Morning Report
July 04, 2024
“The US dollar softened significantly yesterday as ISM data showed the worst contraction in services activity since 2020. This puts heightened emphasis on the non-farm payrolls report tomorrow, and July 4th holidays could boost volatility today. In the UK, traders are on hold for the release of the exit poll results later this evening.”
Tim Hallinan – Trading Director
Main Headlines
US President firmly rejected calls for his exit from the Democratic nomination in calls to his campaign staff yesterday, pledging to stay ‘to the end’ and drawing public support from the Governors of New York, Minnesota, and Maryland. That has done little to stem speculation, however, with sources telling Reuters that VP Kamala Harris would be the favourite to replace him.
YouGov published their final election poll for today’s UK election yesterday, in which they expect the Labour Party to win the largest majority in modern history. The result puts Labour at 431 seats and with a majority of 212 ahead of the Conservatives’ 102 seats. YouGov has said that even the best-case scenario for the Conservatives would be much worse than the 1906 vote when it won only 156.
GBP
The big event to watch for sterling today is the announcement of the exit poll results at 10pm BST. As mentioned before, the certainty in the polls around a Labour win and the likely continuity in fiscal policy precludes any significant immediate reaction to the election results. That said, there are a couple of unknowns, including the size of a Labour majority and whether Reform can split the right-wing vote enough to wipe out the Conservatives, as the latest YouGov poll seems to suggest. It’s the longer-term view where an incoming Labour government can hope to boost sterling – closer ties to the EU and higher growth would support the pound, if achieved. The British currency is trading around a three-week high on the back of some weaker US data, and non-farm payrolls on Friday is likely to have the biggest impact towards the end of the week.
EUR
A combination of shrinking chances for a National Rally majority, cautious talk at the ECB, and an acceleration in the US data turn has lifted the euro to a three-week high. The anti-RN front has been effective so far – more than 200 third-placed candidates in France have withdrawn from the second round, and the polls are suggesting that an RN majority is increasingly unlikely. This has angered Le Pen but alleviated fears in the bond market to some extent, although French government bond spreads remain significantly higher than before the snap election announcement. The US data is the primary driver for the upward turn, however, and the common currency remains subdued near its weakest levels of the year against the pound. Today we get the ECB monetary policy meeting accounts, although they are likely to repeat much of the caution around the slowing pace of disinflation that policymakers have been giving this week in Sintra.
Elsewhere in Europe, the recent misery for the Swiss franc has continued this morning with an undershoot of expectations in the June CPI report, which fell from 1.4% to 1.3%. A building case for further rate cuts in September and possibly December too has undone much of the franc’s 4% rally against the euro from late May into June.
USD
A crash in the ISM services PMI was among a broad bucket of softer data to hammer the dollar yesterday. The weaker turn in the US macro data looks to be accelerating, and the Citi US Economic Surprise Index – a measure of how strongly the data is deviating from the consensus forecasts – is at its most negative since August 2022. The ISM report flipped from solid expansion to contraction, falling from 52.6 to 48.8. That is the weakest that services activity growth has been since mid-2020, at the peak of the pandemic restrictions. New orders, business activity, and notably employment all collapsed in June, and markets now appear to be positioning for a much weaker non-farm payrolls report tomorrow compared to the original 190K forecast. Yields slipped, and bets on a September rate cut surged to 73% – the Fed is getting the cooler data it was looking for in the meeting minutes released last night. The Atlanta Fed, meanwhile, adjusted their GDPNow forecast of Q2 growth downwards again to 1.5%, having floated around 3.0% for some time. Thin volumes during the July 4th holiday in the US opens some room for some jittery trading today, and all eyes are on the non-farms report tomorrow.
Markets
Bad news was good news for stocks as the US economic data deteriorated, and jubilance over incoming rate cuts at the Federal Reserve spurred a global equity rally yesterday. The European STOXX 600 surged 0.8%, the S&P 500 hit a fresh record high above 5,500, and Asian stocks are above a two-year high. Even the sluggish FTSE 100 has rise 1.3% since Tuesday afternoon.
Main Economic Events (All Times CET)
7:45am: Swiss Unemployment Rate
8:30am: Swiss CPI Inflation
10:30am: UK Construction PMI
UK general election all day, US shut for July 4th
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