European equity markets slumped sharply yesterday, knocked back by concerns that its two biggest economies could well be sliding into recession, after June flash PMIs slowed more than expected.
A slide in commodity prices added to the pessimism with copper prices sliding to 15-month lows, while oil prices have also come under pressure due to rising demand concerns. This weakness has translated into a sharp slide in bond yields with the US, German and UK 10-year yields seeing steep falls in the past two days.
US equity markets, on the other hand, have proved to be slightly more resilient this week, finishing the day higher, led by the Nasdaq 100, as the tug of war continues between the bulls and bears, as investors look to navigate a path between higher rates and recession risk.
Because of the positive US close, and positive Asia session, European markets are set to see a positive open, with today’s focus on UK retail sales for May, and the latest German IFO survey for June.
The latest German business survey could struggle to improve from May’s numbers if the recent PMI numbers are any guide.
We managed to see a pickup in May to 93, after a weak April number, but it's hard to make a case for a significant pick up in sentiment after yesterday’s German government announcement about gas supplies and the slide in the PMI numbers. Expectations are 92.8 for business climate and 99 for current assessment.
Before the German IFO survey, we have the latest UK retail sales numbers for May.
UK retail sales rebounded strongly in April, rising 1.4%, while March was revised higher to -1.2%. Most of the improvement was driven by sales of alcohol and tobacco in supermarkets, while fuel sales also rebounded.
Year-on-year retail sales growth declined 4.9%, however, that needs to be set in the context of last year’s April surge, which saw gains of 9.2%, as the UK was coming out of lockdown and shops were reopening.
All in all, the April numbers, while much better than expected, still pointed to a UK consumer that is low on confidence, but still has the capacity to spend when it wants to or needs to.
As we look to today’s May retail sales numbers, the comparatives to a year ago aren’t expected to be as stark, which means we could see an improvement on a year-on-year basis at the same time as seeing a month-on-month decline.
We might also see some carry-forward effect in terms of spending ahead of the Jubilee bank holiday weekend although it might not be enough to prompt a positive number, with expectation of a decline of 0.7% expected, while year-on-year a 4.9% decline could improve to one of 4.5%.
With GfK UK consumer confidence already at a record low in May of -40, it is notable that in June there was a further deterioration to -41 as higher prices continued to impact discretionary spending.
The topic of consumer confidence is expected to be front of mind in the US later today, with the final University of Michigan confidence numbers for June expected to be confirmed at a record low of 50.2.
It was these numbers, and the move higher in both short- and long-term consumer inflation expectations, that prompted the Federal Reserve to controversially rip up its forward guidance playbook for a 50bps rate hike, just prior to this month’s meeting during its blackout period.
The anonymous briefings to so-called friendly media over that weekend, by unnamed Fed officials, that we could expect to see a 75bps hike, and not the expected 50bps move, prompted a significant bout of market volatility and were a bit of a game-changer, in terms of the wider inflation narrative, as well as significantly increasing rate hike expectations this year.
Apart from that, the shift in guidance also did significant damage to the Fed’s credibility when it comes to its guidance playbook. The sudden change reinforced the notion that the Fed was starting to panic that they might be losing control of prices, on the basis of one data point.
EUR/USD – continues to struggle to move above the 1.0600 area, slipping back again yesterday. We need to see a sustained move above 1.0600, as well as trend line resistance from the highs this year, which comes in at 1.0650 to open the 1.0800 area. Below 1.0330 targets parity.
GBP/USD – not much momentum either way at the moment. Finding support below 1.2200 but rallies are struggling. We need to push above the 1.2450 area to argue for further gains. A move below 1.2150 opens up a retest of the 1.1950 area. Below 1.1950 targets the 1.1500 area.
EUR/GBP – slipped back from the 0.8640 area yesterday but remains in a wider uptrend from the April lows with support now at 0.8545. We need a sustained push through the 0.8630 area to open up 0.8700. A break below 0.8500 targets the 0.8420 area and 200-day MA.
USD/JPY – appears to have put in a short-term top at 136.70, sliding below 135.20, and could well fall back towards the 131.50 area and the lows last week. Resistance currently sits at 135.40, and the previous peaks.
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