Equities rise despite grim data

More and more US data suggests that the growth in coming months will not be as strong as previously expected. The data on initial claims provided yet another unpleasant surprise yesterday rising once again and remaining well above 400k mark. With 4 weeks average staying close to 440k for the third straight week it seems that a payrolls reading (for May) in range of 150-175k would be a good one. That’s definitely not enough to reduce unemployment rate and improve consumer confidence significantly.

Despite the data equity markets were able to overcome an initial weakness and the gain at the closing bell in New York with Asia following suit. Technically, there are two conflicting patterns on the S&P500 futures – a reversed H&S suggesting a possible rise to 1345 pts. and a resistance offered by the upper limit of a mid-term declining channel (ca. 1332 pts.). Breaking that level could give the bulls even more momentum.

No rush to hike rates…

One of the reasons why equities fare relatively well despite the poor data and problems in Europe is that markets – learning from experience – price in increased dovishness at central banks. Indeed since early April interest rates expectations moderated noticeably in both US and the euro zone. Quotes on FRA12x15 (measuring interest rates expectations for roughly another year) declined by 42 bp in the euro zone and 35 bp in the US since April 11th. That’s some 1,5 interest rate moves – a quite substantial decline. Even though the prospect of QE3 in US seems remote, the Fed proved on numerous occasions that there is no such thing as “too dovish”. Consequently, USD and EUR are likely to underperform against other majors and the impact of the data on equities is somewhat cushioned.  

Events to watch – US consumer data

The US data on consumer spending and incomes (8.30 ET, 14.30 CET, consensus 0,5% and 0,4% m/m respectively) usually does not impact the markets significantly but this time every piece of evidence (confirming or denying the soft patch) matters. The UM index (9.55 ET, 15.55 CET, consensus 72,4 pts.) is another secondary figure which in current circumstances may have an impact.   

Przemysław Kwiecień PhD, Chief Economist

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