Morning Report
August 16, 2024
“A buoyant US retail sales report has alleviated the market’s worst fears about a potential downturn in the US economy, and a 25bps cut at the September FOMC meeting is now the consensus. However, it is sterling that is the star performer over the past few days, with sentiment becoming increasingly positive around the UK economy.”
Sam Cornford – Head of Trading
Main Headlines
In the world of US politics, JD Vance and Tim Walz have agreed to a vice presidential debate on the 1st October, while the Harris campaign has proposed a second presidential debate in the same month with Donald Trump. Meanwhile, Trump has sought this week to delay the sentencing for his hush money case in New York until after the election, saying that there are ‘election interference objectives’.
A day after the World Health Organisation declared the mpox virus outbreak a global emergency, a first infection of the new strain was confirmed in Sweden yesterday. There have been more than 27,000 cases since the outbreak began at the beginning of last year.
GBP
Since the GDP print yesterday, sterling has seemingly regained some of the positive sentiment that previously thrust it to two-year highs in July. The pound is up around 0.3% against the dollar just this morning, and that is despite a 0.5% month-on-month retail sales print that was modestly weaker than expected. It follows a similar gain yesterday that came in the context of a 0.5% surge in the dollar index. Q2 growth matched the 0.6% forecast, but perhaps the 0.3% figure for the eurozone on Wednesday provided markets with a timely reminder that British economic expansion is running at twice the pace, and that the post-BoE-cut decline in sterling was overdone. There is no more data this week beyond the CB Leading Index, so it’s US sentiment in the driving seat today.
EUR
The euro’s venture above 1.10 turned out to be short-lived, as the aggressive US rate cut bets that had propelled it there were trimmed again yesterday after upbeat retail sales and jobless figures. The euro has had few domestic events to give it a nudge recently, and sentiment around growth on the continent has deteriorated somewhat over the past few months – you cannot credit the eurozone economy for the single currency’s eight-month high. Rather, it has all come through the USD leg. Trade balance data this morning isn’t likely to move the market, and traders will be setting their sights on next week’s PMIs.
USD
The market is steadily settling on a 25bp cut from the Fed in September, lifting the dollar over the past couple of days. The activity data since the soft July non-farm payrolls print has generally surprised to the upside, and that has prompted rates traders to walk back their bets on an aggressive, recession-style cutting trajectory that included a catch-up 50bp cut next month. Last week it was the ISM services print and a downtick in unemployment claims, and, although inflation has been soft this week, yesterday’s bumper retail sales and jobless figures have gone a long way in alleviating recession fears. The June figure was revised down to -0.2% but July sales growth jumped to 1.0%, and unemployment claims came lower again to 227K. Consumer sentiment data is the key event this afternoon, although markets are not expecting much change since July.
Markets
With another piece of US data soothing fears that a recession is on the way yesterday, stocks on Wall Street and in Europe tracked a surge in risk sentiment. That spilled over to the Asian session this morning, with Japan’s Nikkei on the cusp of its best week in over four years after gaining 8% from the low base from last week.
Main Economic Events (All Times CET)
8:00am: UK Retail Sales
2:30pm: US Building Permits & Housing Starts
4:00pm: US UoM Consumer Sentiment
7:25pm: Fed’s Goolsbee speaks
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