July 03, 2024

“Eyes were on Sintra yesterday as Powell boosted confidence in a potential September rate cut. That has the dollar trading moderately weaker this morning, ahead of a wave of labour market and growth indicators this afternoon that should keep markets moving.”

Sam Cornford – Head of Trading

Main Headlines

A Reuters/Ipsos poll yesterday showed that one in three democrats think that US President Joe Biden should end his bid for re-election in November, following his wobbly performance at last week’s debate. A congressman from Texas became the first Democratic lawmaker to public call for Biden to move aside yesterday, with disquiet growing among the party’s ranks amid soaring odds of a Trump victory.

The UK hits the booths tomorrow for a general election in which the latest Survation poll expects Labour to gain a record number of seats. Former Prime Minister Boris Johnson surprised voters yesterday with a last-minute appearance to voice support for the Conservatives’ campaign.

GBP

Tomorrow’s general election is front of mind for UK markets. There is limited scope for a direct impact on sterling from the vote results, and the Bank of England is likely to remain the primary driver, but the potential for stability in government and closer trading ties to the EU could benefit the pound in the longer term. Given the clear lead in the polls, the unknown variables surround the extent of the Labour majority and whether Reform can split the right-wing vote and threaten a Conservative wipeout. This means that the risk of a hung parliament denting sterling is extremely low, although if the number of Conservative seats is too small to form a meaningful opposition we could see some downside risks. Without a big shock, traders will be keeping their eyes on the lifting of the BoE blackout and some further clues on the voting intentions at the August rate decision.

EUR

Rising rate cut bets in the US lifted the euro higher yesterday. Eurozone CPI slipped to 2.5% as expected, but the core measure failed to track it downwards and held at 2.9%, supporting the case for caution from ECB officials. The data confirmed that it’s not quite over yet, with higher rates struggling to make a dent in flatlining services inflation at 4.1%. That cements the July pause at the ECB, which the market had priced as a near certainty already. Lagarde repeated some familiar rhetoric at a talk in Sintra yesterday, saying that they are ‘very advanced’ on the disinflationary path, but that the stickiness in services and wages continue to warrant a cautious, meeting-by-meeting approach to cutting rates. She speaks again this afternoon, although it’s hard to imagine that she could add anything groundbreaking. We also have the final services PMI this morning.

USD

Powell’s dovish tone in Sintra and a retracement in US yields have the dollar trading a bit softer this morning. The Fed Chief said that the US is back on a ‘disinflationary path’ and confirmed that recent data is what he is looking to see to pull the trigger on rate cuts. The optimism reignited market bets for a cut in September, with 80% of a second one priced in by December. Markets were happy to brush off a modest rise in job openings numbers, meanwhile, with the data now back around pre-pandemic averages and a downward revision to last month’s figure. Today is data heavy. The ADP non-farms report is a notoriously poor predictor of Friday’s official report, but it moves the markets nonetheless, while unemployment claims have taken on some increased importance recently amid an upside breakout in claims from its previously narrow range. The ISM services PMI is expected to confirm a cooling trend in the US economy with a softer rate of expansion later this afternoon, moving from 53.8 to 52.7. Finally, we get a set of minutes from the previous Federal Reserve decision in which the expected number of rate cuts this year was revised down from three to two – these should be littered with caution, but markets may continue to latch on to Powell’s more optimistic tone yesterday.

Markets

Powell’s optimism spurred rate cut bets, trimmed yields, and pushed up stocks yesterday, with a higher close for the three major indices in the US spilling – including a record close for the S&P 500 – over into a positive session in Asia. European equity futures are tracking higher this morning

Main Economic Events (All Times CET)

10:00am: Eurozone Final Services PMI
10:30am: UK Final Services PMI
2:15pm: US ADP Non-Farm Payrolls
2:30pm: US Unemployment Claims
3:45pm: US Final Services PMI
4:00pm: US ISM Services PMI
4:15pm: ECB President Lagarde speaks
8:00pm: FOMC Meeting Minutes

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