July 19, 2024

“The ECB kept markets in the dark about their plans yesterday, leaving the eurozone interest rates trajectory particularly uncertain. However, it’s a modest recovery in the dollar that defined trading yesterday.”

Sam Cornford – Head of Trading

Main Headlines

US President Joe Biden has begun to become ‘receptive’ to the idea that he may need to drop out of the race for November’s election, according to the New York Times, as more of his closer allies begin to turn against him. His campaign co-chair, however, dismissed the story as ‘absolutely wrong’.

The UK government borrowed a significant amount more money that economists had expected in June, at £14.5bn versus a £11.2bn median forecast. This is down from the £17.7bn in June 2023, but still highlights the challenges to public finances faced by the new Chancellor Rachel Reeves, who has ruled out increases to income or corporation tax.

GBP

Sterling has slipped around 0.9% from its post-CPI peak against the dollar on Wednesday, as US yields have picked up. Retail sales figures have kept the pound on the backfoot this morning with a 1.2% decline in June – far worse than 0.6% forecasts – and that’s largely down to cooler weather. This leaves sales down on a net basis in Q2 and should be a small drag on GDP growth. GfK consumer confidence rose a touch, however, from -14 in June to -13 in July, as consumers become increasingly optimistic about the prospect of near-term rate cuts from the Bank of England. With no more data for markets to chew on today, traders will be setting their sights on the next round of PMI releases early next week.

EUR

A rebounding dollar guided EUR/USD lower yesterday, but a non-committal ECB did give the euro some support on the crosses. With core inflation ticking higher and some policymakers hinting at regret towards the first rate cut last month, the rate pause at 3.75% surprised no-one. There were a couple of optimistic acknowledgements which blamed the stall in disinflation on one-off factors, but the central theme of both the statement and the press conference was an absolute refusal give any signal about the near-term rate path. There are some in the Governing Council who would have liked to have held rates in June, and now feel burned by the overpromising for a cut that forced their hand to save reputational damage. They do not want to repeat that mistake and are now more appropriately valuing their flexibility. Markets are still confident about a second rate cut in September, which Lagarde referred to as a ‘wide open’ meeting. Beyond some current account data this morning, the attention will shift to next week’s PMIs and today’s dollar dynamics.

USD

Rising US Treasury yields and waning risk appetite have dragged the dollar higher this week, despite hitting a four-month low just a few days ago. A higher-than-expected jobless claims print yesterday, while exaggerated due to one-off factors including Hurricane Beryl and auto layoffs, added to the evidence of a cooling labour market yesterday. But a string of second-tier data has surprised to the upside over the past few days, including retail sales, industrial production, building permits, and a Philadelphia Fed manufacturing index. The more constructive outlook for the consumer and productivity means that the Atlanta Fed has upped its forecast for Q2 GDP growth from 1.5% to 2.7% since the beginning of the month – we’ll get the official figures for that next Thursday. Add on top threats for trade tensions with China and Taiwan and a selloff in equities, and you have a dollar recovery. The move has not quite had the legs for a significant bounce-back, however, and rising September rate cut bets still have the greenback down 1.5% this month. Today, we have a couple of Fed speakers to round off the week this afternoon, before the focus turns to GDP and core PCE inflation next week.

Markets

The large-cap tech selloff spilled over into a broad-based decline in equities globally yesterday. In the US, the Dow lost 1.3%, the S&P 0.8%, and the Nasdaq 0.7%. The UK’s FTSE fell nearly 1%, while Japan’s Nikkei 225 is set for its biggest weekly fall since April. Threats of escalating trade tensions with China and Trump’s accusations of Taiwan stealing the US’ chipmaking industry have spurred a spike in the VIX stock volatility gauge.

Main Economic Events (All Times CET)

8:00am: UK Retail Sales & Public Sector Borrowing
2:30pm: Canadian Retail Sales
4:50pm: Fed’s Williams speaks
7:00pm: Fed’s Bostic speaks

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