Morning Report

July 08, 2024

“Eyes are on the US CPI report and the aftermath of a surprise French election vote this week, with markets keen to assess the likelihood of Federal Reserve rate cuts this autumn after a broad weakening in the US labour market data this week.”

Tim Hallinan – Trading Director

 

Main Headlines

In a surprising result, the French far-right National Rally party failed to live up to expectations in the final round of election voting yesterday, slipping to third behind the leftist NFP coalition and Macron’s centrist alliance. The success of an anti-far-right front that involved third-placed candidates dropping out from the second round of voting has left France with a deeply split National Assembly, with coalition talks now set to kick off to cobble together a working government.

The UK’s new Labour government has appointed the UK’s first female Chancellor, Rachel Reeves, who has promised to take ‘difficult decisions’ to ramp up economic growth. She will pledge to unlock infrastructure and private investment in a speech to business leaders today.

GBP

Sterling rose against the dollar for the seventh consecutive session on Friday, rallying modestly on the political stability associated with Labour’s landslide election win. Any further reaction will depend on how fiscal policy plays out over the next few years, with the autumn 2025 budget a key date on the political calendar, as the new government attempts to achieve a tricky balance of increasing growth and fixing public services whilst keeping the national debt on a downward path. This week, though, it’s all about the return of Bank of England speakers, starting with external member Haskel late in the afternoon. Similar to Mann, who also speaks on Wednesday, Haskel was one of the last to throw in the towel and stop voting for further rate hikes earlier this year.

EUR

The success of the anti-far-right front in the French elections took markets by surprise last night, as Le Pen’s RN party not only failed to win a majority but fell to third place behind both the left-wing NFP and Macron’s centrist Ensemble alliance. The euro has recovered from an initial dip triggered by the exit polls and the NFP’s better-than-expected result. With both sides of the political spectrum offering policy agendas deeply unfriendly to markets, a hung parliament and political gridlock is the least-worst outcome for the euro. How France now forms a government is not fully clear, with NFP’s Melenchon pledging to fully implement its agenda through a minority government, while others talk either of a coalition of mainstream parties or a technocratic government. In terms of data today, we get the Sentix investor confidence survey this morning, which investors expect to snap an eight-month streak of improvement.

USD

Last week’s data signalled a clear softening in the US labour market and bolstered the case for a rate cut in September, leaving the dollar down nearly 1%. Non-farm payrolls on Friday overshot expectations at 206K, but 111K of downward revisions to previous releases and another uptick in unemployment to 4.1% supported the softer data story overall. The three-month moving average for jobs growth is now down to 177K – the slowest in more than two years – and hiring in June was overwhelmingly concentrated in healthcare and government. For as long as the weakening is slow and steady and consistent with a soft landing for the US economy, the data will continue to send US yields lower and support European FX. A stronger ‘inflection point’ in the labour market and an accelerated downturn, meanwhile, could spark a safe-haven bid and a recoil in global equities if the Fed is scrambling to prevent a recession, although few are expecting such a turn at this stage. Thursday’s CPI data will be crucial with regards to September rate cut bets, which are currently at around 75%, with the consensus pointing to a 3.1% annual rate and another markedly soft month-on-month print.

Markets

Renewed soft landing hopes in the US fuelled another rally in stocks globally last week, with many markets finishing at or near record peaks. The tech-heavy Nasdaq was the star performer, rising 3.5% in the week, while the S&P 500 closed at a record high. European stocks have recovered his morning after initially coming under pressure from French political uncertainty.

Main Economic Events (All Times CET)

8:00am: German Trade Balance
10:30am: Eurozone Sentix Investor Confidence
6:15pm: BoE’s Haskel speaks
9:00pm: US Consumer Credit

 

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