The net evidence suggest that markets will continue to take a more positive approach to risk in the short-term, especially as the broad run of data releases across the main economies has continued to suggest that conditions are stabilising. Nevertheless, it will be difficult to push the mood of optimism much further in the near term given the vulnerabilities in the consumer and credit sectors.
Key events for the forthcoming week
Date |
Time (GMT) |
Data release/event |
Friday May 8th |
12.30 |
US employment claims |
Wednesday May 13th |
8.30 |
UK unemployment claims |
Wednesday May 13th |
12.30 |
US retail sales |
Dollar:
The latest data has continued to support expectations that the economy is stabilising with business confidence improving while there has also been a tentative improvement in labour-market conditions. Immediate fears surrounding the banking sector have also eased with no shocks from the bank tests. In the near term, defensive dollar demand is liable to ease, but the potentially negative impact on the US currency could be offset by the impact of higher bond yields. It may remain difficult to secure a decisive direction in the short-term with the dollar struggling to make much headway.
The dollar maintained a generally weaker tone during the week as defensive demand for the currency eased. There was a further narrowing of credit spreads during the week which boosted confidence and international risk appetite was also robust. The dollar was particularly vulnerable against the commodity currencies.
Following a firmer manufacturing report last week, the US ISM index for the non-manufacturing index strengthened to 43.7 in April from 40.8 previously. This was a six-month high for the index and again above market expectations. The orders component strengthened with a limited recovery in the employment sub-index.
The US ADP employment report was also stronger than expected with job losses of 491,000 for April following a revised 708,000 decline previously. Although still severe in historic terms, it maintained optimism that the economy is stabilising.
Pending home sales rising 2.1% for March compared with expectations of no change. There was also a reported increase in construction spending for the month compared with expectations of a further monthly decline.
Jobless claims were slightly stronger than expected with a decline to 601,000 in the latest week from 635,000 the previous week. Continuing claims were also slightly lower than expected, although they were still at a fresh record high. The employment data during the week increased optimism that the economy is starting to stabilise and there were hopes that the Friday payroll data would be stronger than expected.
Fed Chairman Bernanke repeated his recent cautiously optimistic comments with remarks that the economy is on track for recovery. He still warned that weakness would persist for some time while interest rates would remain at very low levels for an extended period.
Bernanke was also cautious over the banking sector and the stress-test results remained an important focus. The test results suggested that the main banks would need to raise additional capital of over US$70bn, but the market impact was limited as results had been leaked in advance. |