Summary United States: April Economic Data Show Resilient U.S. Economy U.S. retail sales topped expectations in April, while industrial production also grew more rapidly than economists expected. Data on housing starts, home sales and homebuilder sentiment, however, showed tentative signs of cooling. Next week: New Home Sales (Tue), Durable Goods (Wed), Personal Income & Spending (Fri) International: U.K. and Canada Inflation Reach New Cycle Highs U.K. inflation surged to a fresh 40-year high in April, quickening to 9.0% and placing additional pressure on the Bank of England (BoE) to double down and tighten monetary policy. Inflation in Canada also reached a new high, but this time of "only" 30 years; headline CPI inched up to 6.8% year-over-year in April. Next week: Eurozone PMIs (Tue), U.K. PMIs (Tue), RBNZ Rate Decision (Wed) Interest Rate Watch: Bond Yields Up Significantly in Many Foreign Economies The United States is not the only major economy in which long-term interest rates have risen significantly. For example, the yield on the two-year government bond in Germany has risen about 100 bps since the beginning of the year, while the comparable yield in the United Kingdom is up about 80 bps over the same period. Topic of the Week: The Outlook for Corporate Debt in a Rising Rate Environment After nearly tripling from just over $4T at the turn of the century to about $12T today, non-financial corporate (NFC) debt is at an all-time high. With recent Federal Reserve rate hikes and likely more to come, we outlined some hypothetical scenarios to analyze future debt serviceability in the NFC sector considering rising rates. Download the full report

Equity markets are back in positive territory on Friday but I'm struggling to get too excited by the moves we see going into the weekend. The rebound may partly reflect the scale of the declines we've seen in the previous couple of sessions, while the cut to the five-year loan prime rate in China may also be giving global markets a bit of a lift. But ultimately, very little has changed and I expect that will continue to hold these markets back. The rate cut announced by the PBOC is obviously good news and is clearly targeted a revitalizing the ailing property market which continues to suffer due to the crackdown last year and Covid lockdowns this. Along with other measures already announced, this could help to revive a hugely important part of the economy. Whether it's enough to help China hit its 5.5% growth target this year is another thing. I imagine we may see further stimulus efforts this year in order to try and get close to that as the country is facing numerous headwinds, as every other is around the world right now. What it has that others lack though is room to manoeuvre on both the fiscal and monetary front. UK retail sales are not a true reflection of what's to come The UK is in a very tricky position, regardless of the impression the April retail sales data gave this morning. While spending last month hugely exceeded expectations and was accompanied by a small upward revision in March, we also saw consumer confidence fall to its lowest since records began in 1974. While survey data can be volatile, I expect this is a closer reflection of the squeezed consumer in the UK right now. The cost-of-living crisis is going to have a big impact on household budgets and will intensify again in October when the energy price cap is lifted once more. Unless the government offers more support, the country is heading for double-digit inflation and a recession. Not exactly consistent with sustainable gains in retail sales. Oil flat but risks remain to the upside It's been another volatile week of trade in oil but Brent and WTI are set to end it roughly where they started. They're seeing small gains on the day but price action remains very choppy. There are just so many forces at play at the minute and the increased economic gloom this week and Chinese reopening progress has only added to that. The risks remain tilted to the upside though given the Chinese reopening and continued efforts towards a Russian oil embargo by the EU. And the data this week from OPEC+ was once again disappointing, to say the least. Unless the economy substantially falters immediately, there isn't much of a bearish case for crude currently. Not in any significant way, anyway. Gold buoyed by recession fears The second half of the week has been kind to gold as the trepidation in financial markets has shifted slightly from the pace of monetary tightening to recession risks. So rather than higher yields and a stronger dollar weighing on the yellow metal, we've seen investors pouring into safe havens which have lowered yields slightly and lifted gold. Whether that will be sustained in this hiking environment will be interesting and ultimately depend on just how real and significant the economic fears are. At the end of the day, rate hikes should lower demand but so should a recession. If the latter continues to be viewed as a likely outcome of the former, gold could see its fortunes improve further. Can Bitcoin hold above $30,000? Bitcoin has been treading water for a number of days now around $30,000 which has been interesting given the volatility in other risk assets. That it is being driven by economic rather than interest rate fears may explain it. Less focus on stablecoins may also be helping to contain the bleeding. But while some may be encouraged, it's not seeing any momentum above $30,000 at the minute and the longer that goes on, the more prone it looks to another plunge.

