Investors will track the EU GDP and US retail sales

After Asia markets rallied following the easing of some Chinese trade restrictions, the European open is expected to be positive as we look forward to another day of important economic data from the UK and the US.

Tuesday is the third day in a row so far that the dollar index has been lower. In contrast, US bond yields have pulled back slightly as traders estimate that more aggressive interest rate hikes by the Federal Reserve are going to harm the long-term growth of the US economy.

UK economic data

There will be lots of new data in the UK economy in the coming days - we will receive the wages data for April today, the CPI inflation data for April tomorrow, and the retail sales data for April on Friday, which will likely slow significantly due to the higher inflation rate.

According to the latest estimates, the wage growth for the three months to March is expected to be 5.4%, including bonuses, and 4.1% without bonuses. The trend should pick up even further when the April numbers are released next month.

Aggressive rate hikes and recession fears

As part of Monday's US data, the New York Empire State manufacturing activity index shrank for the second consecutive month to -11.6 in May 2022. In addition, investors continue to digest the impact of China's COVID-19 lockdowns on its economic activity data. As inflation shows no signs of cooling down, disappointing data from both the US and China is fueling fears of a global economic recession. This has led to the US Federal Reserve and other central banks having to tighten monetary policy more aggressively.

Moreover, global interest rate expectations are becoming more hawkish, as the spread between German and US 10-year real yields has narrowed by more than 30 basis points since May 2022. 

Earlier on Tuesday, minutes published by the Reserve Bank of Australia showed that it considered a steeper rate hike which hints at another rate hike in June's meeting.

Events of today

The UK and Australian central banks have also raised interest rates. Traders anticipate speeches by ECB president Christine Lagarde and Fed Chairman Jerome Powell on Tuesday, with Philadelphia Fed President Patrick Harker speaking the next day.  

The French unemployment rate dropped to 7.3% in the first quarter of this year after falling to the lowest level in 14 years in the first quarter, data revealed on Tuesday, along with the UK claimant count dropping by around 57,000 in April and the unemployment rate lowering to 3.7%.

It is expected that the second estimate of Eurozone Gross Domestic Product will be released later in the day and will show modest growth of 0.2% for the quarter, up 5.0% year-on-year.

Investors will also be looking ahead to the US retail sales and industrial production releases.