April 24, 2024

“Diverging PMI results yesterday sparked concerns about rising inflationary pressures in the UK and eurozone while a weakening in activity in the US pulled the dollar away from its year-to-date peaks. The next few days are set to be busy, with US GDP and core PCE the big topics in FX.”

Sam Cornford – Head of Trading

Main Headlines

Australian CPI inflation fell less than expected from 4.1% to 3.6% year-on-year in Q1, prompting markets to abandon bets for rate cuts this year. Stubborn services inflation kept the figure buoyed, leaving total easing priced in at 0.03% this year.

On Wednesday, Lloyds Banking Group announced a 28% decline in first-quarter pretax profit, as expected. Escalating costs, including a new industry-wide levy on lenders, drove the UK’s largest mortgage lender’s pretax profit down to £1.6bn from £2.3bn.

GBP

Hawkish commentary and an accelerated growth in the services sector in April lifted sterling by 0.8% in total through yesterday’s session. The UK economic rebound is pushing into Q2, putting the 2023 technical recession firmly into the rearview mirror for the time being. While the manufacturing index slipped back below 50.0, services activity surged higher to the best reading for 11 months at 54.9. Meanwhile, speakers from the Bank of England have become increasingly divided in their inflation outlooks. Remember that Governor Bailey had contended that rate cuts are ‘in play’ and his Deputy Ramsden argued on Friday that inflation could fall to 2% and stay there this quarter – Pill and Haskel proved to be far more cautious about cutting rates yesterday, placing themselves in the hawkish camp as both warned of the risks that a tight labour market embeds a more persistent bout of inflation. It’s a quiet day for the UK data today, but we can look to some sales and consumer confidence data in the second half of the week.

EUR

In a similar story, improved services output in the eurozone made up for a manufacturing sector sat in the doldrums, boosting the composite PMI indicator further into expansionary territory at 51.4. The report pointed to lower inflation and growing wages as bolstering purchasing power in the bloc, something which bodes well for GDP growth but may unnerve some at the ECB, although the markets have little altered their pricing for the path of rate cuts on the back of the report. The German ifo business climate survey is the highlight today, where estimates have pencilled in the brightest investor sentiment since May last year.

USD

While the US exceptionalism story remains intact for now, a more disappointing survey in the US trimmed some of the dollar’s strength yesterday afternoon. Both the manufacturing and the services indexes failed to meet expectations as both crept closer towards stagnation levels at 49.9 and 50.9 respectively. The report blamed weak demand and contracting employment – if you exclude the pandemic, services employment fell at the quickest pace since the financial crisis. This suggests that the labour market could soon loosen at an accelerated rate and weaken the pace of inflation, which could bring forward US rate cuts. The market did not run to price more easing in, but a repeat of these signals in the hard quits and payrolls labour data next week would dent the dollar further. Today, we get some durable goods orders data this afternoon, but the focus is really on the pace of economic growth in Q1 tomorrow and the Fed-favoured core PCE inflation gauge on Friday.

Markets

Stocks surged yesterday, buoyed by high hopes for US megacap tech earnings due for release this week. Tesla surged 13% as management promised new, cheaper models to compete with Chinese competition, despite the first contraction in revenue since the height of the pandemic. Meanwhile, the FTSE 100 caught up with its peers to finish 1.1% higher and near an all-time peak reached earlier in the historic session.

Main Economic Events (All Times CET)

3:30am: Australian CPI Inflation y/y
10:00am: German ifo Business Climate
2:30pm: Canadian Retail Sales
2:30pm: US Durable Goods Orders

To learn more about Ballinger Group, please visit our website or our LinkedIn page.