April 25, 2024

“The US data is the main focus for markets over the next couple days, with some big GDP and core PCE inflation releases coming up. Sterling and the euro have benefitted from improving growth pictures this week and have trimmed some of the dollar’s gains – let’s see if they can hold on today or if the strong dollar dominates again.”

Tim Hallinan – Trading Director

Main Headlines

Forecasts for lower revenue and ballooning AI expenses knocked nearly $200bn off the market capitalisation of Meta yesterday, knocking positive sentiment about the earnings potential of AI. Its shares fell around 15% in afterhours trading.

UK car production slipped by almost 30% in the year up to March, according to the Society of Motor Manufacturers and Traders, who said that manufacturers moved over to EV production and phased out current models. The trend is expected to continue this year, with production projected to fall another 6%.

GBP

A risk-on mood boost and hawkish pushback within the ranks of the Bank of England have lifted sterling some 1.6% off its five-month low notched on Monday. The trough from earlier in the week gave a taste of how a sell-off in the pound would look if the more dovish possible scenarios unfolded. One thing is clear, though, and that is that nobody knows when the bank is going to start cutting rates, not least the bank itself. There are two competing narratives coming out of the BoE right now: (i) inflation is soon set to come down briskly and put cuts on the table over the next quarter, and (ii) strong risks remain that above-target inflation remains a more persistent component of the UK economy, which would prescribe delaying cuts until the underlying pressures are fully quashed. Whichever materialises will be key for sterling’s trajectory this year, but policymakers are struggling to form a consensus. The US data will guide sterling today, as a quiet calendar leaves only CBI realised sales for markets to chew on this morning.

EUR

With the eurozone growth outlook improving and geopolitical jitters ebbing, the euro has recovered around 40% of the selloff following the US CPI print that confirmed a divergence between the ECB and the Fed. Some more positive data arrived yesterday to boost overall sentiment around the euro, as German ifo business optimism surged to the highest level since May 2023. We get the ECB economic bulletin this morning and a speech from Nagel later, but neither are likely to be market movers – the US data is in focus today.

USD

The next two days’ data will be significant for the dollar. The first estimate for Q1 GDP this afternoon is set to land well above the Fed’s estimate of the long run potential, and this should keep the US economic exceptionalism story as the main narrative underpinning the strong dollar. The market is looking for a 2.5% figure. That said, the pace is clearly decelerating from the blowout 4.9% and 3.3% readings from Q3 and Q4 last year, and the leading indicators are signalling a further slowdown in Q2. Some will point to rising credit card delinquencies, poor employment surveys, and the erosion of pandemic-era savings as the first cracks appearing ahead of a considerable weakening, but markets have been burned several times before when piling in on bets for a softening that never arrived. None of these cracks are yet to show up in the hard data, and durable goods orders – an indicator for capex – was certainly positive yesterday, having grown 2.6% in March.

USD/JPY pushed through the 155 barrier yesterday, a line which markets had widely associated with greater risks of intervention from Tokyo. There were no signs of any action, however, and the lack of response has given traders the confidence to push on towards the 156 mark. The Bank of Japan meeting tomorrow will be closely watched by yen traders, with Governor Ueda likely to do what he can to shore up the currency.

Markets

Equities wobbled late on yesterday in an overall mixed session as concerns about soaring AI costs spooked investors. Meta’s surging expenses and lower revenue forecasts trimmed hundreds of billions off its market cap yesterday. In the US government bond markets, meanwhile, a record $70bn five-year note auction pushed yields higher as the US debt continues to balloon.

Main Economic Events (All Times CET)

8:00am: German GfK Consumer Climate
12:00pm: UK CBI Realised Sales
2:30pm: USD Advance Q1 GDP & Unemployment Claims
4:00pm: US Pending Home Sales

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