Risk On And Euro On The March
MARKETS IN RISK-ON MOOD
The past week has seen some sizeable moves in financial markets. ‘Risk on’ sentiment has dominated as markets have shrugged off domestic tensions in the US and ongoing signs of the deteriorating relationship between the US and China. The focus instead remains on hopes for a second half rebound in economic activity as lockdown measures are eased. As a result equities have continued to surge with a number of markets up by more than 8% on the week. Accordingly, government bond markets have come under pressure. US 10-year Treasury yields have touched above 0.95% their highest level since March, while UK 10-year gilt yields have moved above 0.33%. Some peripheral Eurozone bond markets, however, received support from the latest easing moves from the European Central Bank. In currency markets, the US dollar has slipped further against both the euro and sterling. Its weakness helped the pound weather the news that little progress has been made in the latest round of Brexit talks between the UK and EU . Meanwhile, the oil price has risen to its highest level since early March (pushing Brent crude above $40bbl). A virtual meeting of OPEC and other key oil producers is scheduled for Tuesday but there are reports that agreement has already been reached on an extention of production quotas. Markets will probably continue to focus on further signs that lockdowns are easing. A number of European countries are set to lower some barriers this week while reports suggest that New York is making preparations to start opening up again. Timely economic data will receive attention but markets may continue to shrug off reports of the hit to economic growth during the lockdown, including what seems likely to be a dire UK GDP report.
FED ON HOLD AS IT ASSESSES DEVELOPMENTS
No major policy changes are likely to come out of the US Federal Reserve’s policy update on Wednesday. Recent comments from Fed officials, however, suggest that many remain concerned that the rebound in the economy may be disappointing and that there is a substantial risk that it may falter. So despite today’s much stronger-than-expected labour market report, a key message will be that they stand ready to provide further support. That could include further QE if necessary and potentially a move to explicit yield curve control. However, the Fed does not seem to be seriously considering a move toward negative interest rates. In the meantime, Fed policymakers may consider some changes to their ‘forward guidance’ to emphasise that monetary policy is unlikely to be tightened and in particular interest rates will not be raised for a considerable period of time. They could also reintroduce the summary of the Committee’s economic projections (suspended in March), and use the interest rate forecasts (the so called ‘dot plot’) to reiterate their low rates message. The coming week’s US economic data calendar is light. However, Tuesday’s NFIB small business optimism survey for May and the June University of Michigan consumer sentiment index (Fri), are timely readings which will be watched for indications that sentiment has picked up. Wednesday’s May CPI is forecast to show inflation stabilising at a low level following its recent sharp decline. That fall was primarily driven by the big drop in the oil price and so its recent rebound, if sustained, will likely lead to some pickup in headline inflation in coming months. However, underlying inflationary pressures are also subdued and so inflation seems set to remain well below the Fed’s target for a considerable period of time.
UK GDP TO HAVE PLUNGED IN APRIL
Friday’s reading for UK April GDP will provide the most comprehensive indication yet of the economic impact of the lockdown. Output is expected to have fallen by 20% with activity in the industrial sector, construction and services all forecast to be down sharply. PMI data point to the likelihood of a further, albeit smaller, drop in output in May as the lockdown continued for almost all of the month. There are very few UK data releases scheduled for the rest of the week. However, the British Retail Consortium’s May retail sector update will provide timely information on domestic consumer trends. Anecdotal reports from retailers point to long queues and healthy sales as they re-open. However, May data may be too early to capture this in a significant way.
ECB’S LAGARDE SPEAKS TO THE EUROPEAN PARLIAMENT ECB
President Lagarde will testify to the European Parliament on Monday. Her comments are likely to be very similar to those made during her press conference following Thursday’s policy announcement. She will be able to point to the extra €600bn of asset purchases that the ECB promised as part of its emergency support programme. However, she will also probably again emphasise the need for further fiscal support to help drive the EU’s economic recovery. April industrial production data for the Eurozone as a whole, and for some of the largest member countries, are expected to show very big falls as lockdowns were in effect throughout the month. A fall of around 20% is estimated for the region as a whole. Elsewhere, China May international trade and inflation reports will be watched for signs that the economy is picking up again post-lockdown. Meanwhile, May money supply figures may provide indications of a boost to credit conditions from looser monetary policy. Finally a new fiscal stimulus package is expected to be announced in Japan.
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