Market Ends The Week In Risk-On Mood

MARKETS BACK IN A ‘RISK ON’ MOOD BY WEEKEND The past week has seen some sharp fluctuations in sentiment. Equities first slipped sharply but subsequently rebounded with US stocks, in particular, reaching a new record high. Government bond yields have also been volatile, first falling sharply and then rebounding. However, US longer-term yields are still below their levels prior to last week’s FOMC meeting and well below their highs for the year. In currency markets, the US dollar started the week close to a two-month high against both the euro and sterling. It then fell back but Thursday and Friday have seen sterling weaken, pushing GBP/USD away from the 1.40 mark. Market gyrations seem to reflect question marks over future courses of action of central banks, particularly over how quickly they plan to remove the substantial degree of monetary policy given to economies during the pandemic.

The June update from the US Federal Reserve seemed to catch markets by surprise. It was perceived as more hawkish than expected, pointing to the possibility of an earlier reversal in policy. However, subsequent comments by Fed policymakers this week seemed to calm some of those fears allowing equity markets to rally.

This week’s Bank of England policy review in contrast was initially perceived by markets as being less hawkish than expected causing sterling to slide. What both episodes do show is that a period when central bank intentions could be very confidently predicted is giving way to a more uncertain environment. That points to the likelihood of more market volatility in the coming months. This Thursday’s policy update from the Bank of England was the last of a series in recent weeks by the major central banks. The Swedish Riksbank reports in the coming week but we now have a gap until the next set of reviews from the European Central Bank, the Fed & the BoE.

In the meantime, markets will focus on comments from key central bank policymakers. Central banks still generally view the current burst of inflation as ‘transitory’ and that policy needs to remain very supportive for growth. Nevertheless, the policy seems set to gradually evolve in a less supportive direction providing the economic rebound continues. At least some central banks, and particularly the Fed, have said that they intend to be more reactive than in the past, which points to them wanting to see several months of data before making a policy change. That is consistent with a view that any moves are some way off. However, policymakers seem set to increasingly point that w ay through the summer months unless the recovery falters.

US PAYROLLS AND EUROZONE CPI IN FOCUS

The coming week’s most important data releases are international. In the US, the monthly labour market report (Fri) will as usual be seen as a key measure of economic conditions. Employment growth disappointed in both April & May. Employment levels are still some way below w here they were prior to the pandemic, which supports central banks' views that there is substantial slack in the labour market. However, that is hard to square with high levels of vacancies and reports that some industries face labour shortages. Some commentators have been arguing that the more generous unemployment benefits paid during the pandemic have made people less likely to seek work. As several US states are dropping these additional payments from June we may soon learn more. In the meantime, we expect a large rise in payrolls for June, of 800k, and a further fall in the unemployment rate to 5.6% (from 5.8% in May). The monthly earnings data will also be watched closely. These have picked up over the past two months consistent with reports that businesses are having to pay more to recruit and belying the Fed’s assumption that labour market slack will cap any wage pressures. A third consecutive increase may prompt market concern. Another important US releases in the coming week is the ISM manufacturing report for May, w hich could rise modestly from an already high level. In the Eurozone, the June Consumer Price Index seems of most interest given ongoing concerns of mounting inflationary pressures. In May, annual CPI inflation climbed to 2.0% - its highest since late 2018 and the ‘core’ rate also rose albeit to a more modest 1.0%. For June, both are predicted to have fallen modestly, with the ‘headline’ rate declining to 1.9%y/y and the core measures to 0.9%y/y. That may provide some reassurance to the ECB, although some economists are forecasting that inflation may pick up again next month. Other Eurozone indicators such as business confidence for June and the second reading for the June manufacturing PMI seems likely to provide further evidence of a second-quarter rebound in economic activity.

BUSINESS BAROMETER WATCHED FOR FURTHER RISE

In the UK, the Lloyds Business Barometer for June may be the most interesting indicator next week. In May, it rose for the fourth consecutive month to its highest level in three years reflecting an improvement in businesses’’ own situation” and their feelings about the wider economy. However, June has seen an acceleration in Covid-19 cases and the decision not to end all restrictions making it uncertain whether it will post another rise. The Business Barometer will also provide further information on the state of the labour market and price pressures. Looking at next week’s other UK reports, Q1 GDP is a second reading that is still expected to show a 1.5% fall on the quarter. The June manufacturing PMI is also a second estimate. The first was down slightly from May’s level but still pointed to strong growth and also continued strong inflationary pressures. Finally, of most interest in the BoE money supply and lending numbers will be what they say about the housing market given continued evidence of strong price gains.

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