February 27, 2024

“A bumper sequence of economic data kicks off today with some releases in the US as the markets build up to critical inflation data in the US and Europe on Thursday. For now, the dollar continues to trim its gains against the G10.”

Tim Hallinan – Trading Director

Main Headlines

Private lending activity in Europe has surged back to levels not seen since mid-2022, according to recent data from Deloitte released on Tuesday. The data suggests that investors are increasingly turning to risky corporate debt, anticipating interest rate cuts by the European Central Bank (ECB) later this year. Deloitte reported that private debt funds, which typically offer high-interest loans to indebted companies backed by buyout firms, issued 189 loans in the final quarter of 2023. This marks the highest quarterly figure since the second quarter of 2022, just before the ECB initiated its first interest rate hike.

The Institute for Fiscal Studies cautioned British Chancellor Jeremy Hunt against announcing additional pre-election tax cuts in his upcoming budget unless he can explain the accompanying spending reductions required to fund them. The think tank highlighted the potential for increased population estimates to bolster headline economic growth and lower expectations for future interest rate levels, potentially providing Hunt with more fiscal flexibility.

GBP

Sterling scored its sixth consecutive daily gain against the dollar yesterday in what is its best run since the turn of the year. In the second half of this month, a steadily weakening dollar has handed the pound some steady upwards momentum, despite the absence of any domestic data that has had a material impact on the rates outlook. It brushed off a sharp fall to 2.5% in the BRC Shop Price Index overnight to creep higher again this morning, and a speech by the BoE’s Ramsden is the only remaining market event to take place today. A generally barren economic calendar puts the focus on developments elsewhere to move the pound this week – in this regard, US and eurozone inflation data are the biggest challenges to its steady bullish trajectory.

EUR

The euro continues to drift upwards on the back of last week’s equity-fuelled boost to risk appetite, as traders prepare for the inflation data later this week. ECB President Lagarde’s familiar rhetoric lifted the single currency yesterday, reiterating the growing confidence that the disinflationary path is progressing as expected, but again calling for more conclusive data to feel comfortable cutting rates. Markets are starting to believe her, and prior bets on a full June cut were trimmed throughout the day. We get some money supply and private lending data this morning, but at the forefront of minds is naturally German and French CPI on Thursday, which are set to give Lagarde some of the evidence that she is looking for. Elsewhere in Europe, the National Bank of Hungary makes its next policy decision today, where many expect the rate cut pace to accelerate again now that inflation is within the bank’s target range.

USD

The dollar has ceded further ground this morning as investors continue to deploy capital elsewhere, particularly against the more risk-sensitive currencies in the G10 space such as SEK, NOK, and AUD. There were few impactful events yesterday beyond a slightly disappointing 661K new home sales in January, but the data flow kicks off this afternoon with durable goods, house price, consumer confidence, and Richmond manufacturing data. Consumer confidence is likely to remain stable after rocketing in Q4, while durable goods orders are expected to contract by 4.9%, although investors are likely to see past the softness in what is typically a volatile measure. Thursday’s core PCE remains the biggest topic of conversation, with markets gearing up for a strong print having digested the CPI and PPI numbers. USD/JPY fell this morning after Japanese core CPI landed a tick higher than expected and on target at 2%, likely keeping the BoJ on track to exit negative interest rates in April.

Markets

Equities moved only modestly yesterday as major indexes consolidated gains won in last week’s tech rally. Japan’s two-year government bond yield surged to its highest level in a decade, boosted by a higher-than-expected CPI print that keeps the BoJ on track for an end to negative interest rates. European and US stock futures point to a lower open this morning ahead of some key data this week.

Main Economic Events (All Times CET)

1:00am: UK BRC Shop Price Index
8:00am: German GfK Consumer Climate
10:00am: Eurozone M3 Money Supply and Private Loans
2:30pm: US Durable Goods Orders
2:40pm: BoE’s Ramsden speaks
3:05pm: Fed’s Barr speaks
4:00pm: US CB Consumer Confidence

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