Another poor day for world equity markets which started with disappointment over economic data in China suggesting slower growth and sentiment has been dented further this afternoon following publication of the US Conference Board’s Consumer Confidence index for June which suffered a significant decline to 52.9 from the previous reported level of 63.3 and the consensus was looking for a similar figure this month. The market is in no mood for bad news and with a several major economic data announcements starting to show real cracks appearing in the US economic recovery there is every chance that markets are going to move lower from here.

With markets again under pressure today the string of economic data scheduled for publication this week especially in the US is likely to have a significant impact on world equity markets. Confidence is extremely fragile and the US employment report is what everyone will be waiting for on Friday. The Non Farm Payrolls during recent months have benefitted from the hiring of temporary workers for the US census count, the pace of which will have slowed during the last month. The last payroll report after stripping out census hiring was very disappointing with private payrolls showing a gain of 41,000, much below what analysts were expecting. This month will be very important and another weak private payroll number will be taken very badly by the market. The consensus appears to be expecting a positive private payroll number of around +100,000 to +150,000. The slow-down in census hiring may well create a negative headline number but that in itself will not worry the market, but a poor private payroll number will. We will get a fair indication of where the Non Farm payroll report is headed when the ADP private payroll numbers are published on Wednesday. The market is expecting an ADP number of around +80,000.


In Europe today we have had German CPI data that was broadly as expected with a month on month rate of 0.1% whilst the annualised rate fell to 0.9% from 1.2%. Deflation rather than inflation is a greater threat at present.

In the US today the main data for publication was personal consumption expenditure which is viewed as a barometer of the state of the consumer and showed a 0.2% increase during May. Perhaps more importantly, incomes increased by 0.4% over the month providing consumers with the opportunity to increase their savings rate. This is trend that is likely to continue as the long process of deleveraging plays out.

It is interesting to see that several of the major brokerages are starting to review their GDP growth expectations for the US over the second half. Most expectations seems to be around the 3% level but after the final revision to the Q1 GDP data down to 2.7% from 3.0% forecasts for the rest of the year are likely to be revised. It is certainly difficult to see much momentum building from here given the poor state of the US jobs and housing market which is likely to create a drag on consumer expenditure. The real issue is to what extend expectations are out. If we see a significant slowdown in the rate of growth it may well create the conditions for a further decline in the equity market as we move closer to the final quarter of the year.

There is one particular economic indicator that is getting more press at present and that is generated by the Economic Cycle Research Institute. The particular index does have a very good history of predicting US recessions with only one occasion when it predicted a recession that didn’t occur. At present this particular data set is again suggesting a recession in the US is not far away, although most commentators seem yet to be convinced. If nothing else it may well be pointing to a significant decline in the rate of growth.

We have had two pieces of economic data today in the US. The weekly initial jobless claims were a little better than expected with the number coming in at 457,000 compared to the consensus expectation of around 465,000 and the number last week of 472,000. The number is still very elevated for this point in the economic cycle and there remains a real risk of significant disappointment over the non-farm payroll data scheduled for a week tomorrow. The other data in the US we have had today are durable goods orders for May which slipped y 1.1% against the consensus which was expecting a lightly more modest decline of 0.5%. If you strip out the impact of transportation orders the May figure shows a 0.9% improvement over the month compared to a decline of 0.8% in April.


We had strong evidence earlier this week that the US housing market is on the verge of a double dip. Existing home sales during May declined by 2.2%. The consensus was expecting an annualised rate of 6.2m when in fact the figure came in at 5.66m. The next day new home sales for May were reported and this figure came in substantially below expectations at 300,000 on an annualised basis compared to expectations of around 400,000. The decline during May was a record breaking 33%. The May decline is not quite so serious when you consider the increase in the two month period to April was 28.5% as homebuyers rushed to buy before the expiry of the homebuyers’ tax credits. Nevertheless in the absence of stimulus measures the outlook for the US housing market is looking increasingly gloomy. It certainly demonstrates the potential for a slowdown in economic activity as stimulus measures are withdrawn in the US as the year progresses. If we do see a further decline in US house prices it will inevitably impact on consumer confidence which has the potential to hold back GDP growth during the second half of the year.

