August 12, 2024

“This week, a raft of top-tier data should give investors plenty to keep markets moving after FX volatility hit the highest since May 2023 last week. CPI in the US and UK, and British GDP are the key events.”

Sam Cornford – Head of Trading

Main Headlines

Republican vice-presidential candidate JD Vance yesterday agreed with Donald Trump’s call for the White House to have more influence in the Federal Reserve’s decision making, raising the alarm again about the future of the central bank’s independence under a possible Trump presidency. “We should have America’s elected leaders having input about the most important decisions that confront our country,” Vance said.

A CIPD survey showed this morning that British employers are planning the smallest pay increases in two years at 3%, down from 4% in the previous survey three months ago. Another Bank of England survey put the figure at 4.1%, which is also the lowest in over two years.

GBP

Sterling notched its fourth consecutive week of contraction last week in its worst run since September last year. It has been a hard landing from the stretched mid-July peaks above 1.30. The calendar is packed this week in the UK, beginning tomorrow with wage growth and unemployment, and followed up by CPI on Wednesday, GDP on Thursday, and retail sales on Friday. Wage growth garners a lot of attention nowadays and the BoE’s Catherine Mann, who voted to keep rates on hold two weeks ago, was keen to warn in an FT podcast against being ‘seduced’ into thinking that the inflation battle had been won, given that high pay rises could take years to fade. Tomorrow’s figure is expected to cool sharply from 5.7% to 4.6%, however. With the first rate cut done and traders looking to gauge the likely pace of the next ones, markets are likely to gloss over the widely forecasted pickup in the headline CPI figure on Wednesday, and it’s progress on the services component that will be needed to vindicate further cut bets.

EUR

EUR/USD looks set to be glued to its current tight range until the data starts rolling in tomorrow. The euro never did take full advantage of the rate differentials that narrowed in its favour last week, even as the equity markets and the likes of the yen normalised. That could be down to the market’s focus on some of the euro’s weaker fundamentals, with this Wednesday’s Q2 GDP growth revision expected at a modest 0.3%, and tomorrow’s ZEW sentiment to cool considerably. No data today, but plenty to move the market globally throughout the week.

USD

Amid the third largest stock volatility spike on record and a rapid dovish repricing of the Fed’s rate trajectory, all told, the dollar index ended last week where it started. The greenback’s recovery in the second part of the week appeared to bolster the narrative that the soft July payrolls report had triggered a snowballing market event – the unwind of carry trade positioning – and not necessarily a significantly material change to the US economy’s fundamentals that would have otherwise justified these moves. That said, markets still price in around a 50% chance that the Fed delivers a jumbo 50bps rate cut in September – the resultant narrowing in the US yield spread has likely been offset by safe haven flows amid the recent volatility. Wednesday’s CPI print is the biggest event across markets, and the consensus is looking for a repeat 3.0% year-over-year figure on the headline and 3.2% for core CPI, which would be the lowest in over three years. That would be enough to keep the September rate cut as the market’s base case but, if the overreaction to last week’s jobless claims is anything to go by, there could be some large swings if we get a surprise.

Markets

Stock volatility has cooled off significantly, and equities appear to have stabilised at about the levels they were trading at before last Monday’s selloff. Japanese markets are closed today, and the Nikkei only ended the week 2.5% down despite a 12% collapse at the beginning.

Main Economic Events (All Times CET)

5:00pm: US Inflation Expectations

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