August 29, 2024

“The big data events of the week kick off today, beginning with Spanish and German CPI prints and a US Q2 GDP report ahead of tomorrow’s eurozone CPI and US core PCE releases. The dollar has some steady momentum heading into these events.”

Tim Hallinan – Trading Director

Main Headlines

AI darling Nvidia fell as much as 8% in afterhours trading last night, even as Q2 revenues more than doubled from the previous year and beat expectations, highlighting just how much hype has been funnelled into the chipmaker this year. With investors accustomed to huge earnings and forecast beats, those with the most bullish bets were ultimately disappointed.

UK Prime Minister Keir Starmer and German Chancellor Olaf Scholz held a press conference in Berlin yesterday where Starme promised a ‘once-in-a-generation’ bilateral treaty by the end of the year that would help the UK to ‘reset’ its relations with the EU. It would mean ‘a closer relationship on a number of fronts, including the economy, including defence, including exchanges.’

GBP

Sterling’s 0.5% drop yesterday tracked a broad rise in the dollar and that has put it back to where it started at the beginning of the week, which has been mostly consolidative so far. The pound continues to benefit from some good momentum on the crosses, though, and sits near a one-month peak against the euro and just below its two-year highs that it notched towards the end of July. There has been no clear driver for this, but it could be a slow burn effect as traders have digested Governor Bailey’s Jackson Hole hawkishness and trimmed some euro exposure. Keir Starmer has been making a few headlines, not least with his gloomy speech that he used to set expectations for autumn tax rises. It is difficult to tell whether yesterday’s treaty announcement with Germany can get investors excited for a closer EU relationship just yet, but if successful this could be a tailwind on a longer-term basis.

EUR

The euro continues to trade on the softer side this morning, trimming some strength after cooler-than-expected Spanish CPI inflation in August. The common currency briefly threatened to slip back below the 1.11 level yesterday, which gave it some good support. It has shed the majority of the rally from last Friday when Powell gave the greenlight for Fed rate cuts, despite the short-term yield differential gains sticking. This could be down to a broader rise in growth pessimism in the eurozone, and many have touted month-end portfolio flows and some risk aversion ahead of some critical data events. Spanish CPI fell more sharply than expected from July’s 2.9% this morning to 2.4%, versus a consensus for 2.5%. The German release comes region-by-region throughout the morning, with a consolidated figure arriving early in the afternoon, where the market is looking for a 2.2% print. ECB Chief Economist Philip Lane’s speech in Frankfurt later this morning is the other key event today, before tomorrow’s bloc-wide inflation report.

USD

The market was in a dollar-buying mood yesterday and the dollar index climbed around 0.5% without any clear data catalysts. We appear to have reached something of a short-term limit for dollar weakness based only on US rate fundamentals – Fed rate cut bets have been somewhat exhausted, now that four cuts are priced into the next three meetings and next year’s calendar is expected to involve consecutive 25bp cuts until the Fed reaches neutral. Without a recession-style scenario, it is hard to envisage markets pricing in a significantly quicker pace, and in that situation the dollar would likely catch a safe-haven bid. The next leg lower is likely going to need to come from more hawkish expectations or an economic rebound in Europe. Today, we get a second estimate for Q2 GDP, which printed at a very healthy 2.8% annualised rate at the first time of asking, and this week’s jobless claims print. Jobless claims is a high-frequency and high-volatility data release, which means that there is little insight to really be gained from individual data surprises. But try telling that to the market, which has become ultra-sensitive to this type of release since the Fed’s focus shifted from inflation to the labour market.

Markets

A bout of risk aversion dragged US stock indexes lower yesterday, led by the tech sector ahead of Nvidia’s Q2 earnings. The S&P 500 slipped by 0.6% and the Nasdaq by 1.1%, while the FTSE and the STOXX managed to inch higher in Europe. Nvidia’s open in the US today will be key for risk appetite globally, having fallen as much as 8% at its afterhours trough. The fact that meeting median expectations for revenue growth was not enough to appease investors suggests that we could be nearing the peak of this year’s AI-fuelled chipmaker trade.

Main Economic Events (All Times CET)

9:00am: Spanish Flash CPI
2:00pm: German Flash CPI
2:30pm: US Q2 GDP 2^nd Estimate & Unemployment Claims
6:00pm: Swiss National Bank Chairman Jordan speaks
9:30pm: Fed’s Bostic speaks

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