August 07, 2024

“The post-non-farms volatility continues to play out this morning, and we’re seeing some big sentiment-based swings in the yen, franc, and the Nordics now that markets have calmed their US recession fears.”

Tim Hallinan – Trading Director

Main Headlines

US Vice President Kamala Harris has picked Minnesota governor Tim Walz to be her running mate for the November presidential election, with whom she campaigned together for the first time in Philadelphia yesterday. 60-year-old Walz is an ex-teacher and former member of the US Army National Guard who was elected as governor in 2018. Political betting site PredictIt now slightly favours Harris as the likely winner of the election.

The British government has said that it will repeal legislation introduced by the Conservatives aimed at allowing employers in key public services to enforce minimum service levels during strikes. The new Labour administration has said that the measures had only made tensions worse by reducing workers’ rights.

GBP

The pound has seemingly disconnected from its short-term rate differentials over the past week and continues to head lower in the wake of last week’s rate cut, despite yield spreads moving in a sterling-positive direction. A more aggressively dovish path has been priced in for the Bank of England, but it is a move that has occurred at an even quicker pace for its peers. The dollar’s two-year yield advantage compressed to a five-month low after Friday’s soft payrolls report, and yet GBP/USD hit a one-month low yesterday, while the pound hovers above a three-month low against the euro. This may have something to do with an unwind in stretched long positioning, with speculators putting on their highest volume of bullish bets on record in July. In terms of data, the construction PMI rose sharply in July from 52.2 to 55.3, and Halifax data has shown an increase in UK property prices by 0.8% in July, concluding two consecutive months of decline.

EUR

Euro volatility has begun to cool off and it has settled firmly below the 1.10 mark. The rapid compression of the dollar’s US yield advantage appears to be sticking, but the single currency is yet to fully connect with the levels it previously achieved when the rate differential was this tight – it cleared 1.12 in July 2023 when the two-year Bund-Treasury spread was last as small as on Monday. That should be a tailwind for now, although it’s subdued risk appetite that appears to be shackling the euro at around 1.09. Retail sales yesterday disappointed forecasts for a marginal expansion with a -0.3% contraction, while German industrial production has added to the brighter data this week, having risen 1.4% in June.

USD

The rebound in the equities markets have given the dollar room to recover against the low-yielding yen and franc. BoJ Deputy Governor Uchida can take some of the credit this morning, having told markets that policymakers are unlikely to hike further while the markets remain volatile given the fact that there is less urgency to fine-tune policy in comparison to the US and Europe. USD/JPY is up 3.5% from the seven-month lows touched on Monday. The overly panicked recession fears induced by last Friday’s soft payrolls report have faded significantly, although the move lower in US rates has largely stuck and the Federal Reserve is still expected to cut by four or five 25bps increments before the end of the year. The Atlanta Fed’s GDPNow forecast for Q3 was upped to 2.9% yesterday, and it’s hard to argue that there are any real macro signs of an imminent recession beyond that single jobs figure, which we know is often subject to heavy revisions and has likely been warped by Hurricane Beryl. The improvement in risk appetite has led to strong recoveries in the Nordics and the Aussie dollar this morning. Data is light today but clearly there is plenty keeping markets busy ahead of tomorrow’s jobless claims print, which is taking on more meaning these days given the heavy focus on the labour market.

Markets

Risk assets rebounded broadly yesterday after Monday’s mania, with the S&P 500 and the Nasdaq both up 1% in the session and futures for the Stoxx 50 and FTSE 100 signalling similar gains at the European open today. Japanese stocks have all but erased the 13% dip at the beginning of the week, helped this morning by BoJ Deputy Governor’s comments. Oil has lifted from multi-month lows too as equities have stabilised, with markets shifting their focus back to supply risks in the Middle East.

Main Economic Events (All Times CET)

8:00am: German Industrial Production
9:00am: Swiss FX Reserves
4:00pm: Canadian Ivey PMI
7:30pm: Bank of Canada Summary of Deliberations

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