- RBA and BOE rate decisions
- Plenty of data, including US nonfarm payrolls
- Earnings focus turns to Europe
The first month of the second quarter is about to end and it has been yet another solid one for stocks and other risk assets. Central banks such as the Fed and ECB promised to keep their QE stimulus programmes running at full throttle despite signs of strong recovery in the US and some other parts of the world. The speeding up of Covid vaccinations in the Eurozone also helped to calm investor nerves, leading to a turnaround for the euro. The US quarterly reporting season has been very good, too, with 87% of just over half of the S&P 500 companies who have reported their have beaten expectations.
However, on the last day of April, when this report was written, we saw a bit of reversal as month-end portfolio rebalancing and profit-taking took some shine off the indices and caused the dollar to bounce back sharply as the Fed’s Kaplan said the Fed should start talking about tapering bond buying soon – contrary to what Chairman Powell had said earlier in the week. Will the dollar recovery continue in the week ahead of will it once again fade?
Heading into the new month, will it be a case of “sell in May and go away,” or will we continue to see strength for the markets as confidence grows further about the global economic recovery? Are investors going to start fretting about rising bond yields and the potential for monetary tightening? So far this hasn’t been the case despite growing inflationary pressures, but it is something definitely worth keeping an eye on. Investors have so far taken confidence from strengthening economic data and the Federal Reserve’s dovish resolve emboldened them to stay bullish on stocks despite concerns about high valuations, rising inflation and the potential for borrowing costs to rise.
Investors will now be watching US bond yields closely as they, along with their European counterparts, are edging ever higher amid growing signs about a US-led global economic recovery. As global lockdown measures are slowly likely to ease, things will hopefully return to more normal ways in the coming months. The US economy is likely to maintain or accelerate its strong pace of recovery and inflation will probably heat up. Investors are pricing this in by pushing bond yields higher. Small and steady rise in yields will not scare the stock market bulls, but if they start to accelerate to the upside then it would suggest to me that growth optimism is slowly but surely being replaced by worries over inflation.
Macro and earnings highlights
We have couple of central bank meetings, featuring the RBA and BoE, while there’s plenty of macro data including monthly jobs reports from both North American nations to look forward. Earnings will continue to pour in from the US in what has been a solid reporting season so far.
- German retail sales
- Euro zone final manufacturing PMIs, flash for Switzerland, Italy and Spain
- US ISM manufacturing PMI
Although the week ahead is filled with more macro data and central bank meetings, as well as company earnings, the fact that China and Japan will be out until and including Wednesday for public holidays, means expect thinner volumes in the early parts of the week – especially as Monday is also a bank holiday in the UK. Still, the ISM PMI will be important for data watchers as it will provide indications about the health of the US economy, including employment ahead of Friday’s nonfarm payrolls report.
- Reserve Bank of Australia
- Earnings: Pfizer
The Reserve Bank of Australia is likely to keep policy unchanged. Domestically, there has been some delays in the vaccination progress in the country, which reduces the chances for a rate hike. But it will be interesting to see what the central bank will say about the surging commodity prices, which should be inflationary. Copper prices have risen about 25% on the year so far, adding to its large gains made in 2020. Iron ore and palladium are also up sharply, with the latter hitting repeated new record highs.
- New Zealand employment data
- Euro zone final services PMIs, flash for Italy and Spain
- US ADP private payrolls and ISM services PMI
- Earnings: Pfizer and GM
We will get more indicators for nonfarm payrolls report on Wednesday as ADP and employment component of the ISM Services PMI are released.
- German factory orders and Eurozone retail sales
- Bank of England policy decision
- Earnings: Societe Generale, ING, Next, Barratt,
The focus will be on the Bank of England on Thursday as investors will be wondering whether the central bank will start turning more hawkish amid improvement in data and ongoing optimism over the re-opening of the economy. Flash manufacturing and services PMIs have both climbed above 60.0, retail sales have jumped 5.4% in March and house prices are going through the roof ahead of the stamp duty holiday expiry at the end of June. House prices rose +2.1% month-over-month according to Nationwide. This is yet another sign of rising inflationary pressures in the economy. Although CPI and wage inflation have remained relatively soft, input costs are nonetheless rising as the increases in prices of raw materials are exacerbated by a strengthening pound. In short, there is less need for emergency stimulus measures from the Bank of England and if the central bank does turn hawkish then the GBP/USD may finally break that key 1.40 hurdle where it has repeatedly found resistance.
- Chinese trade balance Caixin services PMI
- German industrial production
- US nonfarm payrolls
- Canadian employment report
- Earnings: Credit Agricole and IAG
US nonfarm payrolls report will be the main macro event for the day and investors will be keen to find out whether the jobs market continued to rebound strongly in April after a solid 916,000 increase in jobs in March. Economists are predicting a 950K increase this time, which means there is scope for disappointment if expectations are not met.
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