Morning Report

July 10, 2024

“Fed Chair Powell was keen not to give the market what it wanted yesterday in terms of rate cut clues, giving the dollar some support yesterday. Investors are now gearing up for a crucial US inflation print tomorrow that will be highly consequential for the September Fed meeting.”

Tim Hallinan – Trading Director

 

Main Headlines

The New Zealand dollar has slipped 0.6% this morning after the Reserve Bank of New Zealand held rates at 5.50% as expected but signalled the possibility of earlier rate cuts. Policymakers said that inflation is likely to cool to the 1-3% target range in the second half of the year, and implied rates in the swaps markets now point to a 25bps cut in October.

As UK Prime Minister Keir Starmer heads to Washington for his first international engagement at the NATO summit, he has committed to increase UK defence spending to 2.5% of GDP once a strategy review has been completed and the UK can afford it.

GBP

Bank of England speakers are under the spotlight for sterling today and should give some more concrete clues on voting intentions at the August policy meeting. Given that he is closer in thinking to the core of the MPC, it is Huw Pill’s speech that is likely to carry more weight for markets today. In the last rate decision, several policymakers had said that their vote to hold rates steady had been ‘finely balanced’, and much of the recent stickiness in services inflation was played down, opening the door for a few more cut votes in August. External member Catherine Mann speaks too this afternoon, although given her predictably hawkish tendencies it is unlikely to be her that ever tips the balance towards rate cuts – expect her to follow Haskel’s lead in calling for continued caution.

EUR

With political jockeying in France set to take some time, the euro is taking its cues from the US, and cooled from a four-week high in yesterday’s session. For now, the left-wing NFP has made it clear that it wishes to govern despite not having achieved a majority, while those in the centre have expressed openness to holding talks with the more moderate parties within the NFP alliance. While waiting on some material newsflow from French politics, it’s Powell’s two-day testimony and US inflation data guiding EUR/USD, with only a speech from the ECB’s Nagel on the calendar for today for the eurozone.

USD

Despite some dovish giveaways, Fed Chair Powell lifted the dollar slightly as he leaned more to the hawkish side than markets were expecting at the Senate yesterday. The testimony said that, in line with the weaker data last week, the labour market has now fully cooled back to its pre-pandemic state, and that this makes it increasingly necessary to be attentive to the two-sided risks of keeping rates high. None of this translated into any signalling for rate cuts, however, and he reiterated the need for further data to bring the Fed’s confidence up. For a rate cut to occur, it has been made clear that we need to see one of the following: (i) a period of successive 0.0-0.2% monthly core PCE inflation prints that confirm a sustainable path to 2% (we have had one and are set for another on Thursday), or; (ii) a significant weakening in the labour market. The concern from some commentators is that if the labour market is now only in a ‘good’ state and no longer overheated, then the situation into next year could be much worse if policy is not eased rapidly, particularly given the non-linear dynamics of the labour market of the past that suggest that the pace of loosening could accelerate. Powell speaks again today in front of the House of Representatives, although we wouldn’t expect any significant further clues given that it’s likely that he got everything off his chest yesterday. Bowman and Goolsbee may offer some fresh rhetoric, however, and it’s tomorrow’s US CPI that markets are counting on to show further disinflationary progress.

Markets

Stocks drifted sideways in yesterday’s session as Powell’s less-dovish-than-expected testimony supported yields. The S&P 500 and the Nasdaq moved up very modestly while European and UK indexes inched lower.

Main Economic Events (All Times CET)

3:30am: Chinese CPI & PPI
4:00am: Reserve Bank of New Zealand Rate Decision
3:30pm: BoE’s Pill speaks
4:00pm: Fed Chair Powell testifies to the House
5:30pm: BoE’s Mann speaks
8:30pm: Fed’s Bowman speaks

 

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