April 12, 2024

“The June rate cut is on for the ECB, who now only need to see a bit more cooling before they are ready to kickstart their easing cycle – likely alone. The dollar is still on an upward trajectory on the back of Wednesday’s CPI heading into today, with some consumer sentiment data and Fed speakers on the radar today.”

Sam Cornford – Head of Trading

Main Headlines

The chair of the Senate Banking Committee urged President Joe Biden on Thursday to restrict Chinese-made vehicles from entering the US auto market, signalling heightened scrutiny of China’s automakers. This represents the strongest push yet from a US lawmaker for action against Chinese vehicle imports. Earlier reports suggested that President Biden is contemplating tariff increases on Chinese EVs, and this letter adds to mounting pressure on the White House to address the issue.

Last month, Britain’s housing market witnessed increasing buyer interest, reaching its strongest levels in over two years, according to a survey by the Royal Institution of Chartered Surveyors. The survey also indicated that house prices hit their highest point since 2022, reflecting a growing momentum in the market’s recovery. These findings align with recent indications of stabilisation in the housing sector, attributed to easing inflation and declining mortgage costs following a period of lower demand in 2022 and early 2023.

GBP

The UK posted some modest, but positive, 0.1% growth in February that should keep it clear of a quarterly contraction and lead it to a swift exit from the technical recession. This has only stemmed further declines against the dollar however, as a bulldozing greenback continues its gains this week with lagging Fed cuts set to keep yields high. With manufacturing leading the way with a 1.2% expansion, the worst of the rates-induced economic weakness is likely behind us now, although the growth outlook remains rather subdued through the next couple of years as the impacts of rate hikes continue to weigh on activity. At this point, the economy is ticking along just strongly enough for the Bank of England to focus squarely on the inflation outlook – i.e. weak activity is unlikely to be a factor that brings forward rate cuts. This outlook will become clearer next week, with wage growth and CPI figures set to provide further clarity on bank’s likely trajectory.

EUR

The euro has slumped to a five-month low on the cumulative impacts of high US inflation and a strongly dovish ECB. While yesterday’s meeting surprised nobody, a particularly explicit reference to a June cut was a notable development for the euro, with the policy statement announcing that, long as the data continues to improve between now and June, a cut is on the way. This fundamentally puts the May wage data as the final hurdle, where a modest deceleration should be enough to give policymakers to confidence to pull the trigger. That said, there were no commitments to the rate path after the first cut, and a rapid easing cycle is less likely than a cautious fine-tuning of policy over time. Lagarde is keen to emphasise that she is ‘data-dependent, not Fed dependent’, but any euro weakness triggered by divergence to the Fed is likely to keep a check on the extent on the cuts, particularly if these cuts are going to be counterproductive in terms of a deflating euro fanning imported inflation. In Sweden, the Riksbank’s Deputy Governor has already said that a weaker crown is the biggest threat to near-term cuts. We don’t get any data today, but we do hear from de Cos and de Guindos at the ECB.

USD

The dollar is trading very happily near a five-month high today as it extends its rally despite weaker producer price inflation yesterday. PPI fell to 0.2% m/m versus expectations for a 0.3% print, which stalled the greenback’s bull run yesterday, but it is back on track this morning with some 0.4% in extra gains. As a reminder, the blowout 3.5% CPI figure from Wednesday sent Treasury yields soaring and finally ignited divergence in the market’s expectations for rate cuts versus the ECB, putting the Fed on track for a September first cut and less than two this year, according to the rates markets. The Fed’s Williams and Barkin seemed a bit more optimistic about the number yesterday, with both looking for a continued downtrend towards 2% and further cooling in activity. We’ll hear from Bostic and Daly today, who will speak this evening after the University of Michigan consumer sentiment surveys.

Markets

Wall St staged a recovery yesterday as a lower PPI inflation figure eased concerns about a resurgence in inflation, ahead of some key bank earnings releases today, including JP Morgan, Wells Fargo, and Citigroup. Gold notched yet another fresh all-time high this morning, boosted by central bank buying, while crude continues to trade north of the $90 mark.

Main Economic Events (All Times CET)

8:00am: UK GDP m/m
4:00pm: US Prelim UoM Consumer Sentiment
8:30pm: Fed’s Bostic speaks
9:30pm: Fed’s Daly speaks

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