Stocks rise modestly amid cautious trading conditions

OVERNIGHT

Most Asian equity indices are trading higher overnight, albeit gains are largely modest as investors continue to weigh up the prospect of further interest rate increases and the risk of an economic slowdown. Rises in share futures pointed to gains on the open across US and European exchanges.

THE DAY AHEAD

The ‘r’ word received further attention last week after the minutes of the US Federal Reserve’s latest policy meeting revealed that Fed economists now think that a mild US downturn later this year is likely. That was prompted by ongoing concerns of a regional bank-led credit crunch, which could cause problems particularly for SMEs. US government policymakers including US Secretary Yellen denied that a recession is imminent. Moreover, the IMF in its latest forecast update, also continued to see subdued growth as the most likely outturn. However, markets saw the news as another reason to expect that interest rates are close to a peak and that US rates may be cut later this year. Lower than expected US CPI inflation and a fall in producer price inflation also provided a boost to the hopes for lower US rates although it should be noted that ‘core’ US CPI inflation edged up.

Ahead of the Federal Reserve’s May policy meeting, data and policymakers’ comments will be closely watched. Notably, there are a swathe of Fed speeches due this week (albeit none are scheduled for today), which will likely attract significant attention from market participants. Today’s US economic calendar is limited to the New York State Empire manufacturing and NAHB housing market surveys for April. For the former, the headline index fell for a fourth straight month in March, dropping sharply to -24.6 from -5.8. We expect a rebound in April to -15.0, although that would still leave it weak by historical comparisons. The new orders component – which has been below zero over the past five months – will be closely watched to see how sustainable the recovery will prove to be.

Across Europe, the economic data calendar is particularly quiet with the final print of Italian CPI for April on today’s slate.  However, the greater focus is likely to be on comments from ECB President Lagarde, who is scheduled to speak at the Council on Foreign Relations in New York. The ECB will also publish its latest survey of professional forecasters, while in the UK, BoE Deputy Governor Cunliffe is due to deliver the keynote speech at the Innovate Finance Global Summit.

Early tomorrow morning, China Q1 data and March updates for retail sales and industrial production will be particularly interesting as markets try to gauge the initial impact of the recent removal of Covid restrictions. Meanwhile, domestically, the latest labour market update is forecast to show further tentative signs of an easing in the very tight market conditions with employment growth in the three months to February forecast to have risen only slightly by 5k. Nevertheless, the unemployment rate is still expected to be unchanged at 3.7%. Earnings growth is likely to have eased again with annual regular growth projected to ease to 6.2% from 6.5% previously.

MARKETS

The US dollar has edged up modestly this morning but remains lower than levels seen earlier in the year. GBP/USD is holding above 1.24, while EUR/USD is only marginally below the 1.10 mark.