July 17, 2024

“Stickiness in UK services inflation this morning has dented hopes that the Bank of England would begin to cut interest rates in August, sending the pound to its highest since July last year. More UK data comes tomorrow morning, ahead of an expected rate pause at the ECB.”

Sam Cornford – Head of Trading

Main Headlines

A Reuters/Ipsos poll released yesterday showed that four in five of Americans are concerned that the US is ‘sliding into chaos’, after an assassination attempt on Trump at the weekend and the recent memory of the US Capitol attacks. The number of respondents saying they feared acts of violence against their community rose from 60% to 67% since a June 2023 survey.

King Charles will read out British Prime Minister Keir Starmer’s proposed new laws at a ceremony and a speech in the House of Commons today, after the Labour Party won a vast majority at the UK general election a few weeks ago. The agenda is set to focus on economic growth, including steps to speed up homebuilding and infrastructure projects.

GBP

UK CPI inflation held at the 2.0% target in June, beating expectations for a slight undershoot at 1.9%, and lifting sterling to a fresh one-year high as markets have trimmed their bets on an August rate cut. A 5.7% rise in services prices landed significantly higher than the 5.5% consensus, which translated into a steady 3.5% core inflation measure. As explained previously, 2% at the headline is not enough to prompt a rate cut, because it is being by the transitory downward effects of normalising food and energy prices. It was the services component that had to start trending in the right direction, and there’s no solid evidence yet that this is happening. The conclusion in the market is that this stickiness should keep policymakers hesitant to start easing policy in a few weeks’ time. Labour market tightness is the other piece of the puzzle, and we’ll get some clearer signals on wage growth and unemployment tomorrow morning, which would have to soften considerably to tip the balance now.

EUR

The euro has settled in a relatively tight range this week ahead of tomorrow’s ECB decision. We are now trading higher than before Macron called the snap election in early June, driven primarily by a recovery in the interest rate differential. The central bank ‘divergence’ story that had some calling for EUR/USD parity back in Q1 never materialised, with nearly three cuts now priced in total for both the Federal Reserve and the ECB this year. Without the French political uncertainty, it’s possible that the euro could be pushing towards year-to-date highs. The eurozone-wide ZEW index disappointed yesterday, printing at 43.7 versus expectations for 48.1 and snapping a five-month streak of improvement. French politics and uncertainty about the ECB’s rate path were among the factors explaining the lower figure. A final CPI figure is expected this morning, although it’s rare for these revisions to change the inflationary story. The ECB rate decision tomorrow is the main event this week, although most are expecting policymakers to keep their cards close to their chest and avoid backing themselves into a corner with forward guidance.

USD

The markets remain focused on Federal Reserve rate cut bets, and the dollar is on the backfoot this morning despite some positive retail sales data yesterday. Retail sales were flat in June, despite a forecasted 0.3% drop, and ‘core’ retail sales rose 0.4%. The Atlanta Fed upped its Q2 GDPNow growth forecast to 2.5% yesterday, and while the slightly less weak outlook boosted hopes for a soft-landing scenario, it did not trim easing bets. A September rate cut is now fully priced and 65bps in cuts are pencilled in by the end of the year. Kugler’s comments yesterday that the recent data was suggesting a path to 2% undoubtedly encouraged this pricing to hold steady. Today, we have building permits and industrial production data, followed by a speech from the Fed’s Waller.

Markets

World equities grinded higher yesterday as better-than-expected US retail sales bolstered soft landing hopes further. The large-caps rose, with the S&P 500 rising 0.6% and edging closer to 5,700, but the remarkable rise recently has been in the small-cap Russell 2000 index, which is now up more than 10% since last Thursday. Gold surged by 2% to a fresh record high yesterday as US Treasury yields fell.

Main Economic Events (All Times CET)

8:00am: UK CPI
11:00am: Eurozone Final CPI
2:30pm: US Building Permits
3:15pm: US Industrial Production
3:35pm: Fed’s Waller speaks

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