Some big data yesterday, ahead of even bigger data to come today. Starting with yesterday, Eurozone retail sales showed positive but unspectacular growth which was much better than forecast. But of more concern was the PMI data which also came out, and that showed that Eurozone activity was at a 13 month low. Looking deeper we observe that while there were decelerations in Germany, Italy, Spain and Ireland, France looks to have slipped back into contraction. It is obvious that Draghi and his colleagues at the Eurozone central bank will be tempted to implement additional stimulus in the coming ECB meetings. The pound continued, what I still consider to be a counter-trend rally, and most of the GBP/USD bounce came after the poor services PMI data which came out yesterday morning. When poor data has a counter-intuitive impact on prices it tells you that the market has no more capacity to sell in the short term and positioning needs to be flushed out. I’m willing to re-assess how far GBP/USD might go in this counter-trend move, but I’m sticking with my conviction that things remain dire for sterling. In Brazil the data was even worse, with the economy suffering its worst performance in 25 years, lower commodity prices, falling investment and an inability to free the fiscal tap have wreaked havoc and resulted in a GDP decline of 3.8% in 2015. Finally, in the United States, we got some productivity and Unit Labor Cost data and composite PMIs, but nothing particularly noteworthy really, with stable PMI’s falling labour costs, and productivity declining but not as badly as forecast. Not surprisingly consumer confidence has taken a bit of a hit since the start of the year as all the market turbulence is wont to do. All in all, there wasn’t anything particularly encouraging about yesterday’s data, but I still hold out hope that lower energy costs will work some magic going into the middle of the year. Frankly the negative narrative coming out of the primaries in the US is a bit of a dampener for anyone searching for a feel good factor. One can only hope that once the candidates are selected a more positive tone might be attempted, but I suspect that hope would be forlorn.
The equity markets have continued to grind higher, and losses from the start of the year are probably halved right about now, but there is still some way to go before investors start feeling more cheerful. There’s a wall of negativity that the market is still yet to overcome, but I continue to think that risks are for higher prices later on in the year.
We expect currency markets to be tentative in front of the big data later on today. We see the risk being better than expected labour market data, and that could have implications for the dollar over the next few months. We still see the possibility of a final low in EUR/USD and a continuation of the GBP/USD bear trend as interest rate expectations and relative growth come to the fore as the main drivers of asset prices.
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