August 14, 2024

“Yesterday’s weaker PPI figures boosted markets at the expense of the dollar as investors continue to be optimistic about heavy Fed rate cuts this year. The UK inflation data has shown some promising signs too this morning, and US CPI this afternoon is the week’s highlight.”

Sam Cornford – Head of Trading

Main Headlines

The Reserve Bank of New Zealand has sent the Kiwi dollar tumbling by 1% this morning after a surprise rate cut and signalling for more this year, only three months after flagging the possibility of further hikes. Policymakers are now confident that Q3 inflation will fall within the 1-3% target band and see it as safe to cut. Governor Orr said that ‘when the facts change, so do we’.

More than 1,000 rioters have now been arrested in the UK following the violence of the last few weeks. In Prime Minister Starmer’s first big test since taking office, courts have sought to make an example of those caught, with some receiving lengthy sentences in a bid to deter others from participating.

GBP

A softer inflation print has erased some of sterling’s 0.8% surge against the dollar yesterday. The jobs report was sending a lot of mixed signals, but CPI this morning was a much clearer dovish signal with a surprisingly large drop in services inflation in July. While the headline CPI figure rose to 2.2%, that was less than the 2.3% expected, and the jump had been well-signposted by both economists and the BoE for some time. It’s down to the energy price cap falling by less than it did last year. The deflationary effects of the energy component were always bound to fade, and that’s why the BoE has preferred services inflation as its primary yardstick for longer-term domestic price-setting. Fortunately, this fell from 5.7% to 5.2%, in large part driven by a normalisation in volatile restaurant and hotel prices following a spike in June. Given falling wage growth and cooling services, the case is building for further rate cuts, particularly if policymakers choose to blame the drop in unemployment on faulty data, and markets are pricing in around two further rate cuts this year.

EUR

Soft US inflation data yesterday has lifted EUR/USD to within a whisper of a seven-month high, having pushed through the 1.10 marker this morning. There is a real lack of catalysts coming from the eurozone, and the euro’s strength is primarily a result of falling US rates rather than any significant improvement in the domestic economy. In fact, yesterday’s ZEW survey was particularly poor, with eurozone sentiment falling by around three times more than expected from 43.7 to 17.9 owing to the familiar culprits of monetary policy uncertainty, conflict in the Middle East, and last week’s spike in volatility. The poor economic outlook has made 1.10 a relatively solid ceiling over the past few weeks, but there appears to have been a tentative breakthrough this morning.  Today’s second estimate of Q2 GDP is unlikely to change much and is expected again at 0.3% quarter-on-quarter.

USD

The dollar has dipped 0.6% on the back of a soft PPI print yesterday, and this week’s main event comes in the form of CPI this afternoon. Both the headline and core PPI measures landed below expectations, with the latter falling to 0.0% month-on-month. There are two reasons why investors care about PPI: the first is that it’s a good predictor of consumer prices down the line, and the second is that some of the PCE inflation components are fed straight from PPI. The signs are looking good for another soft core PCE print so far, and this bolsters the notion that the inflation data is no longer an obstacle for rate cuts. It all comes down to this afternoon’s CPI print, however, and the consensus is looking for 0.2% month-on-month and 3.0% year-on-year, which does not necessarily show any further progress but will be plenty to keep markets optimistic about a September rate cut. In fact, it is the size of the rate cut – whether 25 or 50bps – that is most in focus, and a surprise drop could dent the dollar further.

Markets

Markets were in a jubilant mood yesterday as a soft US PPI report reinforced the Fed’s ability to begin cutting rates next month. Last week’s meltdown feels like a lifetime ago already and recession fears appear to have faded rapidly, with both the S&P 500 and the Nasdaq now above pre-payrolls levels after jumping 1.7% and 2.4% respectively yesterday. The FTSE 100 rose around 0.5%.

Main Economic Events (All Times CET)

4:00am: Reserve Bank of New Zealand Policy Decision
8:00am: UK CPI
11:00am: Eurozone Q2 GDP Second Estimate
2:30pm: US CPI

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