Morning Report
January 08, 2025
“The US data made headlines yesterday, lifting the dollar and hurting US equities as concerns rose about the potential for a rise in inflationary pressure to further restrict the number of rate cuts this year. Elsewhere, the Swedish krona is the underperformer this morning after inflation fell further below the 2% target.”
Tim Hallinan – Trading Director
USD
Signs in the macro data hinting towards a reacceleration in US inflation lifted Treasury yields and by extension the dollar yesterday, with markets at one point leaning towards a one-and-done Fed cutting path in 2025. Both key data points surprised to the upside: job openings surged to the highest since May, headline ISM services rose to a strong 54.1, and the prices paid component of the ISM index stood at the strongest level since February 2023. The potential for rising inflationary pressures and some renewed strength in the US economy opens the gate for an even more cautious Fed and some further dollar upside, particularly if compounded by an aggressive tariff policy, though Friday’s payrolls will be the more important signal this week. The Fed’s Waller might give us some clues on whether he’s becoming more concerned at his speech this afternoon, and on the data calendar we get some ADP jobs numbers, unemployment claims, and the FOMC meeting minutes later this evening.
GBP
Sterling touched its highest level of the year so far against the dollar yesterday morning, but ultimately succumbed to the dollar’s macro-led bullish momentum in the afternoon. The US data is firmly in the driving seat for the pound again today, with markets forced to wait until next week for the next round of inflation and growth data ahead of a likely Bank of England cut on 6th Feb. The leading role of the dollar can be seen in the absence of volatility in GBP/EUR since last Thursday’s big drop, and we will be looking to the upcoming UK data for the next moves.
EUR
The market took the rise in eurozone inflation to 2.4% in its stride yesterday. That is because policymakers are likely to look through the uptick, which was largely the result of unfavourable base effects – i.e. a big drop in energy prices from the previous December that fell out of the year-on-year comparison. Services inflation edged slightly higher but core inflation held steady at 2.7%, and that was enough for markets to consolidate around bets for 100bps in relatively gradual rate cuts from the ECB this year. The drop in EUR/USD was dollar-driven, and although it is still undervalued versus the rate differential following the moves over holiday period, there has been scarce opportunity for the euro to work its way higher amid the strong US picture. A speech from the ECB’s Villeroy and a little-watched PPI inflation print are the only domestic events in the diary today. Elsewhere in Europe, a bigger-than-expected drop in Swedish inflation to 1.5% this morning has the rates market fully pricing in rate cuts at both the January and March meetings, which would take the policy rate down to 2.00%.
Markets
Good news was bad news for US stocks yesterday. Strong macro data meant fewer cut bets, higher Treasury yields, and lower stocks. The S&P 500 fell 1.1% and the Nasdaq slipped 1.8%. The story was better in Europe, where Germany’s DAX and France’s CAC 40 both made gains of 0.6%.
Main Economic Events (All Times CET)
8:00am: Swedish CPIF Inflation
11:00am: Eurozone PPI Inflation
2:15pm: US ADP Non-Farms
2:30pm: US Unemployment Claims
8:00pm: FOMC Meeting Minutes
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