Strong US data support dollar

The dollar gained ground yesterday following the release of stronger than expected Purchasing Managers’ survey data (PMIs) for the US economy. The euro has slipped to around $1.0820 (from a high yesterday of about $1.0860) while sterling is back at $1.27, leaving the euro-sterling cross at 85.2p. UK retail sales data for April released earlier this morning were a good deal weaker than expected but haven’t impacted the pound very much.

US government bond yields rose on the back of the PMI data (10-year yields were up around 5bps on the day), while German and UK yields also pushed higher. US stocks had a poor session with the Dow Jones shedding around 1.5% and the S&P 500 down around 0.7% (albeit the latter from Wednesday’s all-time high).

The US economy continues to grow at a solid pace judging by the latest PMI data with the Composite PMI rising to 54.4 in May, led by rising services sector activity, having slipped in each of the two previous months. The equivalent data for the Euro area and UK economies point to a further increase in GDP in the second quarter, after they both returned to positive growth in the first quarter of the year.

Retail sales in the UK fell sharply in April according to this morning’s data with volumes dropping by 2.3% last month (poor weather was partly to blame it seems), although over the three months to April volumes were still up 0.7% on the three months to January.

In the Euro area, data released by the ECB showed negotiated wage growth reaccelerated in the first quarter of this year to 4.7% from 4.5% in the final quarter of last year, matching its recent high in Q3 2023.  While this is unlikely to stop the ECB lowering interest rates next month, it may make them a bit more cautious about the pace and timing of further cuts.

Fed member Bostic notes that while “in the first quarter of 2024, inflation basically went sideways, the last couple of numbers suggest that maybe we have moved past that and inflation is continuing back on its path to 2%, but it is going slow.”

Economic data due today include consumer confidence/inflation expectations and capital goods orders in the US. There are a number of central bank members (mainly ECB) due on the wires over the course of the day as well.