Tomorrow in the US we get the final estimate for Q1 GDP growth which the consensus expects to remain at 3.0%. Expectations are for US growth to remain at this level throughout 2010. However, there is a real possibility that growth will tail off in the US during the second half of the year. The consumer still does not look to be in a position to take the reigns as the inventory replacement cycle that has boosted growth during recent months comes to an end. Also a lot of the stimulus measures in the US will have been used up by the start of the fourth quarter leaving a real risk of a raid slowdown in the rate of economic growth. This is a significant risk for equity markets as we enter second half. Also tomorrow we have the latest University of Michigan Consumer sentiment data for June which is expected to remain close to the previous reported level of 75.5.

Finally, the UK Budget was certainly tough in terms of the fiscal squeeze it will create but in order for UK plc to retain its AAA status it does go a long way to achieving this. The level of spending cuts and taxation are undoubtedly a risk to the recovery and there is a fine line between maintaining growth and stifling recovery but what is clear is that the size of the fiscal squeeze will almost certainly mean interest rates in the UK will stay very low for years rather than months. The jury will remain out for some time over whether the budget will achieve its objectives especially given the uncertainty over exactly what spending cuts will be made, something that will not be known until later in the year.

World markets have started the week with good strength following comments over the weekend from the Chinese central bank about its renminbi policy. They stated that they intend to relax the two year dollar peg put in place at the time of the global economic crisis to protect their exporters and will now allow their exchange rate to be more flexible. Just how flexible is not known but the move is seen as one that will reduce fears of a trade war with the US. A more flexible exchange rate policy should help to reduce inflationary pressures in China as well and overall this move should be beneficial for the world economic recovery. However any benefit is likely to remain relatively limited given the likelihood of the currency remaining very much managed with a significant move in the currency unlikely.


This week in the US we have the FOMC interest rate meeting which starts on Tuesday with their decision scheduled for Wednesday. There is still no reason to change the fed funds target rate and the focus will once again be on the accompanying statement with market watchers looking for signs of any future changes to policy. Also on Tuesday in the US we get existing home sales data for May. With the April expiry of the special tax credits incentive this number could easily disappoint with the consensus expecting an annualised rate of around 6.2m units. We get more home sales data on Wednesday with new home sales for May which are expected to fall by up to 20% to an annualised rate of around 400,000 units.

The major US data this week will be durable goods orders for May which after a 2.8% increase in April are expected to show a modest decline during May. The weekly initial jobless claims continue to make interesting reading and after the unexpected 12,000 increase last week to 472,000 a further rise this week will really stoke fears of a bad nonfarm payroll figure a week on Friday. In the US on Friday we get the third and final estimate for Q1 GDP which is expected to remain unchanged at 3.0% on an annualised basis. Friday also brings the next dosage of consumer sentiment data which always has the power to move the market during the final hours of trading on a Friday afternoon. The University of Michigan data provided a mid June reading of 75.5 with a similar figure expected this time. The more recent stabilisation of equity markets will no doubt help.

This week in the UK is all about the emergency budget tomorrow. There is plenty of press speculation/leaks on what is going to be announced and whilst most of it is probably already priced into market expectations there is still scope for surprise announcements and vat will be of particular interest. The extent of any hike and timing is very much unknown but it will have implications for retailers and the inflation rate.

In Europe tomorrow there will be further clarity of whether business expectations are changing in Europe with publication of the IFO business climate index for June. We also get the European Commission Consumer Confidence index for June. Wednesday brings the latest Gfk consumer confidence data and also due for publication are the European Purchasing Managers Index for Services and Manufacturing. The former registered 56.2 in May and a similar figure is expected for June whilst the latter was 55.8 and again a similar figure is expected for June. Look out for any material miss which could well dampen equity market sentiment.