At the end of another choppy week for European markets sentiment appears to have become much more fragile, with the moves being seen in bond yields reflecting concern that we are heading for a growth slowdown. Yesterday’s price action saw a sea of red for markets in Europe with the most pain being felt by the retail sector after this week’s profit warnings from US retail giants Walmart, Target and Kohl’s. US markets have also seen some heavy selling this week, with both the S&P500 and Nasdaq 100 managing to hold above their lows from last week of 3,858 and 11,692, while still finishing the day lower for the second day in succession. Asia markets, on the other hand have seen a strong rebound this morning after China cut its 5-year loan prime rate by 15 basis points, for the second time this year. Consequently, European markets look set to open higher this morning at the end of yet another rollercoaster week for investors. The one silver lining from the selling of the past two days was that we managed to close well off from last week’s lows, suggesting a general reluctance to become too bearish too quickly. That said every single rebound we’ve seen since early April has seen a rebound shallower than the previous one followed by a lower low.   One other thing that has also become clearer this week, has been a notable shift in tone in comments from Fed officials, and appears to indicate rising concern about stickiness in current levels of inflation. Powell’s comments on Wednesday do appear to be softening the market up for the prospect of more aggressive rate moves. As we look ahead to today’s European open, we’ll be looking for a further insight into the damage that a record 9% UK CPI has done to the appetite for UK shoppers to go out and spend money, as the latest Gfk consumer confidence numbers for May fell to a record low of -40 in data released this morning, a truly sobering reflection of how much damage surging inflation is doing to consumer sentiment. After a strong start to the year in January, UK retail sales have seen declines of -0.5% in February and -1.4% in March, battered by rising prices and consumer confidence back at levels last seen in 2008. The march decline of -1.4% was driven by a sharp fall in fuel sales, as the rising cost of living prompted consumers to pare back non-essential spending and drive their cars less. Not only that, but February was also revised lower, from -0.3% to -0.5%. In cutting back on their spending, consumers will also have had one eye on the upcoming surge in energy bills, as well as other price rises, which were due to hit their wallets in April, and saw headline CPI rise to a record 9% in numbers released earlier this week. The most recent BRC retail sales numbers showed that like for like sales fell 1.7% in April, so higher prices are certainly having an effect on spending patterns. On the plus side, the Easter period may see a pickup on spending in travel and leisure as consumers take advantage of the later Easter break, although with the various travel problems, that may not offer the lift it might have done in the past. Expectations are for a fall of -0.3% including fuel sales, however it wouldn’t surprise to see a much bigger decline.   EUR/USD – Appear to be building a base at the 1.0340 area, but we need to see a move through the 1.0650 area to make things interesting and signal a move towards 1.0820. The bias remains for a move lower towards parity, while below 1.0650. GBP/USD – Moved up to the 1.2520 area with an area of support at the 1.2320 area, as well as the recent lows at 1.2150. While below the 1.2630 level the risk remains for a move bac towards 1.2000, on a break below 1.2150. EUR/GBP – Finding a bit of resistance just below the 0.8500 area, with stronger resistance at the 0.8520/30 area. Support remains down near the 0.8420 area.   USD/JPY – Finding support just above the 126.80 area. This is a key support area, with a break below targeting 123.00. As long as 126.80 holds then a move towards the 135.00 area target remains intact. FTSE 100 is expected to open 78 points higher at 7,380. DAX is expected to open 118 points higher at 14,000. CAC40 is expected to open 60 points higher at 6,332.

Outlook: Today we get the usual weekly jobless claims. April existing home sales, the Philly Fed, and for the policy wonks, the ECB policy meeting minutes from the April meeting. The elephant in the room is the S&P down over 4% in the worst rout since June 2020, just when everyone got the message the Covid pandemic was a Big Deal and worthy of the panic that had started a few months before. Ironically, in 2020 the Q1 GDP was down 9.1% and Q2, not yet released when the S&P tanked that time, was a whole lot less bad at -2.9%. The implication is that markets are awfully slow to recognize a serious problem, but that flies in the face of the old attribution of the S&P being a leading indicator of economic health. We say the hysteria yesterday was unwarranted and that will be seen when facts get unspooled. The problem with hysterical panic is that it spreads like wildfire and disregards offsetting information. This is the classic behavior of crowds.  Reuters has a headline “Which earnings to the rescue?” but then the story goes nowhere and doesn’t name anything. So how does a bear market get halted? One silly idea is that some market leaders with deep pockets start acknowledging that the carnage created some buying opportunities. How does this differ from bottom-fishing? The holding period is longer and return-motivated, not knee-jerk opportunistic short-term gain, but we can know that only after some time. All this is supposedly caused by a sudden new acknowledgement of inflation. Poppycock. We have been talking about inflation for over six months. But there might be a tiny push from (of all places) Switzerland. Yesterday Swiss National Bank chief Jordan (such a Swiss name) said “the SNB will take care to maintain price stability” and sees the risk of second-round effects. This got quite a lot of attention because the SNB has been silent so far about inflation, unlike all the others. Gittler at BDWiss points out “Jordan didn’t say what the SNB would do in response, but the last time inflation in Switzerland was this high the policy rate was around 2.75%, not -0.75%, the lowest in recorded history. They could raise rates or they could let the currency appreciate further, which would lower the cost of imported goods, especially energy.” Yikes. Stock Market Rant: The stock market rout was caused by retailers releasing lousy earnings due to inflation—nothing to do with management, mind you. It’s a little unclear how this happens. Had they underpaid for goods sold that now cost more and can be sold for more? In general, retail sales are up. These losers just didn’t have their price of that action. We just had rising retail sales for the 4th month in a row. If sales are up and earnings are down, why do we not blame management? Bloomberg notes that about Target, where this all started, “Yesterday the stock got absolutely clobbered, with its worst one-day loss since 1987. That came a day after Walmart also had its worst day since 1987. But if you read the Target earnings call, you see the issue was not actually some unexpected plunge in consumer demand. The issue they cited over and over again was the speed of the consumption mix, which caught them flat-footed and over-inventoried. “Here's CEO Brian Cornell answering a question about US consumer behavior in the face of high inflation: ‘….. We can tell you what we saw during the quarter and the start of May, where we just continue to see a resilient consumer. Our traffic numbers are up to start the second quarter. They're shopping multiple categories.’” Bloomberg goes on: “Then after the bell yesterday we got Cisco earnings, which sent the stock lower. But it was really all about Chinese supply chain disruptions. Actual demand seems to be robust. Here's Cisco CEO Chuck Robbins: ‘If you combine enterprise and commercial together, we grew 9%, but without the Russia impact, we actually grew 12% and on a trailing 12 months basis it grew 28%. So we are still comfortable with the demand signals that we're seeing and our customers aren't telling us anything differently right now.’" Some retailers took losses in the quarter. Is that really the calamity of the century? No, not in its own right--unless it triggers a wider sense of conditions out of control, which can help send at least some conditions out of control that otherwise would be stable. The WSJ has a nifty piece on the risk of recession not actually priced in yet, even though the pullback is substantial. “One example: Microsoft has dropped from 34 times estimated 12-month forward earnings to 24 times since the start of the year—even as predicted earnings have risen. Something similar has happened...

