July 01, 2024

“The diary is packed with political events and data releases this week. Sighs of relief about the extent of the RN’s lead in France make the euro and European markets the outperformers this morning, while a raft of US labour market data keeps monetary policy in focus for the Federal Reserve.”

Sam Cornford – Head of Trading

Main Headlines

Top Democrats in the US ruled out swapping with President Joe Biden as the nominee yesterday, after a wobbly debate performance last Thursday that boosted the odds of another Trump presidency. Democrat leaders opted to rally around Biden, although some have admitted that there are some honest conversations going on behind closed doors.

Ahead of the UK general election on Thursday, the Sunday Times and the FT announced their endorsement for the Labour Party for the first time since 2005, with the former looking for a ‘radical reset’ and the latter arguing that ‘Britain needs a fresh start’.

GBP

A pricing out of the worst-case political scenario in France has supported sterling this morning ahead of its own election on Thursday. The UK polls point to a huge Labour victory, but this would not be anything resembling a surprise for markets. Should Labour take over, continuity in fiscal policy and the prospect of closer EU ties bode well for the pound in the longer term, but the vote itself is unlikely to cause fireworks. Instead, it’s the Bank of England we’ll be watching, with the lifting of a pre-election blackout providing some clues on who may be looking to vote for a rate cut next month. Today, mortgage approvals and consumer lending data make up the calendar, both of which are expected to be relatively stable.

EUR

The euro is shedding some its election-induced risk premium this morning, lifting it 0.5% after Le Pen’s RN won the first-round vote by a slightly smaller margin than expected. The initial vote share is 33% for the far-right RN, 28% for the left-wing coalition NFP, and 22% for Macron’s centrist alliance. The euro’s strength is down to smaller odds of an outright majority for the RN, softening the chances of big spending increases or clashes with the EU, although the situation will remain uncertain for the euro until the result of the second vote on Sunday. It’s not yet clear how the vote share will translate into seats, particularly with unknowns surrounding which third-placed candidates may drop out and unite against the far-right over the next few days. Today, German CPI is released by region throughout the morning, ahead of the eurozone-wide figure tomorrow morning, and we’ll get a speech from President Lagarde in Sintra at the ECB’s annual retreat.

USD

The dollar has kicked off July on the back foot amid gains in Europe. It climbed for the second consecutive quarter in Q2 and around 1% higher in June, despite an overall softening data picture as political risk took over across the Atlantic. The core PCE release on Friday landed on the weaker side at 0.1% month-on-month for the first time since November, as expected, in a result that broadly boosted the prospects of a first cut in September, as is the market’s base case. That said, we would still need a relatively immaculate path of consecutive softer prints over the next few months to convince Fed policymakers that it will be the right time, and a couple of bumps could rapidly derail that narrative, as has happened several times this year. The data calendar this week is packed: the ISM manufacturing PMI should improve from a low base today, Fed Chair Powell speaks in Portugal ahead of the JOLTS survey tomorrow, the ISM services PMI and the FOMC meeting minutes follow on Wednesday, and the headline non-farm payrolls report finish the week off on Friday. The overall consensus is for a continued softening in the labour market, particularly in the number of job openings, supporting the softer inflationary picture painted last week.

Markets

World stocks hit further record highs last week, having climbed nearly 2.5% in Q2, although they ended Friday a touch softer. The European markets are the outperformers this morning, with France’s CAC 40 rising nearly 2% after Le Pen secured a narrower victory than many had been expecting.

Main Economic Events (All Times CET)

7:00am: Japanese Consumer Confidence
8:30am: Swiss Retail Sales
10:00am: Eurozone Final Manufacturing PMI
10:30am: UK Final Manufacturing PMI, Mortgage Approvals & Net Consumer Lending
2:00pm: German Prelim CPI
3:45pm: US Final Manufacturing PMI
9:00pm: ECB President Lagarde speaks

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