On Wednesday in the UK the minutes from the latest Bank of England MPC meeting are due for publication. The rest of the week is relatively quiet in terms of European and UK announcements.

The next Daily Comments will be sent on Thursday.

We had more disappointing jobs data in the US yesterday with the weekly initial jobless claims rising by 12,000 to 472,000. Some of this may well be due to the economic impact of the BP oil spill, but nevertheless the level of claims looks set to remain elevated for far longer than many predicted. The US economy is still experiencing a recovery with very modest job creation at a time when we should be seeing a significant fall in the number of unemployed. If as many expect the economic recovery softens later in the year we may well see US unemployment remaining close to 10% for a long time to come.


Other US economic data published yesterday were the leading indicators for May which remained in positive territory at 0.4% although a little lower than the consensus expectation of 0.6%. The Philadelphia Fed Manufacturing Index for June was published yesterday and that showed a decline to 8.0 from the previous reported level of 21.4. There has most definitely been a slowdown in the pace of US manufacturing activity over the last couple of months with the ISM seemingly having peaked and the more recent New York survey and Philadelphia surveys starting to come back from their recent highs. This may well be more due to the inventory cycle coming to an end as firms have now replenished diminished stock levels and we may well see the data level out but remain in positive territory over the coming months.

We have no major data due for release in the US today. In the UK today we get a further insight into the finances of UK plc with the public sector net borrowing for May. We also get UK mortgage approval data for May today. In Europe the main announcement scheduled for today will be the German Producer Price Index for May. We will comment on this data on Monday.

The main event for next week will be the UK emergency budget on Tuesday.

The world cup has provided a short term fillip to UK retail sales during May as consumers stocked up on big televisions. The end result was a 0.6% gain compared to the consensus which was looking for a modest 0.1%. Sales for April were revised down from a 0.3% increase to unchanged. Next week the emergency budget is likely to bring significant cuts and increased taxation making life very difficult for consumer expenditure over the coming months and years. The outlook for retail in general looks to be very difficult indeed.


During recent days there has been a lot of market speculation about how deep the Spanish problem is. The Spanish government has been selling bonds this morning and has comfortably raised €3.5bn although at a significantly higher rate to what they had to pay in May. Today’s 10 years bonds were sold at 4.86% compared to the May level of 4.045%. The fact that they got the sale away comfortably has provided a degree of relief this morning and it almost feels as if the European debt crisis is now being ignored by the market and is considered old news. The truth of the matter is that it is a problem here to stay and the real impact may yet be felt by the real economy. Attention is now very much focused on Spain and Spanish banks which are having to borrow significant amounts from the ECB due to a squeeze in the private funding market. There were several headlines doing the rounds yesterday that Spain may need emergency funding although the Spanish finance minister refuted this. It will not take much to create a second wave of panic selling especially if the worries start to move to Italy. Despite the equity market rally of recent days there is still good reason to remain very cautious.

In the US yesterday we had further confirmation that the housing market is going into reverse following the expiry of the tax credit program. House builders are taking a cautious attitude to where the market is going with a 10% decline in housing starts following on from the 3.9% gain during April. The consensus was expecting an annualised housing start rate of 650,000 but the actual figure fell well short at 593,000. A weak housing market will not help a recovery that will become increasingly reliant on the consumer taking up the reigns as the various stimulus measures are gradually withdrawn over the coming months.

Turning to the US consumer, earlier in the week we had the Johnson Red Book retail sale report. The report stated “General merchandise and apparel sales in general underperformed basic goods, but retailers said weather fluctuations were less of a factor than a general decline in customer traffic and a lower propensity for spending, suggesting consumers were reducing discretionary purchases and being more defensive in their buying pattern” which does show the general strain consumers find themselves under at present. According to the report month on month sales declined by 0.5%.

