August 15, 2024

“Yesterday’s US CPI print lent some extra support to the market’s conviction on a Federal Reserve rate cut in September, and that has helped lift the euro to eight-month highs. UK GDP has provided sterling with a boost this morning, and the focus now shifts to US retail sales this afternoon.”

Tim Hallinan – Trading Director

Main Headlines

Chinese factory activity cooled for the third consecutive month in July, denting hopes for a recovery in the world’s second-largest economy. Many market participants have renewed their calls for further policy support measures from China’s ruling party.

ONS data yesterday showed that British house prices rose by 2.7% in the 12 months up to June after posting the same figure in May, in the joint-highest jump since March 2023. The average house price now stands at £288k.

GBP

UK GDP growth was solid in the second quarter, expanding by 0.6% as expected by the market consensus. It did not quite meet the Bank of England’s 0.7% estimate but was strong enough to keep concerns elevated about inflationary pressures coming from a booming services sector. Month-on-month growth in July was stagnant at 0.0%, although the positive signals in the PMIs – and potentially in tomorrow’s retail sales release – are pointing to some strong momentum into the third quarter, although with a slight cooling. This positive sentiment has driven sterling around 0.3% higher this morning

EUR

EUR/USD has tentatively found its place trading above 1.10 for the first time since the beginning of the year, as soft US inflation data has boosted optimism around Fed rate cuts starting next month. There was a sense that markets did not feel like the euro deserved to be back at these levels, given the weak demand environment and softening growth prospects over the past few months, despite the rate differential encouraging a rally. The recovery in risk appetite this week appears to have done the job, however, and holding here requires the aggressive Fed rate cut bets to hold true.

USD

US CPI yesterday gave the Fed a blinding green light to proceed with rate cuts in the September meeting, and that has weighed on the dollar overnight. Headline inflation fell from 3.0% to 2.9% and the core measure dropped from 3.3% to 3.2%. That’s still a significant amount above the medium-term 2% target, but when you dig into the details it becomes clear that the Fed has all but done its job in terms of squeezing excess inflationary pressure out of the domestic economy. The two components driving almost all of the month-on-month increase were lagging indicators: shelter and auto insurance. The first uses an often dubious and opaque estimate called Owner’s Equivalent Rent, and the leading indicators for rents have fallen much lower. The second is a direct result of previous price increases for vehicles and repairs that have led insurance companies to seek to recuperate these costs. Overall, inflation is no longer a clear obstacle for rate cuts, and that means that the Fed can more safely shift to concerns around the labour market. Markets have trimmed the probability for a 50bps cut in September to 35%, but there is near unanimity in markets that policymakers will cut at least two or three times this year. Today, retail sales are on the radar and are expected to have expanded by 0.4% in July.

Markets

World stocks continue to climb higher from last week’s post-payrolls dip, having risen 2% this week as softer US inflation data has aided a recovery in risk appetite.

Main Economic Events (All Times CET)

3:30am: Australian Employment Change
4:00am: Chinese Retail Sales & Industrial Production
8:00am: UK GDP q/q

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