July 12, 2024

“Rate cut optimism in the US soared yesterday as further signs of progress came with a softer-than-expected CPI inflation report. PPI inflation will complete the picture this afternoon and could trigger similar moves. In the UK, meanwhile, the focus is on a one-year high in sterling that faces a CPI test next week.”

Tim Hallinan – Trading Director

Main Headlines

Facing increasing scrutiny on his mental acuity, Biden was closely watched at a NATO press conference yesterday that included several slip-ups, including referring to Vice President Kamala Harris as Donald Trump, and Ukrainian President Zelenskyy as President Putin. The oldest-serving US President continue to hold firm on staying in the race, however, and his good grasp of the topics discussed saw his odds of winning the November election rise to around equal to Kamala Harris.

The British water regulator, Ofwat, has told the UK’s water companies that they must stop sewage spills and fix leaks without the larger bill hikes they were requesting. Ofwat will allow bills to rise by 21% on average over the next five years, which the industry does not see as enough to solve the crisis amid companies like Thames Water at risk of being nationalised to prevent collapse.

GBP

The combination of hawkish commentary from Huw Pill, a stellar growth figure for May, and a sharper-than-expected fall in US inflation has lifted sterling to a one-year high. The stars have been aligning for the pound for a few months now, and we’re up 5% from the year-to-date low touched in late April. The election has brought political stability whilst uncertainty is rife on the continent, while sticky services inflation in the UK and cooling price pressures the US now has the Bank of England and the Federal Reserve set to cut rates in sync. Add in a growth rebound just as the momentum in the US is weakening, and the pound is up nearly 1.5% this year. The next focus for the pound is next week’s UK CPI print and whether this can tip the balance for the August rate meeting – markets are putting a rate cut at a coin flip for now, and while Pill is keen to stress the limits of one data point, a surprise could swing these odds relatively dramatically.

EUR

The euro has ridden a wave of broad dollar weakness this week, with little domestically to alter the economic outlook. The same is true for today, and it’s the US producer price inflation guiding the euro this afternoon. The single currency is now up around 1.9% against the dollar from its post-election-announcement lows in June, and while some of this can be pinned down to allayed fears of a majority for either of the market unfriendly parties on the rise in France, the majority has been driven by the USD leg and a broad weakening in the US macro data. The political situation is proving to be an ambient headwind to further euro strength, however, and it shed a significant proportion of its US CPI-induced gains yesterday. A cooling in core inflation in Sweden has tilted expectations towards three Riksbank rate cuts in the second half of the year, lifting EUR/SEK by 0.7% this morning.

USD

The dollar dipped to a one-month low after a softer-than-expected CPI inflation report cemented bets on a September rate cut. Headline CPI contracted by 0.1% month-on-month while the core measure rose 0.1%, dragging the annual figures down to 3.0% and 3.3%. Those monthly numbers are exactly what the Fed is looking for, and for now keeps the Federal Reserve on the path to cutting rates in September. The stall in progress in Q1 seems to have been replaced by a solid disinflationary trend for now, and leading indicators for components like shelter and auto insurance point to further progress on the way. Shelter inflation has been a big contributor to inflation and finally eased off in June alongside a broader softening across the index. The 2-year US Treasury yield slipped 13bps, the market-implied probability for a September rate cut inched up to 85%, and the dollar slipped around 0.5%. The softer outlook for the Fed-preferred core PCE inflation gauge should become even clearer this afternoon with PPI inflation. We also get a UoM consumer sentiment figure, which has been trending downwards since February.

The outsized 2% move in USD/JPY yesterday has markets ringing the alarm bells on Japanese intervention again, this time seemingly changing tact by piggybacking on weaker dollar moves. The Japanese media has reported intervention, although officials have remained quiet as per usual

Markets

Low US inflation, falling bond yields, and rising hopes for earlier Federal Reserve rate cuts has often been the perfect mix for stocks this year, but global equity indexes snapped their winning streaks yesterday. The move came as investors rotated out of the megacaps that have driven much of the gains this year, and into mid- and small-cap companies. The Russell 2000 small-cap index surged 3% as the S&P 500 fell nearly 1%.

Main Economic Events (All Times CET)

2:30pm: US PPI Inflation
4:00pm: US UoM Consumer Sentiment

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