Other US data we had yesterday was Industrial Production for May which came in a little ahead of expectations with a 1.2% month on month gain compared to the consensus which was expecting a 1% gain. Also in the US we got the Producer Price Index for May which fell by 0.3% month on month, a little less than the decline expected due to lower energy costs. At present there is very little in the way of inflationary pressures in the US. The US CPI data for May published today was broadly as expected with a month on month decline of -0.2%.

Today in the US the reported weekly initial jobless claims number has risen to 472,000 (the consensus was expecting around 450,000). It is possible some of this will be due to the fallout from the BP oil spill, but they way the trend is going private payroll job creation will be almost non-existent leaving us vulnerable to another poor non-farm payroll number next month.

Possibly the first signs of cracks appearing in the European economic recovery came today with a slump in German investor confidence. The ZEW German investor confidence index for June fell to 28.7 from 45.8 in May whilst the consensus was expecting a more moderate decline to 42.0. Undoubtedly the recent and ongoing sovereign debt problems in Europe are the cause of the decline and the real question is whether a decline in confidence will be temporary or sufficient to cause economic activity to slow down. We also had the ZEW European economic sentiment survey for June today which showed a steep decline to 18.8 from the previous reported level of 37.6.


The UK inflation report was broadly as expected with a decline to 3.4% year on year from the previous level of 3.7%.

In the US today we have had the Empire State Manufacturing index for June which was broadly as expected coming in at 19.57 compared to the May figure of 19.1. This does help to alleviate concerns over a slowdown in manufacturing activity. Tomorrow in the US we get Industrial Production for May as well as the May Producer Price Index and housing starts for May.

After the Dow gave up all of its gains yesterday, it has again rallied which has helped the UK market to another positive close. The appetite for risky assets certainly seems to be coming back but for how long is more difficult to gauge.

A busy week ahead in terms of economic announcements although today is relatively quiet with just April industrial production data for the Euro zone which came in a little ahead of expectations at 0.8% month on month compared to the consensus expectation of 0.7%. We are still getting a lot of data for the period prior to the fallout over Europe but even so most of the more forward looking indicators do not suggest that there has been any sudden reversal in current trends.


Tomorrow we get the UK May CPI data. Inflation in the UK has remained stubbornly high during recent months. The Bank of England has taken the view that with so much excess capacity in the economy we will see the more recent inflationary pressures ebb away with the CPI expected to fall back over the coming months. One fly in the ointment may well be the emergency budget next week and if the VAT rate is moved higher it will almost certainly result in the CPI remaining well above the target rate for some time to come. An interesting article in the Times yesterday quoted Andrew Sentance, a current MPC meeting member who suggested that the amount of spare capacity in the economy may not be as great as is currently assumed. This could well result in interest rates moving higher much earlier than expected. The data tomorrow is expected to show a small drop in the current annualised headline rate of 3.7%, but uncertainty does seem to be growing as to whether inflation will fall as much as expected. It is still difficult to envisage an interest rate hike this year unless the broader economy starts to show greater strength.

The newly formed Office for Budget Responsibility has produced revised forecasts for UK GDP growth today for the next 4 years bringing the previous Chancellor’s rather ambitious outlook down to more realistic levels. The new data forecasts growth this year of 1.3% (previously 1.0% to 1.5%), whilst next year has been reduced to 2.6% (previously 3.0% to 3.5%). This data has been published ahead of the emergency budget which will take centre stage next week and whilst expectations are already set for significant cuts it may still contain new policies that could upset the market.

The economic calendar in the US kicks off tomorrow with the Empire State Manufacturing index for May. This is a monthly survey of manufacturers in New York State. The April data did fall somewhat against expectations to 19.1 from the previous reported level of 31.86. The consensus is expecting the number for May to show a modest improvement on the April number. A further decline would certainly raise worries over a slowdown.

