Morning Report

July 09, 2024

“The euro is holding firm amid political gridlock in France, and the attention shifts today to a crucial speech from Fed Chair Powell at the Senate this afternoon. With the US data becoming weaker, markets will be keen to find out if this is giving him the confidence he needs to start cutting rates in September.”

Sam Cornford – Head of Trading

 

Main Headlines

Tropical Storm Beryl cancelled more than 1,300 flights and knocked out power for 2.7m as it made landfall in southeast Texas yesterday. The storm was the earliest Category 5 hurricane since records began as it swept through the Caribbean Sea last week.

New British Chancellor Rachel Reeves ordered a Treasury analysis into the ‘dire inheritance’ she said was left by the outgoing Conservative government, and announced in a first speech yesterday that she would end a ban on onshore windfarms, bring back mandatory house-building targets, and speed up planning approval for infrastructure projects.

GBP

The first BoE speaker to return after the election kept sterling supported yesterday, with known hawk Haskel unsurprisingly arguing that interest rates need to be held steady for a while longer until there is more certainty in underlying inflationary pressures subsiding. We should get some clearer clues on the consensus view within the core of the MPC – i.e. those who will be decisive in tipping the balance towards cuts eventually – with a speech from Huw Pill tomorrow. This morning, the BRC’s retail sales figure contracted by 0.5% in the year up to June without any real market impact. Traders will be looking to rhetoric coming out of the US this afternoon, with an eye on the May UK GDP data on Thursday morning.

EUR

The euro is holding near a four-week high despite the political gridlock in France. With the National Assembly split between three groups, the biggest of which was a last-minute alliance of four loosely related parties, political commentators have been discussing a multitude of potential scenarios and what each would mean for the euro and the eurozone economy. In short, the policies of both the left-wing NFP and the far-right RN are considered unfriendly to markets, with the NFP’s unwillingness to pay attention to fiscal discipline particularly unfavourable situation for the euro, if they were to govern. Gridlock is preferable to either party being able to implement their policy agenda, and a coalition in the centre-ground or a technocratic government that could help to the government budget into balance would be the best-case outcome for markets. Whatever the outcome, French politics is likely to be a lingering weight on the euro, at least until another election can be held. In other news, the Sentix investor confidence index snapped an eight-month winning streak and slipped back into pessimistic territory. Data is sparse today, so it’s coalition talks in France and Fed Chair Powell in the US that should drive the euro.

USD

The dollar is trading slightly stronger this week as markets await Powell’s rhetoric in front of the Senate this afternoon. His semi-annual Monetary Policy Report testimony to the Senate (today) and the House (tomorrow) dented the dollar earlier in the year with an optimistic tone that seemed to defy the stronger inflation data in Q1. The broad expectation is that he will be dovish today, too, with the increasingly tight balance between keeping inflation down and maintaining a healthy labour market likely to be a key topic of interest, given the material weakening in the data that we saw last week. He will get most of his thoughts off his chest early on this afternoon and we can expect the bulk of the market impact to come relatively quickly. Markets currently price a rate cut in September at around 76%. Elsewhere today, we get speeches from the Fed’s Barr and Bowman and the NFIB Small Business Index, where it’s the hiring plans subindex that tends to get a significant amount attention for its predictive power for non-farm payrolls.

Markets

US stocks inched higher again with the S&P 500 hitting a fresh record high in a quiet day for data, while European indexes were rather directionless in the face of political gridlock in France. Japan’s Nikkei surged over 2% to touch another record peak, this time fuelled by semiconductor companies.

Main Economic Events (All Times CET)

12:00pm: US NFIB Small Business Index
3:15pm: Fed’s Barr speaks
4:00pm: Fed Chair Powell testifies to the Senate
7:30pm: Fed’s Bowman speaks

 

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