The European Central Bank is in the spotlight this week with their monetary policy statement and interest rate decision to be published on Thursday. While benchmark interest rate is expected to remain at 0%, market participants are eager to listen to the ECB President Lagarde’s comments on the economic recovery, at the back of disastrous vaccine rollout in the EU. The Euro Area is approximately 2 months behind the U.S. in terms of vaccinations, currently struggling with the third wave of infections and lockdowns in a number of key European countries. The markets, however, seem to have faith in Euro Area recovery with EURUSD recovering from swing lows in March to current 1.1960 levels. The next key level 1.2000 is only a few basis points away and likely to be tested during this week.
The ECB is expected to continue on its current path of asset purchases, absorbing most of the bonds issued by the EU member states. We witnessed a record issuance of EUR 370 billion worth of bonds in Q1 2021, signaling that the annual total may exceed 2020 peak level of EUR 1.2 trillion. Also, the maturities of recent issuances are at a record with 15% of total issued debt maturing in +25 years while 8% have maturity longer than 31 years. This extension in maturity is expected to push up long EUR yields and steepen the yield curves, supporting EUR even further.
U.S. retail sales data exploded last week with a monthly gain of +9.8%, the second largest print ever. All sectors were up, but the largest gains were in hobby sectors (sporting goods, hobby and musical instruments, bookstores) that expanded +23.5% on a month-on-month basis, as well as in clothing and accessories stores (+18.3%). Groceries and alcohol stores sales saw the slowest growth of 0.7%, whilst health and personal care store sales grew +5.7%. Retail sales data reflected the re-opening of the U.S. economy thanks to successful vaccine rollout, but also direct stimulus payments from the federal government to individuals.
People are becoming increasingly mobile and going out once again, which is evident from increasing gasoline sales (+10.9% in March, after positive February and January data) but also from a jump in clothing stores (+18.3% in March), restaurant and bars sales (+13.4% in March, after negative February and January data). Stimulus payments likely contributed to the magnitude of the expansion, bolstering sectors that have seen a decelerating pace of growth, such as electronics (+10.5%) and furniture stores (+5.9%).
With such strong retail data, we can be rather certain that there will be no additional stimulus directed to individuals, which begs the question about the potential source of growth in the American economy. Consumers are likely to pull back from the current spending levels, although we might see an increase in services related spending once the economy fully re-opens. Savings rate is still elevated, near 13.6% as of February 2021, and likely to tick higher in March as part of the stimulus which is likely to be put aside for rainy days.
S&P 500 was up 1.37% to 4185.48 to all-time highs, while Nasdaq-100 gained 1.42% to 14014.91 points. Russell 2000, representing U.S. small and medium companies, rose 0.86%. The dollar index DXY lost -0.68%, supporting gold to gain +1.89%. Oil futures rose 6.52% at the back of weaker dollar, shrinking U.S. oil inventories and upgraded outlook issued by OPEC.
Have a great trading week ahead!