In the absence of any market moving news today the market is ticking higher with the FTSE100 up 25 points at the time of writing. The Dow futures are pointing to a 50 point gain.

A strong day for world equity markets yesterday with strong export data for China and other upbeat economic reports from around the globe helping to calm nerves and bring back investors’ appetite for risky assets. The expectation seems to be forming that the austerity measures being undertaken in Europe will not impact on overall world economic growth. Whether this view will last is difficult to tell and we may well still be in the middle of an ongoing equity market correction. Again the volatility we are experiencing is a strong indication of that. The Dow on Wednesday was up by 125 points at one point only to end the day down and yesterday we experienced a 273 point gain. We are not experiencing normal market conditions which is why any major one day gains especially on low volume should be treated with extreme caution.


The ECB met yesterday and Jean-Claude Trichet gave very little away with regard to the ongoing bond purchase programme. He did say that the programme would continue for as long as is necessary and there was no mention of any possible cap on the level of purchases made. There was no change in interest rate policy as expected and the Bank of England MPC which also met yesterday kept rates on hold.

The US weekly initial jobless claims were again disappointing with a decline of 3,000 to 456,000 from the previous level of 459,000 which was subject to an upward revision from the previous reported level of 453,000. These numbers remain stubbornly high and it will be interesting to see if the numbers start to rise further given the economic impact of the BP oil spill.

The major data due for announcement today was May US retail sales which surprisingly fell by 1.2% against the consensus which was expecting a similar month on month gain of 0.4% as reported for April. We have also had the University of Michigan Consumer sentiment preliminary reading for June this afternoon which as expected has shown a modest improvement to 75.5 from the last reported number of 73.6. Not spectacular but an improvement nevertheless although doesn’t stack up against the decline in retails sales.

Another surprise today was the reported decline in UK industrial and manufacturing production during April although this must be set against a strong March when output grew by 2%.

Monday is fairly light in terms of economic announcements and in the absence of any major developments over the weekend we may well see a quiet start to trading on Monday.

The publication of the US Beige book yesterday (anecdotal accounts of economic activity in all 12 Federal Reserve Districts) gave some grounds for optimism over the ongoing recovery in the US. It reported that activity is expanding across all 12 districts and is more broadly based than before with improvements in activity in more sectors of the economy than reported during the previous month. This report is very up to date in that it covers the period up to the 28th May and with the ongoing problems in Europe it would seem that the US is continuing to buck the trend and is still on course to achieve a respectable level of growth this year . After the Non Farm Payroll data last Friday expectations over the employment outlook for private payrolls have waivered somewhat. However, this report whilst confirming that the employment picture remains weak did state that employment levels are edging up across all districts. The report also mentions a general improvement in spending by consumers and businesses whilst inventory investment is slowing which is not unexpected at this stage of the recovery cycle. Overall a positive report which does provide the bulls with some reason for hope that the recovery is beginning to pick up some momentum.


Today the European Central Bank and the Bank of England each have their respective meetings to discuss interest rate policy. There is unlikely to be any change in policy but all eyes will be on what Jean Claude Trichet has to say after the ECB meeting especially with regard to their ongoing bond purchase programme.

With so much attention focused on the employment picture in the US the weekly initial jobless claims numbers due for publication today may well have an impact on trading this afternoon. The figure last week was 453,000 and the market will be looking for a figure a little lower than this. Any increase will be taken badly by the market.

In Germany we have had CPI data for May published today which was unchanged from the previous month at 0.1% leaving the annualised rate at 1.2%. Inflation in Europe is unlikely to be an issue for a long time yet with the threat of deflation more likely in the short term.

Further evidence today that the world economic recovery has so far not been impacted by the problems in Europe came from China with very strong export growth during May. Exports increased by a massive 48.5% in May compared to a year ago and on a month on month basis they were up 10.9%. Any impact from Europe is yet to be felt judging by these numbers but a slowdown in European activity is likely to have some impact over the coming months.

