Market Views

GLOBAL CREDIT BULLETS | Monday, 24th May, 2021

PMI data confirms strong European recovery.
Strong PMI data last week brought business optimism to new highs and confirmed Europe’s accelerating economic recovery. The eurozone composite index rose to a 39-month high of 56.9 from 53.8 in April, above consensus of 55.1. The improvement was due to services, which had been lagging, where the headline index rose from 50.5 to 55.1, well above consensus of 52.5. Across countries, the French service sector drove much of the upside surprise. The French services PMI rose to 56.6 in May from 50.3 in April easily beating consensus of 53.0, likely reflecting the easing of some restrictions in early May. The German services PMI rose to 52.8 in May from 49.9 in April, back above 50 for only the second month since last September. But manufacturing fell back slightly from 66.2 to 64.0, still very strong but another moderation from the record high in March. The UK showed similar results, albeit with manufacturing leading the improvement at 66.1 from 60.9 in April. Overall, unlike the seemingly peaking momentum in US recovery, strong data and improving vaccination rollouts across Europe confirm its strong and accelerating recovery.

Fed Minutes – Preparing to plan for tapering.
The April Fed minutes released last week provided a hawkish surprise to the market. The minutes deviated from the uniform guidance from policymakers to date that it is still too early to begin a discussion about tapering. A number of FOMC members suggested it may be appropriate to start talking about tapering in coming meetings if the economy continues to make rapid progress toward the Committee’s goals: full employment and long-term average inflation of 2%. Notably, however, the minutes came before the disappointing April jobs data. At the April press conference, Powell emphasized that policymakers would not need to see a full achievement of its economic goals before tapering its asset purchases but that “we just need to make substantial further progress”. We think the FOMC intends to provide some guidance to financial markets about how a tapering plan would be structured and implemented towards year-end, without first waiting for all the way to the fulfillment of its “substantial further progress” benchmark.

Central Bank Digital Currencies (CBDCs) – are central bankers arming themselves with new powers?
Last week Fed Chair Jerome Powell announced the Federal Reserve’s consideration of a possible digital version of the dollar, stating the release of a research paper this summer exploring a move to a central bank digital currency. Following a 30% fall in Bitcoin last Wednesday, Powell also turned up the heat on cryptocurrencies, saying they pose risks to financial stability, and indicating that greater regulation of the increasingly popular electronic currency may be warranted. Attention to CBDCs has certainly been growing over the past year, with the BIS estimating that over 85% of the world’s central banks are working on central bank digital currencies.

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