August 01, 2024

“The Federal Reserve gave some calculated rhetoric yesterday that kept its options open but signalled heavily that a first rate cut is coming next month. It’s all about the Bank of England and sterling today, where a knife-edge decision has widened the scope for a sharp turn in the pound.”

Tim Hallinan – Trading Director

Main Headlines

The US election is hotting up ahead of the vote in three months’ time, with a poll yesterday showing that Kamala Harris has overtaken Donald Trump across the swing states that her rival was previously looking likely to clear up. Harris has had a few further boosts this week, securing backing from the United Auto Workers union and a group of more than 100 venture capitalists that hope to balance Trump’s growing support from tech billionaires.

Facebook parent Meta surged 7% in yesterday’s trading after it beat analyst forecasts for Q2 revenue and signalled that strong spending on ads would continue to cover the costs of its AI investment. While concerns are growing about when heavy capital spending on AI development at other tech companies will bear fruit, Meta’s operating margins are improving, reaching 38% in Q2.

GBP

Today’s Bank of England decision has markets nervous this morning, and sterling has dropped sharply in the early trade to a three-week low alongside some volatility in gilt yields. The policy decision is by far the most consequential event for sterling in a long time, simply because markets do not know whether it will be the first cut of the cycle or another hold. A pre-election blackout period significantly reduced how much opportunity members of the MPC had to speak and, of the speeches that did come, only one came from a member in the core of the committee whose uncertain votes could swing the outcome. Market pricing has leaned towards a cut over the past week and the lack of domestic catalysts means that it has likely been a result of a more global dovish repricing ahead of a likely Fed cut in September. Economist surveys are pointing towards the same outcome, but it is still close enough to a coin flip that there is scope for the pound to move in either direction.

EUR

The euro struggled to gain traction yesterday, despite falling dollar yields and some hotter-than-expected inflation data, as traders held firm on their conviction that the ECB will cut twice more this year in September and December. The July CPI estimate landed at 2.6%, beating forecasts for a steady 2.5% print, while the core measure unexpectedly held at 2.9%. It wasn’t enough of a hawkish surprise to derail heavy pricing on follow-up rate cut next month, however, and while it should add a touch of caution for policymakers, it’s within the scope of volatility that is unlikely to dent the ECB’s confident in the longer-term outlook. A material reacceleration would ring alarm bells, but for now markets are not spooked. The data calendar today is light beyond a string of final revisions to the June manufacturing PMIs, which were deeply disappointing at the first estimate.

USD

The Federal Reserve set the stage for a September rate cut at last night’s meeting. Rates were kept on hold, as everyone expected, and while the statement retained a sense of caution that has kept their options open, Powell confirmed that a September rate cut is very much on the table if the data continues to cooperate, saying that ‘there is a growing sense of confidence that you could move at the next meeting’. The optimistic view on growth, plus signals for incoming rate cuts, gave markets an excuse to add on some more risk and the dollar fell immediately after the decision, but it has already recovered its Fed-induced losses overnight. Today, we get a fresh jobless claims figure, for which the consensus is a steady 236K that will reinforce the upward trend in claims, followed by the ISM manufacturing PMI for July. Tomorrow’s non-farm payrolls report is the next key event for the dollar, and the forecast here is for 176K.

Markets

The Fed gave exactly what was needed to catapult stocks yesterday, both reaffirming its belief that growth is ticking along robustly and hinting towards rate cuts at the next meeting. The S&P 500 rose 1.6% and the Nasdaq by 2.6%, in their best one-day gains since late Feb. The move was once again fuelled by tech gains, with Nvidia gaining $350bn in market cap in a 13% rally, following Tuesday’s 7% slump. Oil enjoyed its best day of the year as it jumped 5%.

Main Economic Events (All Times CET)

10:00am: Eurozone Final Manufacturing PMI
10:30am: UK Final Manufacturing PMI
11:00am: Eurozone Unemployment Rate
1:00pm: Bank of England Rate Decision
2:30pm: US Unemployment Claims
4:00pm: US ISM Manufacturing PMI
6:15pm: BoE’s Pill speaks

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