, and while US 10-year yields are higher now than they were at the time of the last meeting, Fed officials do seem to be fairly comfortable with these higher expectations for the time being. Powell was clear that the Fed was happy to tolerate an inflation overshoot before taking any action pre-emptively and this appears to have soothed concerns in this regard for now, with yields slipping back despite Friday’s bumper payrolls report. The real risk is likely to come from the shorter end of the curve. For now, 2-year yields are well anchored down near 0.15%, and while that remains the case, markets can probably tolerate higher longer-term yields in the short term.

The nature of any discussions by various FOMC members will be closely parsed to see where, if any splits on the timing of a taper or rate rise are likely to come from, with particular attention likely to be on next year’s voting members, rather than this year. Atlanta Fed President Raphael Bostic has already suggested that the Fed could start to look at rates rises in 2023 if the data supports it, and while that is a minority view, it is unlikely to remain so if the US labour market continues to improve, in the fashion we saw last Friday when 916,000 new jobs were added in March. A few more months of circa 1m jobs being added would be much harder to ignore, and the market will start to move in that direction whether the Fed wants them to or not.

EUR/USD – continues to edge higher from the 1.1704 lows, moving up towards the 200-day MA with the potential for a move towards the 1.1920 area. The bias still remains for a move towards the previous lows at 1.1615, while below 1.1880.

GBP/USD – rebuffed the 1.3920 area, slipping back with support now back at the 1.3750 area. A move below 1.3710 retargets the 1.3670 area. A move through 1.3920 retargets 1.4020.

EUR/GBP – found support at the 0.8470 area, and has subsequently move back above 0.8540. We could squeeze back to the 0.8620 area, but while below the potential remains for a move towards 0.8400.   

USD/JPY – fell just shy of the 111.00 area last week, and has since slipped back, below the 110.20 area, which now becomes resistance. A slide below 109.70 has the potential to reopen a move back towards the 108.70 area.

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