Today we have closed out a long position in GlaxoSmithKline. With sentiment swinging wildly at present there is every chance that we will be able to buy back the shares over the coming days if market conditions are correct.

A relatively quiet day in terms of economic announcements with positive comments from Ben Bernanke made yesterday about the US economic recovery helping to prevent another significant fall in European markets although all still stand down the best part of 1% at the time of writing.


More good economic news from Germany has also helped sentiment with April Industrial Production rising by 0.9% against consensus expectations of a 0.7%. The March figure was revised up to 4.3% and the outlook remains mildly positive with expectations of further gains at least in the short term based upon more recent indicators.

In the UK retail sales for May were up 0.8% on a like for like basis. Non Food like for like sales growth was 1.3% and whilst the overall picture showed a slight improvement most of this was down to the sunny weather rather than any real improvement in consumer spending. Sales of big ticket items such as furniture are still declining on a like for like basis.

Fitch comments today about the UK deficit describing the current situation as a “formidable challenge” have not helped the pound and have strengthened concerns over exactly what the emergency budget on the 22nd will bring.

The US market this afternoon is fluctuating between positive and negative territory and is struggling to find direction in the absence of any major news. Volatility looks set to stay for the time being.

The rally in equities that seemed to be gaining momentum last week was once again brought to a halt this time due to disappointment over the US Non Farm Payroll data for May. After the two previous months with good increases in private payroll numbers (218,000 in April and 158,000 in March), the last month, 41,000 suggests that the momentum has been lost. It is probably too early to make the assumption that the cycle has lost momentum but you would not expect to see these numbers starting to dip so soon and clearly this is what is worrying the market. A few commentators are already suggesting a US double dip but again it is far too soon to start speculating on this with a more likely outcome being a significant slowdown in US economic growth during the second half. The latter is something that is not necessarily priced into the market at present.


Other slightly disappointing data from the US last week were factory orders for April which came in at +1.2% month on month compared to the consensus expectations of +1.8%. However the previous data for March was revised upwards to +1.7% from +1.1%. If the recent weakness continues it could well mean that US Q2 GDP forecasts have to come down over the coming weeks. The US ISM manufacturing index dipped during May to 59.7 from 60.4 in April which may mean the peak of activity has been reached. The equivalent Non Manufacturing ISM index remained static over the last month.

There is plenty of event risk in Europe over the coming weeks with several key events that could once again pressure world markets. This evening European finance ministers are meeting to finalise the details of the €440bn special purpose vehicle which was put together as part of the €750bn rescue package announced a few weeks ago to bail out Euro zone countries in trouble. Whether there will be any wrangling or disagreement over the fine print remains to be seen.

This week the ECB meet for their usual scheduled interest rate meeting on Thursday. The market will be looking for any comments the ECB president, Jean-Claude Trichet may make after that meeting especially with reference to the bond purchase programme of which around €35bn of bonds have been purchased so far. There have been some arguments that this programme which is designed to bring greater liquidity and stability to European bond markets should be restricted.

So far the recent data coming out of Europe does not point to any significant deterioration in business/economic sentiment and most indicators continue to suggest that the recovery albeit a fragile and sub trend one is still on track.

There is not a huge amount on the economic agenda this week. The main event in the US will be retails sales for May due for publication on Friday with the consensus looking for a number around +0.3% to +0.4%. Also on Friday in the US we get the first estimate for the June University of Michigan consumer confidence index which according to the consensus is expected to show a modest improvement to 75.0 from the previous reported level of 73.6. The Federal Reserve Beige book is due for publication on Wednesday and that gives anecdotal evidence of current economic conditions in its 12 districts.

The main event in the UK this week will be the Bank of England MPC meeting due on Thursday. There will undoubtedly be no change in policy with rates to stay at 0.5%. On the same day the ECB meeting takes place and this one will be very much in focus not from the perspective of the interest rate which is very likely to remain at 1% but more due to any comments that may be made given the events that are unfolding in Europe.

