April 23, 2024

“The PMIs in the UK, US, and eurozone will dominate market movements today, with the latter already posting some positive activity this month that has lifted the euro. Volatility concerns are ramping up in Asia, where authorities in Tokyo and Seoul continue to throw out strong warnings that intervention could arrive imminently.”

Tim Hallinan – Trading Director

Main Headlines

TikTok reiterated concerns about free speech following legislation passed in the US House of Representatives that would ban the video app in the US if Chinese owner ByteDance does not divest its stake within a year. Lawmakers now await a Senate vote in the coming days for the legislation to be signed into law.

The British government posted a budget deficit in the financial year ending in March that was £6.6bn higher than economist estimates. The ONS said that British public sector net borrowing was £11.9bn in the month of March.

GBP

Sterling weakness followed through into yesterday’s session as traders tacked on further bets for a rate cut in June. The pound has broken decisively lower this month, having fallen more than 4% against the dollar from its mid-March peak, when the Bank of England was most likely thought to lag the ECB and the Federal Reserve in cutting its policy rate. Increased confidence from within the MPC for an imminent downturn in inflation and easing concerns that underlying pressures will linger have ramped the market-implied probability for a cut at the end of this quarter to near 50/50, while August remains the favoured bet. The PMIs this morning should remain in expansionary territory in both the services and manufacturing sectors and confirm that the UK’s economic rebound has endured into the second quarter after a bleak second half of 2023. That said, the impact on the rates outlook should be limited without a significant surprise, but we also get speeches by Haskel and Pill at the BoE.

EUR

A mixed bag of PMI data so far for the eurozone has propelled the common currency this morning. While manufacturing activity remains in the doldrums in both France and Germany with both undershooting estimates, the services indexes have both blown away expectations. German services are now well above the expansionary mark at 53.3, while the French equivalent has tipped over into growth territory for the first time since May last year at 50.5. Two-year German yields have gained a couple of basis points, but the ECB is still on for the June cut – Vice President de Guindos implied in an interview yesterday that it is a done deal barring any big surprises, although he stressed caution about following up with further cuts. The consolidated eurozone figure comes this morning.

USD

An improving eurozone economic outlook has trimmed some of the dollar’s gains this morning as investors gear up for the GDP and core PCE releases on Thursday and Friday. With Fed officials unable to speak ahead of next week’s meeting, it’s all about the data this week – this kicks off with the PMIs this afternoon which should inch higher and again reconfirm the US economic exceptionalism story. According to the FT yesterday, the options markets are now hinting towards a 20% chance of US rate hikes this year – this is a far-fetched bet for now, but if further strong data adds to growing expectations and push the ten-year Treasury yield back up to 5.00%, we could see a runaway dollar later in the year. A lot of the focus in FX has been the dollar’s rampage in Asia, with Korean and Japanese officials giving stronger and stronger warnings that intervention could come at any time to shore up their currencies, after last week’s trilateral statement with the US gave them tacit approval from the world’s largest economy. In China, too, the yuan fell to a five-month low against the dollar yesterday as Chinese authorities lowered the fixing.

Markets

Easing geopolitical concerns unwound some of the safe-haven flows that had propped up gold and oil at the expense of equities – world stocks jumped 0.8% yesterday while gold has slipped 3.5% so far this week. The FTSE 100 was the biggest beneficiary of the relief rally, hitting an all-time high as a weaker pound prompted foreign investors to snap up some cheaper stocks. In the US, the tech megacaps rose broadly ahead of some key earnings releases for Meta, Alphabet, and Microsoft this week.

Main Economic Events (All Times CET)

8:00am: UK Public Sector Net Borrowing
10:00am: Eurozone Flash PMIs
10:30am: UK Flash PMIs
3:45pm: US Flash PMIs
4:00pm: US New Home Sales

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