Daily Brief

Volatility is here to stay

4 minute read

Weak Chinese data

The recent pattern of skittish markets and heightened volatility looks to be showing no signs of abating anytime yet. Markets are now fretting much more over the prospects for global growth, against that constant backdrop of stubbornly high inflation, and the recent economic data from China did little to calm those jitters yesterday. Chinese Industrial Production slowed through April, down 2.9% (YoY) from the previous month’s 5% gain. Worse still, Retail Sales slipped 11.1% through last month, nearly doubly as bad as analysts had forecast at around -6%. Whilst much of the slowdown can be attributed to the COVID-linked lockdowns in China, markets seem to need little excuse to fret. At least the moves yesterday had faded by the end of the European session.

Another busy day ahead?

Perhaps one reason (for the fade) is that today has the potential to better define this week’s outlook. The latest U.S Retail Sales are due, as well as Industrial Production, and these key data releases will battle for attention with speeches from both Jerome Powell and the ECB’s Christine Lagarde. We touched on the prospects for Retail Sales in yesterday’s update, but an expected 0.7% (MoM/Apr) increase is on the cards, up from the 0.5% previously. The big worry for markets here will be whether the high levels of inflation transmit into much weaker consumer demand.

Bailey on the defensive

The BoE governor, Andrew Bailey, did his best to defend the BoE’s handling of the high inflation levels in the UK to MP’s, during a hearing at the Treasury Committee of the House of Commons yesterday. Whilst Bailey did admit that he was ‘not happy’ with UK Inflation about to hit 40-year highs in April, he said that ‘I do see comments based on hindsight, but we have to take decisions based on the facts and evidence at the time’. Bailey went on to say that the chances of further rises in food prices is a ‘major worry’ for the UK, and he apologised for sounding ‘apocalyptic’. Despite their intensity, the pound took little notice of the comments, and GBP/USD stayed within a 1.2220-1.2300 band through the day. GBP/EUR tried to break back over 1.1800 for the first time in 10 days, but lacked momentum.

Lowest UK unemployment since 1974

However, the latest UK employment report has just been released this morning for April, and finally some good news on the UK front, as the ILO Unemployment rate declines to 3.7% in the three months to March. Markets had been expecting around 3.8%. Whilst it might not sound like much of a beat, that was enough to put unemployment at its lowest level since 1974. Furthermore, the claimant Count also dropped by 56.9K, versus 38.8K expected, being enough to send GBP/USD back over 1.2350, and GBP/EUR over 1.1800.

Hawkish RBA?

The latest RBA minutes were released overnight, and members considered the choice of raising Australian rates by either 15, 25 or 40 bps. Whilst ultimately a 25bps hike was chosen by the RBA, the fact that they were considering a bigger increase, as well as the prospect of further hikes down the road as the RBA try to fend off inflation, has given the Aussie a boost overnight.

Elsewhere amongst currencies

The dollar had a fairly flat session yesterday, with the dollar index (DXY) edging a tad lower toward the 104.00 region, which has since broken below this morning. EUR/USD broke back over 1.0400 and has now posted three consecutive up days in a row, which has not happened for a while, even if those gains have been fairly limited so far. 1.0500 is the next key level on the topside. The Loonie continues to benefit from the (most) recent spike in Oil prices, with USD/CAD slipping back toward 1.2800, having been well over 1.3000 toward the end of last week.

What else is happening today?

Irish CPI inflation, Euro-area Employment data & GDP. As well as Powell and Lagarde’s speeches, both Bullard and Mester will be speaking from the Fed.


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