Today we have already had German factory orders for April which have shown the major benefit of a weakening euro with a significant jump in export orders. Orders were up 2.8% during April whilst the consensus was expecting a modest drop.

The performance of the US market this afternoon will be key to the timing of our next trade. If we see some stability after the shakeout on Friday there may well be the opportunity to take our next position.

The US Non Farm Payroll report this afternoon underlines just how fragile the US economic recovery is and the fact that it is at present a jobless one. Expectations of a 500,000+ number were certainly out when compared to the actual figure of 431,000. As always the devil is in the detail and this number was bolstered by 411,000 temporary workers being hired for the census count. This means the underlying trend was barely into positive territory which at this stage of the cycle is way below what should be happening. Private payrolls rose by considerably less than forecast at 41,000 with the consensus expecting something closer to the 170,000 mark. This is a very disappointing number and unless we see some pick up soon in the employment cycle there is every chance this number will turn negative once again as the temporary census workers roll off the register later in the year. The market reaction in the US was an inevitable hefty decline with the US down 150 points at the time of writing. It is difficult to see sentiment in the short term improving after this data announcement.


Other economic news today was the publication of the second estimate for Euro zone Q1 GDP which remains unrevised at 0.2%. Euro zone retail sales for April published yesterday proved to be disappointing with a 1.2% month on month decline compared to expectations of a modest improvement. Economic data from May onwards for the Euro zone will be of particular interest for signs of any impact that the recent turmoil may be having on the real economy.

We will go into the economic calendar for next week on Monday but with a relatively quiet week ahead in terms of economic announcements the market may well find it difficult to make much headway.

Yesterday we closed out a long position in Reed Elsevier taken a day earlier. The strength in the market yesterday morning provided a good opportunity to lock in a profit and with the way the market is moving this afternoon there may well be another opportunity next week.

The economic data in the US today was broadly as expected with the ISM Non Manufacturing Index for May staying at exactly the same level it achieved the prior month at 55.4. The employment element of the index moved above 50 for the first time during the recovery phase which is encouraging although it is barely above the key level of 50 which would indicate net hiring in the sector. Staying on the employment front the ADP private payrolls for May came in at 55,000 which was a little less than consensus expectations which stood at around the 75000 mark. Tomorrow all eyes will be on the Non Farm Payrolls where there is considerable room for deviation around consensus expectations of +500,000.


Fears over Europe came back to the fore today this time in terms of the real economy impact of the recent financial turmoil. It is difficult to say to what extent if any the more recent developments had on the retail sales data for April but the reported -1.2% month on month decline for April was way below the consensus which was looking for a 0.1% gain.

A relatively quiet day in terms of economic announcements with US pending home sales for April published this afternoon showing a 6% increase month on month ahead of the April tax credit expiry, so little to get excited about with this data. Whilst in the UK M4 money supply growth is starting to show some signs of an increase. This will please the Bank of England and demonstrates that at least some of the quantitative easing which was ended in February is now starting to filter through to the economy which was the overall objective of this policy. However, lending growth remains subdued and it may be some time yet before net lending starts to pick up. Lending to business must expand if economic growth is to pick up momentum over the coming months.


Tomorrow look out for the ADP private payroll data in the US which should set the tone for the Non Farm Payrolls on Friday. The consensus is looking for a positive number of around 60,000 for the ADP payrolls for May whilst expectations of a large 500,000+ number are set for the May Non Farm Payrolls on Friday although a good chunk of this will be due to temporary hiring for the census count. Also tomorrow look out for the US ISM Non Manufacturing Index which is expected to remain close to the previous reported level of 55.4.

In Europe tomorrow we get the May Purchasing Managers Index for Services and April retail sales data.

