Rising Eurozone economic sentiment and the prospect of further stimulus in the US have boosted the mood in the markets on Friday, helping European stocks inch towards record highs. In the same breath, concerns over inflation are keeping those gains in check.
Eurozone economic sentiment suggests that regional recovery is ready to take off. The European Commission’s economic sentiment indicator surged to 114.5 in May, up from 110.5 in April. With vaccination programmes in full swing, Covid cases declining, and businesses re-opening, the end of the Covid crisis appears to be in sight in Europe. Consumer confidence, which declined in April, is recovering in May, boding well for the prospects of a rapid recovery in consumer spending and strong GDP growth going forward.
President Biden will reportedly seek a further USD6 trillion in Federal spending in his first budget later today. This comes as the US economy is showing signs of a solid economic recovery. Data in the previous session revealed that initial jobless claims fell to the lowest level since the pandemic. The prospect of largescale spending and faster growth at a point when the economic recovery is in full swing is driving risk sentiment and the recovery trade. Investors remain firmly focused on the re-opening story with little regard for the US deficit right now.
Inflation fears are acting as a cap on gains as investors look ahead to today’s US Core Personal Consumption Expenditure (PCE) data release. After CPI hit a 13-year high in April, PCE is unlikely to have escaped unscathed. PCE is expected to jump to 2.9% YoY in April, up from 1.8%. A higher-than-forecast reading could reinforce the Fed’s tapering expectations and drag on demand for high-growth tech stocks while driving the rotation into value.
FX – US dollar edges higher with US PCE, budget in focus
The FX markets are relatively subdued ahead of today’s US inflation numbers. The US dollar is trading slightly higher around the familiar 90.00 level awaiting fresh direction from the upcoming economic releases.
Biden’s budget will also be in focus. The President is set to unveil a USD6 trillion budget for the coming fiscal year, in addition to large infrastructure spending plans. The prospect of higher debt is lifting bond yields supporting the greenback.
The pound is consolidating after strong gains in the previous session. Hawkish comments by BoE monetary policymaker Gertjan Vlieghe propelled the pound back to 1.42. Vlieghe has suggested a rate hike could be on the cards as soon as early next year, should the labour market recovery continue smoothly once furlough support is withdrawn.
