European markets ended a broadly positive month on the back foot yesterday as record inflation levels and oil prices at two-month highs, acted as a drag on wider sentiment.
US markets also finished the month broadly weaker, and more or less flat on the month, while yields jumped sharply higher after Fed governor Christopher Waller said he wants to go down the route of several 50bps rate hikes in order to be certain that inflation is brought under control.
With US markets closing modestly lower, but well off their lows of the day, European markets look set to open the month higher with a late sell-off in oil prices threatening to act as a drag on the FTSE100, on reports that OPEC might be open to expelling Russia from its oil production deal, paving the way for a possible unilateral supply increase.
As we get a new month underway, we already know that the economic growth in Europe and the UK is slowing due to rising prices, and supply chain disruptions caused by the Russian invasion of Ukraine and Covid lockdowns in China.
Today’s manufacturing PMIs for May, while expected to be weaker, don’t really reflect the disruptions being faced by the manufacturing sector across Europe.
Spain, Italy and French manufacturing PMI are all expected to weaken to 52, 53.6 and 54.5 respectively, while in Germany it is expected to remain steady at 54.6.
In the UK, we are also expected to see a similar weakening from 55.8 to 54.6, with these particular indicators giving a misleading picture of economic activity across the region.
We also get another glimpse of how tight the US labour market is with the latest April JOLTS data, which is expected to show that job vacancies fell to 11.3m in April, down slightly from March’s 11.5m.
The US labour market has remained one of the standouts of the rebound in the US economy, and with the ADP report due tomorrow and the non-farm payrolls numbers due on Friday, the Federal Reserve appears unfazed about an aggressive tightening stance in the months ahead.
This week’s wages data, due on Friday, could offer more clues about how confident the Fed will continue to be in the coming months, given that there appears to be some splits opening up between the likes of Fed governor Christopher Waller who wants to pursue an aggressive 50bps hikes beyond July, and the likes of Atlanta Fed President Raphael Bostic who appears open to a possible pause in September.
On the subject of raising rates, we look set to see another rate rise today, from the Bank of Canada. After spending most of Q1 procrastinating about whether to raise interest rates, the Canadian central bank finally bit the bullet in April, pushing its headline rate up to 1% from 0.5% against a backdrop of falling unemployment and surging inflation.
The central bank also announced it would be ending its purchase of government bonds by 25th April. This was entirely predictable given that the Federal Reserve was going to be raising raise rates by a similar amount a few weeks later, and that there was little sign that inflation pressures were abating.
In the most recent CPI numbers Canada inflation rose to 6.8% and its highest levels since 1990. With unemployment also low at 5.2% this week’s Bank of Canada decision is likely to see the central bank mulling a further tightening of monetary policy, from 1% to 1.5%.
With the Fed likely to go with another 50bps in June, the Bank of Canada is likely going to have to match that, by 50bps at the bare minimum today, or even be tempted to go harder and do 75bps to get rates back to somewhere close to what is considered neutral.
EUR/USD – Has slipped back from the 1.0790 area, but while above support at 1.0640 has the potential to move towards 1.0850. A move below 1.0640, opens up the 1.0530 area.
GBP/USD – Found support at the 1.2560 area yesterday. Only a move below 1.2550 undermines the case for further sterling gains towards the 1.2830 area. Below 1.2550 argues for 1.2470.
EUR/GBP – Still finding resistance at the 0.8530 area. Still range bound within the wider range of 0.8200/0.8600. A move below 0.8470 retargets the 0.8420 area.
USD/JPY – Has moved higher, moving through the 128.30 area, and looking to retest the 129.30 level. Only a move below the 50-day MA, undermines upward momentum towards 130.00, with a break potentially opening a move towards the 123.00 area.
FTSE 100 is expected to open 8 points higher at 7,615.
DAX is expected to open 77 points higher at 14,465.
CAC40 is expected to open 25 points higher at 6,492.