April 16, 2024

“The UK wage data gave markets few clear signals this morning – wages remain sticky, but unemployment appears to be rising. CPI inflation tomorrow will now be critical for how the pound trades this week, and until then we’ll be looking to Canadian CPI and some central bank governors speaking this evening.”

Sam Cornford – Head of Trading

Main Headlines

The Chinese economy beat expectations by a solid margin in Q1, growing at an annualised rate of 5.3% and – so far this year – surpassing the government’s 5% target. But the other indicators included in the report were less flattering and reinforced concerns that more policy stimulus would be required to boost the economy, with industrial production slipping from 7.0% to 4.5% and retail sales landing well below expectations at 3.1%.

UK venture capital investment suffered its worst quarter since the onset of the pandemic in Q1, according to a HSBC report. British start-ups raised only $3.9bn versus $4.8bn in Q4, more than half of which flowed from foreign investors, as investment dries up following a mid-pandemic boom.

GBP

A mixed bag of labour market numbers dragged the pound to a fresh five-month low this morning. Wages remain sticky, having grown at a steady 5.6% annualised pace in the three months up to February – this is a pace that is simply too hot for policymakers to be comfortable that the risks of more persistent inflation have subsided, handing a lot more support for Megan Greene’s ‘some way off’ argument about cuts compared to Bailey’s optimism about policy easing being ‘in play’. That said, the unemployment rate also ticked up sharply from 3.9% to 4.2% and this has offset any would-be sterling strength this morning. The sampling issues associated with the unemployment rate mean that it cannot be taken directly at face value, however, and overall, the muddied signals have done little to help fine tune expectations for the BoE this year. CPI inflation tomorrow morning should hopefully do a much better job of this, where the consensus is looking for a drop from 3.4% to 3.1% in the headline measure and an even sharper fall in core inflation from 4.5% to 4.1%. Before then, we’ll get Governor Bailey’s comments at the IMF Spring Meetings in Washington DC this evening – let’s see if he remains as optimistic as before.

EUR

The euro continues to edge lower as markets trade on the ECB’s likely divergence from the Fed this year. The eurozone calendar is relatively light and the single currency is trading on the wider themes this week, suffering further losses as risk appetite sours and rate cuts approach much more quickly than in the US. The ECB’s Simkus did little to help in this regard yesterday, contending that the ECB could cut more than three times this year – an outcome that could put parity into view rather quickly if the Fed’s easing cycle becomes more significantly delayed. Today, the ZEW survey this morning is expected to illustrate improving sentiment in the eurozone for the third straight month and the highest figure in two years, presumably lifted by rate cut hopes and a bottoming out in growth.

USD

The dollar continues to plough on to fresh five-month highs this morning, boosted this time by a dour market mood and a robust consumer. Retail sales strongly exceeded expectations with 0.7% month-on-month growth, while the February figure was revised up to 0.9%, spurring a brief test of the 5.00% level for 2-year US Treasury yields for the first time since late November. Momentum seems to be snowballing for the dollar, with the Fed’s Daly also arguing that there was ‘no urgency’ to begin cutting rates in the context of a still strong US economy and sticky inflation. The calendar is slightly quieter today, but we do get building permits and industrial production figures this afternoon, followed by a speech from Chair Powell this evening. USD/CAD is likely to be the most active pair today, with Canadian CPI possibly set to boost the case for the Bank of Canada to kickstart rate cuts in June.

Markets

Equities moved lower across the board yesterday as geopolitical tensions and US inflation continued to bite down on the risk mood in markets, while gold and oil were familiar winners alongside the safe-haven dollar. US earnings season continues today after Goldman Sachs beat profit estimates by 28% yesterday, with Johnson & Johnson, Morgan Stanley, and Bank of America among those releasing financials.

Main Economic Events (All Times CET)

4:00am: Chinese GDP
8:00am: UK Wage Growth & Unemployment
11:00am: Eurozone ZEW Economic Sentiment
2:30pm: Canadian CPI
3:15pm: US Industrial Production
7:00pm: BoE Governor Bailey speaks
7:15pm: BoC Governor Macklem speaks
7:15pm: Fed Chair Powell speaks

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