Risk Appetite Edging Back

  • Pound sold off after yesterday’s restrained BOE message; UK’s debt-to-GDP ratio over 100% for the first time since 1963
  • There were more signs of a softening of Brexit positions
  • Japan’s May CPI was slightly lower than expected
  • Australia’s retail sales spiked on economic reopening

 The news on the virus front has been mixed but the positives have been enough to stabilize markets. The spike in cases and hospitalization Texas will not prevent the state from reopening schools in the fall, and New York is going ahead with its second phase reopening on Monday. The case-count continues to rise in California and Florida. Latin America remains the focal point with 30,000 new cases reported in Chile due to an underreporting backlog, and over 600 deaths in Brazil and Mexico.

Global equity markets are ending the week with substantial gains, but not enough to offset last week’s losses. By mid-morning in London, the EuroStoxx 600 and S&P 500 (futures) are up over 3% on the week, compared to gains of 2.5% for the FTSE 100 and 1.8% for the MSCI EM. The dollar (DXY) is flat on the day after three consecutive sessions of gains, remaining about unchanged on net for the week.  Global fixed income markets were mixed. US Treasury yields are close to flat on the week, while yields were a few basis points higher in the UK and core European countries, but lower in Spain and Italy. Lastly, oil futures are up some 10% on the week and the curve is now flat after months of deep contango.


The only US data release today is Q1 current account.  Rosengren, Quarles, Powell, and Mester all speak today.

Canada reports April retail sales.  Headline sales are expected to fall -15.1% m/m vs. -10.0% in March, while ex-autos are expected to fall -12.0% m/m vs. -0.4% in March.  For now, the Bank of Canada is in wait and see mode.


Markets didn’t like the BOE messaging yesterday.  While expanding QE as expected by GBP100 bln, the bank slowed the pace of purchases by stretching this amount out to year-end.  There was one dissent from Haldane in favor of no QE expansion, while the tone of the statement was a bit upbeat for our liking given ongoing pandemic and Brexit risks.  Indeed, we prefer Fed Chair Powell’s more sober outlook over the BOE’s overly rosy one.

Sterling is recovering a bit today, in part driven by more favorable Brexit headlines. Still, the pound remains 1% weaker against the dollar and 0.7% weaker against the euro over the last two sessions. The meeting between Boris Johnson and Macron yesterday continued to fuel speculation that the UK is willing to soften its position to get a deal done once negotiations restart on June 29. This could include a compromise on the crucial “level playing field” issue, and the shape of the regulatory framework governing the relationship between the UK and EU.

The UK reported May retail sales.  Headline sales rose 12.0% m/m, much higher than the 6.3% m/m expected and -18.1% in April. Surprising as it was, the figures reflect the partial reopening of the economy and the steep declines over the previous two months. May budget data showed borrowing at £55.2 with the increase in spending (+50%) and decline in tax revenue (-28%). This brought the country’s debt-to-GDP ratio over 100% for the first time since 1963.



Japan’s May national CPI was on the low side.  Headline inflation rose 0.1% y/y vs. 0.2% expected and 0.1% in April, while ex-fresh food came in at -0.2% y/y, slightly lower than expected and unchanged from April. Some of this reflects lower energy costs (gasoline prices -16.4% y/y), which should pick up eventually. Yet the data still underscore the difficulties facing Japanese policymakers right now as they attempt to reflate the economy. Recall that BoJ Governor Kuroda said that rates are likely to remain at these ultralow levels until 2023; the bank also boosted its pandemic response financing program by ¥35 trln in the last meeting. The yen is flat on the day.

Australia reported preliminary May retail sales spiked by 16.3% m/m. The lockdown easing led to the predictably rushed purchases and a record monthly figure. This follows a 17.7% m/m decline in April.