At the time of writing the US has closed up 211 points with FTSE100 futures at present looking for a 50+ point opening tomorrow morning.

After a 14% decline in the UK market which was reached on Tuesday of last week world equity markets have rebounded strongly partially no doubt due to the technical aspect of any significant decline resulting in strong one day gains over Wednesday and Thursday with a modest decline on Friday. Whether the last few days mark the end of the turmoil remains to be seen and it pays at such times to exercise an even greater degree of caution when entering trades. The event that caused the recent sell off namely the European sovereign debt crisis has not changed and it may well be an absence of any further major headlines on this issue which has helped to bring a degree of calm over the last two trading days. However, the news after the market close on Friday that the ratings agency, Fitch have downgraded their long terms rating on Spain from triple A to double A highlights the ongoing risk of further negative news flow relating to sovereign debt in Europe.


The real issue is of course what impact the austerity measures and the recent increases may be having on the real economy. We said last week that a prolonged period of turmoil in the financial markets was the real risk that could then impact on business sentiment and the knock on effect on hiring intentions and general business investment. At this stage it seems unlikely that the recovery will be heavily impacted but undoubtedly growth will be lower and considerable uncertainty remains over the longer term impact. The next likely candidate for deficit worries will undoubtedly be the US and the recent concerns over Europe could easily shift to the US where the deficit also remains uncomfortably high and fiscal tightening will be required sooner rather than later. The new fiscal year for the US starts on the 1st July and measures to combat their own budget deficit are likely to constrain growth over the coming 12 months.

US equity valuations were looking high with the Dow over 11,000 and a quick recovery in equity markets back towards the highs of the year would in many respects be unwelcome and we need to see a more orderly and gradual rise to prevent another significant correction and that is not to say that the current one is over. More often than not history has shown 10% corrections to turn into 20% and given the meteoric rise in equity markets over the last 14 months or so it is not inconceivable that a correction much greater than 20% could occur but much depends on how financial markets respond to the measures currently being taken to counter the immediate problems in Europe.

On Thursday of last week we had the second revision to US Q1 GDP which was not as expected with a modest downgrade to growth with the second estimate coming in at 3.0% compared to the preliminary estimate of 3.2%. Most commentators were looking for a modest improvement.

On Friday afternoon in the US the University of Michigan Consumer confidence data for May was published which did show a modest improvement to 73.6 from the previous reported level of 73.3. The equivalent Conference Board indicator published earlier last week showed a useful jump suggesting that the US consumer is becoming more confident about the outlook. Nevertheless when you look at the historical data for the sentiment indices they all stood considerably higher than now at the cycle points where growth is well established suggesting that we are some way off a point of sustainable trend growth.

The first week of the month is always a busy one in the US economic calendar with both sets of ISM data and the all important Non Farm Payrolls. We kick off today with the ISM Manufacturing Index for May. This index has been very strong during recent months although data more recently concerning the US manufacturing does suggest that perhaps the peak has been reached which is why most commentators were expecting the index this month to show a modest decline to 59.5 from the previous reported level of 60.4 and in fact the actual reading was not far off this at 59.7. The ISM Non Manufacturing Index is due for publication on Thursday and the May reading is expected to be little changed from the April level of 55.4. Thursday also brings the ADP employment report for May which gives details of the private payroll picture and sets the tone for the Non Farm Payrolls on Friday. The latter is expected to deliver a very big positive number of close to +500,000 although a significant part of this may well be due to temporary hiring for the census count. The unemployment rate is expected to show a modest decline to 9.8% from 9.9%.

In Europe today we have had publication of German unemployment for May which showed a continued improvement in the overall unemployment trend with a fall of 45,000 in the number of unemployed workers. Euro zone unemployment data for April was not so good with a rise of 25,000 in the number unemployed taking the unemployment rate up to 10.1%. The main European data for the week comes with the publication of the second estimate for Q1 GDP which is expected to remain unchanged at 0.2%.