April 11, 2024

“Yesterday’s blowout US CPI report triggered some sharp moves in the rates markets as sticky inflation wiped out hopes for a summer rate cut from the Fed this year, sending the dollar rocketing to a year-to-date high. There is no time for the markets to breathe today, however, with a fresh ECB decision and a set of US PPI data ready to inject some volatility.”

Tim Hallinan – Trading Director

Main Headlines

US President Joe Biden and Japanese Prime Minister Fumio Kishida announced military collaboration and various other projects including moon landings on Wednesday, bolstering their alliance to address challenges posed by China and Russia. In a joint White House news conference, they emphasised Japan’s growing global significance and its pivotal role for the United States, discussing international flashpoints such as Israel and Ukraine.

The outgoing UK Debt Management Office chief Robert Stheeman warned this week that his successor faces big challenges dealing with the extent of borrowing likely to be required over the next few years. British government debt is set to reach almost 104% of GDP by 2026, after breaching the 100% mark in 2023. The DMO is set to raise £265bn in proceeds from debt issuance this financial year alone – the second highest on record.

GBP

With US disinflation hitting a wall while the BoE Governor gets excited about rate cuts, the pound slid 1.4% peak-to-trough against the dollar yesterday as it now hovers around its lowest levels of the year. The big moves today will similarly come from developments in the eurozone and the US as the pound reacts to the latest ECB decision and US producer prices. However, a hawkish FT column written by the BoE’s Megan Greene this morning has handed a modest boost to sterling, where she warned that cuts remain ‘a way off’ and that market pricing for deeper cuts from the BoE versus the Fed were unlikely, given that inflationary pressures remain more elevated in the UK. The heavy hitters of the UK data calendar come next week in the form of wage growth and CPI inflation, but we do get the BoE Credit Conditions Survey this morning for an insight into loan demand, followed by a GDP print for February tomorrow morning. This is expected to have cooled slightly in February at 0.1%, but should put the UK economy on track for a swift exit from last year’s technical recession.

EUR

After the US CPI report, the euro’s momentum is clearly in the bearish direction heading into today’s ECB decision, which is unlikely to save the common currency without a surprising amount of caution from President Lagarde. The key element placing pressure on the euro is the take off in US-Eurozone yield spreads – rate expectations for both had largely moved in lockstep this year, but markets are rapidly now coming to the realisation that the Fed is likely to cut fewer times than the ECB. After eurozone inflation fell further to 2.4% in March, the market’s base case today is for another rate hold that prepares for a cut in June, conditional on a deceleration emerging in the May wage data. Policymakers have tied themselves into this outcome in numerous speeches now, or they risk eroding credibility. However, with inflation cratering and demand fragile, it isn’t impossible that enough policymakers on the Governing Council are tipped towards a cut – this would be a heavily negative outcome for the euro.

USD

A scorching US CPI report wiped out any remaining possibility that the Fed would cut in June, propelling the dollar to a five-month high. The headline measure surged from 3.2% to 3.5% while the month-on-month print held steady at 0.4%, defying expectations for a decline to 0.3%. The window has simply closed now for enough disinflationary evidence to arrive by June for policymakers to gain the ‘sufficient confidence’ that they are looking for. As a result, the 2-year Treasury yield jumped by 20bps and the number of expected cuts this year slipped down to less than two – this figure was seven at the turn of the year. The US yield advantage against the euro is at its highest level in over a year, but we’ve not quite had the euro trading back at the low levels it did back then, as this time booming equities and risk sentiment have weakened some of the dollar’s safe-haven allure. A continuation of the dollar’s bullish momentum depends on the outcome of the PPI data this afternoon, which is set to come down sharply from the surprise 0.6% figure last month to around 0.3%, but should still point to a sticky core PCE figure towards the end of April. We get some jobless claims data too, although these have been eerily consistent at around the 210K level over the past few months.

Markets

Shares across the globe fell yesterday as spooked traders rapidly recalibrated upwards their expectations for US rates this year. US equities slipped 1% in a move that Asian shares tracked this morning. Commodities prices cooled somewhat too, with gold and oil now trading in tight ranges near their highs.

Main Economic Events (All Times CET)

3:30am: Chinese CPI & PPI Inflation
10:30am: Bank of England Credit Conditions Survey
2:15pm: ECB Monetary Policy Statement
2:30pm: US PPI & Unemployment Claims
2:45pm: ECB Press Conference
6:50pm: BoE’s Greene speaks

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