August 27, 2024

“Powell’s Jackson Hole speech opened the floodgates for market bets on Federal Reserve rate cuts, sending sterling to its highest level since early 2022. The data focus this week is on inflation, both in the eurozone and the US.”

Sam Cornford – Head of Trading

Main Headlines

A final German GDP report this morning confirmed that Europe’s largest economy shrank by 0.1% in Q2 after growing by 0.1% in the first quarter. Some brighter looking data had many hoping for an economic rebound in the first half of the year, but both the hard data and confidence survey figures have turned in the wrong direction over the summer.

UK shop prices deflated for the first time in nearly three years this month, according to data released by the British Retail Consortium this morning. Prices fell by 0.3% in the year leading up to August, ostensibly driven largely by wet weather that discouraged retail purchases and led shops to discount summer stock.

GBP

Sterling emerged as one of the biggest winners from the speeches at Jackson Hole last week, hitting its highest level against the dollar since March 2022. Fed Chair Powell’s speech triggered a surge in bets for Federal Reserve rate cuts, while at the same time BoE Governor Bailey held firm on his cautious stance, arguing that the rate cut path will be ‘a steady one’ and repeating again that rates must ‘remain restrictive for sufficiently long’. This stark contrast is what is underpinning the pound’s strength – the Bank of England is expected to cut at a significantly slower rate than the Fed into next year, with only slightly more than half the number of cuts now priced in by July 2025. The UK data this week is mostly low tier, so the focus is on the inflation data in the US and eurozone.

EUR

Dampened risk sentiment has taken some of the steam out of the euro’s momentum since the weekend, after it marginally missed hitting the 1.12 for the first time since July 2023. Confirmation of Germany’s economic contraction in the second quarter this morning comes after last Thursday’s disappointing PMI activity indicators, which are once again becoming a drag for the euro after some optimistic growth signs earlier on in the year. The dovish US outlook continues to do the heavy lifting for EUR/USD. This week is all about the inflation data, from Germany and Spain on Thursday and then for the whole bloc on Friday. That weak activity data and the consensus for a 2.2% print on Friday have a rate cut priced at 98% for September, with one or two further cuts expected by the close of the year. Rhetoric from Vujcic and Kazaks at the ECB last week was broadly supportive of that view, although known hawks Nagel and Knot may have some counterarguments when they speak today.

USD

Middle East geopolitical concerns saw the dollar catch a modest safe-haven boost yesterday, lifting it from the 13-month lows triggered by Powell’s Jackson Hole speech on Friday. The intensely dovish speech was a watershed moment for US rates, as he all but called victory on inflation and cemented a shift in focus from bringing inflation down to saving the labour market from excessive damage. Importantly, there was some huge endorsement of the soft-landing narrative for the US economy: ‘there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labour market’. It was the perfect cocktail for a rally in riskier currencies, given both a dovish repricing of the US rates curve and boosted confidence that the global economy would come out of the other side mostly unscathed. A 9.9% rise in durable goods orders yesterday undoubtedly reinforced these hopes, although this measure is widely known to be volatile. The August non-farm payrolls report next week is the critical piece of data ahead of the September rate decision, after the soft 114K print spurred bets on a supersize 50bps cut, but for now it’s consumer confidence this afternoon and the Fed-favoured inflation gauge on Friday: core PCE.

Markets

A Middle East risk off move took global equities slightly lower yesterday, but only after reaching fresh record highs on the back of Powell’s rate cut greenlight last Friday. Nvidia earnings tomorrow is the biggest event for stocks and risk assets in general this week, where the bar is high for another growth surprise. Oil prices surged 2.9% yesterday amid supply concerns given geopolitical tensions between Israel and Lebanon.

Main Economic Events (All Times CET)

1:01am: UK BRC Shop Price Index
12:00pm: UK CBI Realised Sales
4:00pm: US CB Consumer Confidence

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