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US retail sales and bank earnings set to round off the week

JPMorgan Chase

European markets underwent another positive session yesterday, driven by outperformance from the luxury sector, with the CAC 40 closing at new record highs, while the DAX and FTSE100 also eked out some modest gains.

Another big fall in US inflation, this time in headline PPI for March as well as core prices is fuelling optimism that we could start to see a similar effect filter down into the CPI numbers in the coming months, thus bringing us closer to possible rate cuts later this year.

This may well be true, however with the US labour market still holding up reasonably well it’s hard to imagine the Federal Reserve will be in any rush to cut rates while the US economy continues to hold up reasonably well on the jobs front.

This looks set to translate into a positive European open later this morning.

Nonetheless, this optimism about a Fed pivot helped to drive US equity markets higher on the day, led by the Nasdaq 100, while the S&P500 posted its best close in two months, though it was notable that we didn’t see a commensurate decline in US bond yields.

Weekly jobless claims did edge higher to 239k, but continuing claims declined to 1.81m, in a sign that hiring patterns remain fairly robust.

We’ll also be getting a key look into how consumer sentiment has fared in March in the wake of the banking turmoil, with the latest US retail sales numbers, along with the latest Q1 updates from JPMorgan Chase, Citigroup, and Wells Fargo.

After a strong start to the year US retail sales stalled in February slipping -0.4%, in the aftermath of the 3.2% surge seen in January.

Personal spending also saw a similar slowdown in the same months, slowing from 2% in January to 0.2% in February.

With all the concerns over bank runs in the US during March and consumers shifting their funds from smaller US banks to the biggest ones, consumer confidence managed to hold up pretty well. That doesn’t necessarily mean that we’ll see a similar pickup in retail sales.

Expectations are for another weak reading of -0.4%, however, the caveat in that regard is that the US labour market continues to hold up well, while gasoline prices slipped to a 15-month low. This may help support spending in other areas of the US economy.

The bigger test, however, will be in how the US banks fared in Q1 and more importantly, how lending to US businesses and consumers held up during what was a turbulent quarter for the sector.

When JPMorgan Chase reported at the end of its last fiscal year, the bank set aside a rather large reserve build of $1.4bn, as a result of a big increase in credit costs to $2.3bn on the back of a deterioration in the economic outlook, with the bank saying that they have a baseline assumption of a mild recession.

These concerns can only have risen further in light of recent events with the main focus on this US bank earnings season on how much the recent turmoil has hit the sectors profit numbers, not only in terms of the impact of loan demand, whether it be in mortgages or credit card lending, but also in terms of deposit inflow.

A lot of SVB’s clients moved their funds to JPMorgan and other US banks on the back of the collapse.

EUR/USD – pushed up through the 1.1030 area and to its highest levels this year, and on course for its highest levels in over a year. Now has support at the 1.0970 area, and below that at the 1.0830 area at the start of the week.

GBP/USD – having broken above the highs of last week at 1.2530 we could see further gains towards 1.2660. While support at the 1.2270 level holds the bias remains toward the upside.  

EUR/GBP – broken above the 50-day SMA and looks set to test trend line resistance at 0.8850, from the highs this year at 0.8970. Currently have trend line support at 0.8740 from the August lows at 0.8350.

USD/JPY – while cloud resistance at 134.50 holds we could see a return to the April lows at 130.60.

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