EUR/USD - 1.0479 Euro's selloff from 1.0563 to 1.0461 in New York yesterday on renewed safe-haven usd's buying due to fall in U.S. yields and U.S. stocks suggests recent corrective upmove from last Friday's fresh 5-year bottom at 1.0350 has ended there and below 1.0438/42 would yield further weakness to 1.0390/00 later. On the upside, only a daily close above 1.0495/00 may risk stronger recovery to 1.0530/40. Data to be released on Thursday: Japan machinery orders, exports, imports, trade balance, Australia employment change, unemployment rate. EU current account, construction orders. U.S. initial jobless claims, continuing jobless claims, Philly Fed manufacturing index, existing home sales, leading index, Canada new housing price index and producer prices.

Shanghai's "freedom day" and JP Morgan's optimism have sparked a relief rally, adverse for the dollar. US data and tough Fed talk on inflation could trigger fresh demand for the greenback. EUR/USD seems especially vulnerable to a shift in the mood.  EUR/USD and other short-term assets are short-term bullish, then bearish. My colleague Tomàs Salles will tackle the technical patterns emerging, and I will focus on the fundamentals.  *Note: This content first appeared as an answer to a Premium user. Sign up and get unfettered access to our analysts and exclusive content. Reasons for the recovery First, China announced that the six-week lockdown in Shanghai will end after the city reported three consecutive days without community infections. The city is the country's largest and the most important one economically. A significant chunk of the recent market gloom came from the downturn in Chinese consumption – and production – due to lockdowns. Any easing is risk-on, adverse for the dollar. The news is different from that on Monday – weak Chinese figures.  The second positive note is also a positive one contradicting a negative one. On Monday, the financial media discussed Lloyd Blankfein's comments that a US recession is a "very high risk." He used to run Goldman Sachs. On "Turnaround Tuesday" the focus is on a note from JP Morgan, another prominent US bank, which said that markets have gone too far in pricing a recession. Once again, this is good for stocks and negative for the dollar. Fear of the Fed to return However, the news from Shanghai does not mean the troubles are over for China, Russia's war in Ukraine continues raging and the Federal Reserve is still tightening. Jerome Powell, Chair of the Fed, will be speaking late in the day and he could remind markets of his aggressive stance – and for good reasons.  Before Powell takes the stage, US Retail Sales figures are set to show consumers continue buying, despite rising prices. Adding to inflationary pressures, the Fed will have received good reasons to increase borrowing costs aggressively, which is positive for the dollar.  EUR/USD as an example EUR/USD has made significant headway, retracing most of the losses from 1.0470 to 1.0350. It may attempt to attack 1.0470, and even move toward 1.0495, the next cap. However, while the 4h-RSI is making its way above 50, momentum remains to the downside and the pair still trades below the 50-SMA, which hits the price at around 1.0490. If EUR/USD fails to break higher, it could turn back down toward 1.0440, 1.0425 and 1.04. As mentioned, My colleague Tomàs Salles will provide deeper technical insights.  Overall, there are good reasons for recovery – but also good reasons to see it as short-lived.