Yesterday, Sterling managed to hold its ground despite the release of some weak economic data. UK PMI business confidence data recorded a decline in the manufacturing index to a 13-month low whilst business confidence declined by the largest amount since the pandemic started with a decline to 17-month lows. The CBI retail sales index retreated to 9 for March from 14 previously and slightly below consensus forecasts with markets generally pessimistic over the outlook. Finally, UK consumer confidence dipped to a 16-month low. However, the services-sector index strengthened to a 9-month high. This morning we have seen retail sales decline by 0.3% for February compared with expectations of a 0.5% increase. It should be noted that the Office for Budget Responsibility predicted the biggest fall in real household disposable incomes in the coming financial year since the ONS data began in the 1950s despite fiscal support announced by the Chancellor in his Spring Statement. If we see this trend continue, the market could start readjusting its view on the interest rate outlook.
Dollar loses ground on improved risk sentiment
The US softened on Thursday as risk sentiment showed signs of improving across financial markets and while investors continue to assess the latest geopolitical developments. The improved market sentiment outweighed the hawkish tone from several Fed officials through this week as riskier assets rallied. Chicago Fed President Charles Evans said that a 50-basis points rate hike could help the Fed move rates close to neutral. The market is now pricing in around seven rate hikes of 25-basis points in the six meetings left in 2022, implying a 50-basis point move at some point. On Tuesday, St. Louis Fed President James Bullard added to his hawkish credentials by saying that “faster is better” when it comes to rate hikes. The hawkish comments saw US Treasury yields increase across the curve.
Looking ahead to today the US economic calendar feature February’s Pending Home Sales data and the University of Michigan’s final Consumer Sentiment Index for March. Meanwhile, several FOMC policymakers, including New York Fed President John Williams and Fed Governor Christopher Waller are scheduled to deliver speeches later in the session.
German confidence to fall to a 1 year low
The Euro-zone PMI manufacturing index retreated to a 14-month low, but above consensus forecasts of 56.0 while the services index was also above forecast. It should be noted that ECB council member Schnabel stated that the central bank may need to reconsider the end of bond purchases if there is a deep recession.
Looking to the day ahead the latest update for the German IFO business survey will be watched. We anticipate a drop in the headline index to a one-year low.
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