April 26, 2024

“Yesterday’s US GDP report gave some mixed signals, with growth momentum slowing significantly but inflation reaccelerating to well above target levels. The dollar ended the day lower overall despite an initial spike, but the core PCE figure this afternoon could reverse this if we get a higher-than-expected print.”

Sam Cornford – Head of Trading

Main Headlines

The Bank of Japan held rates at 0-0.1% this morning and told markets that it is becoming increasingly confident that a durable 2% inflation trend will persist over the next several years, in a step that could set it up to hike rates further later on in the year. The yen fell further, having breached a key psychological level yesterday that many had thought would induce yen-buying intervention from the Ministry of Finance, who have warned countless times that they could take action to save the weak currency.

Lender NatWest’s pretax profit slumped by 27% in the first quarter, according to earnings released this morning, as competition for savings and mortgages had eroded margins. Pretax profit fell from £1.8bn in Q1 last year to £1.3bn but beat analyst expectations for a £1.2bn figure, sending the shares to a 14-month high.

GBP

Sterling has had a relatively good week this week, despite initially extending losses from a particularly dovish speech from Ramsden last Friday. With cautious commentary from the BoE and activity surveys pointing to an upbeat growth outlook while the US data weakened, the pound has retraced over 1% of its losses. The USD and EUR legs of its key pairs are set to dominate over the next couple of weeks, though, with few big data points arriving before the Bank of England meeting in May. The picture is complete now for policymakers, some of whom might be tempted by rate cut votes. Today, the GfK consumer confidence survey printed slightly higher than expected this morning, but ultimately had little market impact – US inflation data is the event to watch today.

EUR

The euro has generally ridden a weakening dollar this week as well as Tuesday’s data that signalled a continued bottoming out in the bleak economic growth story. Today is quiet for the eurozone data diary – we get some consumer lending and money supply data this morning but neither are set to light the markets on fire, while the inflation expectations surveys could help to confirm the likelihood of a summer cut if they are heading in the right direction. Look for the impact of the US data this afternoon, and possibly some movements against the Swiss franc when SNB Chairman Jordan speaks.

USD

The dollar ended up slightly lower once the dust had settled on the US GDP report, despite initially jumping on a hot core PCE deflator. Of the two competing directional signals for the greenback yesterday, the leap in quarter-on-quarter core PCE inflation from 2.0% to 3.7% won out at first as markets trimmed rate cut bets to just over one this year, but the slump in quarterly GDP growth to from 3.4% to 1.6% ultimately eroded any benefit for the dollar. Some of the weaker signals we have seen in the on-the-ground surveys – shrinking services employment, slowing hiring plans for small businesses, and ebbing consumer confidence, for example – are perhaps starting to seep through into the hard data. The US economic exceptionalism narrative is still intact for markets, but the data this week has surely narrowed the gulf in the growth outlook compared to the eurozone. With growth declining and inflation rising, the word ‘stagflation’ has been whispered a couple of times, but it would be too soon to start calling for a repeat of the 1970s. Today’s month-on-month core PCE release could be a consensus beater this afternoon after yesterday’s high quarterly figure, and this could catch the dollar up with its rallying rates.

Markets

An initial dent to stocks from the weaker-than-expected GDP growth was reversed late on in the day, as promising earnings report from Microsoft and Alphabet lit a fire under the big US tech stocks. Equity futures are pointing to another rise at the open today.

Main Economic Events (All Times CET)

5:22am: Bank of Japan Rate Decision
10:00am: Swiss National Bank Chairman Jordan speaks
10:00am: Eurozone Private Loans y/y
2:30pm: US Core PCE Price Index
4:00pm: US Revised UoM Consumer Sentiment

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