News & Analysis


The depressing series of data releases that began in the US yesterday continued in the UK this morning. Retail sales data for March, which had been anticipated to show a modest decline following a strong February print, significantly undershot expectations, coming in at -0.9%. Whilst the immediate market reaction to the print was negative, with a modest sell off in the pound, the release likely contains something of a silver lining. Following the rapid monetary tightening over the past year, a slowdown in consumer activity should not come as a surprise. It also reinforces our call, that despite this week’s headline readings for both wages and CPI printing hot, the underlying numbers suggest an economy where inflation should slow rapidly over the course of 2023. In this context we see one further rate rise at the MPC’s May meeting, for a terminal rate of 4.5%. We do not, however, foresee any rate cuts this year, a view reinforced by this morning’s other UK data release, where there were some signs of green shoots. The GfK measure of consumer confidence shot up to its highest point since the first month of the Ukraine invasion, pointing to consumer demand that whilst slowing, does not appear likely to roll over any time soon. A further steer on the strength of UK economic activity should come at 09:30 BST, with the publication of flash UK PMI data. Market expectations suggest signs of a modest expansion is the most likely outcome. If confirmed, this would be consistent with our view for a UK economy that dodges recession by the skin of its teeth as inflation slows over the course of the year.


Price action in the single currency has shown a consistent trend for much of this week. The euro has merely reversed a large portion of the prior day’s price action but with less volatility. Behind the benign price action is the fact that the debate between a 25bp and a 50bp hike at the ECB’s May 4th meeting has become rather stale in the absence of fresh data. However, that could change today as flash PMI data for April is set to be released for France at 08:15 BST, Germany at 08:30 BST, and the eurozone as a whole at 09:00 BST. At face value, the measures of service sector activity will be the immediate focus for markets, especially seeing as core inflation pressures have rotated towards services components as opposed to goods. But, as is always the way with the PMI data, the market reaction will ultimately settle on what the mixture of current and forward looking measures say about the health of the economy. Should the PMIs beat expectations, specifically within the services sector, markets are likely to become more sympathetic to the idea that the ECB needs to keep moving in 50s to tamp down on demand-driven core inflation pressures.


Doom and gloom was the story of the day on Thursday, with every piece of tertiary US data signalling a quicker-than-expected weakening in the economy. The Conference Board’s leading index, which aggregates 10 forward looking indicators of the economy, fell by -1.2% in March. This contraction was nearly twice as large as the -0.7% expectation and marks a much quicker drop than the one seen in February. Currently, the index is -7.8% lower than a year ago, a signal that has been accompanied by a recession each time it has occurred since 1970. To make things worse, February’s reading was revised lower, from -0.3% to -0.5%. Additionally, initial and continuing jobless claims rose again in early April. While the number of people on unemployment benefits is still low on an absolute basis, these figures are an early signal of cracks in the exceptionally tight job market. Relative to the lows reached in September of last year, initial and continuing claims are now 35% and 45% higher, respectively. While not representative of the broader economy, Buzzfeed also announced that it would lay off 15% of its staff, citing market conditions, which only added to the pessimism around the job market. Further fuelling the case for a hard landing was an outsized decline in the Philly Fed Business Outlook, which fell to -31.3 in April from -23.2 despite analyst expectations for a mild improvement. Home sales also fell by -2.4%, 60k sales short of expectations, and are 17 percent below their 10-year average. While trading in equities and bonds was consistent with the mounting signs of weakness in the US economy—equities fell, as did Treasury yields—the US dollar did not get its usual safe haven bid. Instead, the dollar weakened slightly, with the DXY index closing the trading session -0.16% weaker on the day. Today, markets will be waiting to see whether flash PMI data for April at 14:45 BST confirms the negative signals from yesterday’s data. Additionally, data on banks’ deposit levels will also be closely monitored after the release of the Fed’s balance sheet data yesterday saw the usage of the central bank’s liquidity measures tick up slightly for the first time in five weeks.


The Canadian dollar weakened by -0.13% against the greenback on growing US recession concerns and a -2.4% drop in crude back to the $77 handle. News out of Canada once again centred on Governor Tiff Macklem’s testimony to lawmakers, which once again didn’t deviate too much from the Bank’s last press conference. The only headline of note is that the the Governor deems it “reasonable” that markets are expecting higher rates in the US than Canada, suggesting the BoC may not find themselves forced into further hikes should the US cycle extend. Today, the loonie is trading a third of a percent lower after a rocky overnight session for risk assets. Only the extremely lagged release of February’s retail sales data is released today at 08:30 EST/ 13:30 BST.



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