July 02, 2024

“Markets are navigating US and French politics, the ECB’s rate trajectory, and the US labour market today, and the data comes thick and fast. While the data is expected to soften, political uncertainty is likely to keep investors on edge.”

Tim Hallinan – Trading Director

Main Headlines

The US Supreme Court awarded Donald Trump partial immunity for actions within his constitutional powers as president in a landmark ruling yesterday. Chief Justice John Roberts ruled that presidents have ‘absolute’ immunity regarding their ‘core constitutional powers’ and ‘at least a presumptive immunity’ for ‘acts within the outer perimeter of his official responsibility’. This makes any pre-election trials very unlikely.

Viktor Orban and Hungary’s nationalist government took over the rotating presidency of the EU yesterday with a call to ‘Make Europe Great Again’, although with a transitional period taking place following the EU Parliament elections, it will take a few months until it really begins to exercise its responsibility.

GBP

Sterling is drifting downwards this week as rising Trump bets lift the dollar and cooling political fears in France buoy the euro. The data yesterday was weak at the margin and had little impact overall. The final manufacturing PMI was knocked down to 50.9 but held in expansionary territory, while mortgage approvals held steady at 60k and the BRC shop price inflation measure slipped to a near three-month low this morning at 0.2%. The British calendar is sparse over the next couple of days, so external developments should continue to determine the pound’s direction at least until Thursday’s general election and the lifting of the BoE blackout.

EUR

Political manoeuvring in France and a eurozone CPI inflation print are the focus today. Parliamentary candidates that qualified for the second round of voting on Sunday have until this evening to decide whether to withdraw and support another candidate – the success of the anti-far-right front will be hugely consequential for whether RN can be kept out of winning a majority by the centre and the left. The euro could find some support today if a hung parliament becomes an increasingly likely scenario, which would prevent the RN from fully implementing its manifesto. That keeps the euro under pressure compared to before the election announcement, but it would prevent yield spreads from growing any wider. This morning’s CPI release is expected to tick lower to 2.5% from 2.6%, and the details of the report could take the edge off ECB President Lagarde’s caution when she speaks this afternoon at the annual central bank retreat in Sintra. CPI releases in France, Spain, and Germany have pointed to a softening inflationary picture so far, and should reassure policymakers that cutting in June was the correct decision.

USD

US Treasury yields rose sharply to a one-month high at the long end yesterday, boosting the dollar as markets began to position for an increasingly likely Trump presidency come November. The US Supreme Court’s decision to grant broad immunity for his acts as president has amplified rising bets triggered by Biden’s wobbly debate performance last week. The broad consensus is that with Trump, lower taxes, higher tariffs, and geopolitical clashes would generate higher levels of inflation and therefore a structurally higher rates environment at the Federal Reserve. The only data since Thursday’s debate has been a soft core PCE print and a contractionary ISM manufacturing PMI, and yet 10-year yield has risen 16bps since then. The JOLTS Job Openings figure is expected to continue its relatively rapid descent this afternoon to below 8.0M, and that should boost the case for rate cuts towards the end of the year. We also get a speech from Chair Powell in Sintra, where the softer core PCE data could soften the caution he displayed at last month’s meeting.

Markets

Stocks were mixed in a choppy session yesterday. The notable outperformer was Japan’s Nikkei 225, which continues to benefit from a persistently weak yen that offers some cheaper opportunities for foreign investors. Indices held steady in the US and climbed in Europe on the back of a weaker-than-expected first voting round for France’s National Rally. Brent crude oil continues its ascent, meanwhile, gaining around 12% in just under a month.

Main Economic Events (All Times CET)

3:30am: Reserve Bank of Australia Meeting Minutes
11:00am: Eurozone CPI
3:30pm: Fed Chair Powell speaks
3:30pm: ECB President Lagarde speaks
4:00pm: US JOLTS Job Openings

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