July 25, 2024

“There is a lot of activity in FX at the moment. The yen and the franc are surging rapidly, the Nordics and the Antipodeans are suffering, and sterling and the euro are being moved around by diverging growth outlooks. The data flow continues today, with US Q2 GDP growth the highlight.”

Sam Cornford – Head of Trading

Main Headlines

In a speech aired late last night, US President Joe Biden said that he withdrew from the presidential race to ‘pass on the torch’ in a bid to ‘unite the nation’ and defend democracy. He said that he will spend his final six months in office focusing on the job as president. Meanwhile, Trump and Harris have traded their first blows, with Trump referring to her as a ‘radical left lunatic’.

A report from the UK’s Institute for Fiscal Studies has suggested today that hikes to mortgage rates have likely pushed around 320,000 Brits into poverty, more than 100,000 greater than official statistics suggest. Mortgage rates have come down considerably this year, but remain above 5%.

GBP

The UK manufacturing sector strongly outperformed the eurozone in July, inching higher to a two-year high of 51.8 in yesterday’s PMIs. Services held firm at 52.4, too, and that brought the composite figure up to 52.7, hinting at a positive start for the economy in Q3. Starmer will be pleased. Some underlying details might spook a few policymakers at the BoE, though, with an acceleration in employment growth to the fastest pace in a year underscoring the lingering tightness in the labour market. The August rate decision is on a knife-edge, so it’s marginal changes to the inflationary outlook like this that could tip the balance. An initial boost for sterling quickly faded later in the day. The domestic data calendar has dried up towards the end of the week, so that puts the focus on the wider risk-off dynamics playing out and the US data. The crucial event for the pound will be the Bank of England decision next Thursday.

EUR

Drags from France and Germany, particularly in the manufacturing sector, contributed to a disappointing set of eurozone PMI data yesterday. Both the services and manufacturing indexes undershot forecasts, reinforcing concerns at the ECB about downside growth risks and bolstering the market’s conviction for two further rate cuts this year. The softer outlook weighed on yields, although the single currency managed to hold firm. This morning, we get a German ifo business climate survey and some low-tier data on private lending and money supply, before Lagarde speaks this afternoon. Unless she’s had a change of heart about forward guidance, it’s likely that she will continue to leave markets in the dark about the prospects of a September rate cut.

USD

The dollar index continued to trade within this week’s range yesterday, but that disguises some significant offsetting moves on the crosses. Risk aversion has taken hold in markets, and there are several reasons to choose from to trim your risk exposure: poor tech earnings, an equity selloff, China growth worries, US election uncertainty, potential trade wars, and the unwinding of the carry trade. The Japanese yen and the Swiss franc have been by far the biggest beneficiaries, with the yen gaining over 1% against most of its peers yesterday, as markets begin to position for a real divergence between a Fed preparing to cut and a Bank of Japan coming under increasing pressure to hike. The turn in the yen has forced an unwind of short bets on the currency and traders have been rapidly pulling out of the carry trade, which involves borrowing in low yield currencies to buy high yield ones. That has benefitted the low yielders (CHF, JPY). Meanwhile, the familiar group of risk-sensitive G10 (NOK, SEK, AUD, NZD) have taken a beating as investors stash capital in safe havens. These wider themes will continue to play out today, and on the data side this afternoon’s Q2 GDP growth estimate is expected to come in at a relatively healthy 2.0%, up from 1.4% in Q1. It was the core PCE deflator that caught the market’s attention over the growth figures last time, however, because it all but spoils tomorrow’s monthly figure. The consensus for June is 0.2% month-on-month price growth, and that should be enough to keep the September rate cut on track.

A dovish cut from the Bank of Canada sent the Canadian dollar to a three-month low yesterday, as Governor Macklem pivoted strongly from a focus on the upside inflation risks to the weak economy, suggesting there are more cuts to come. The key line here was ‘we need growth to pick up so inflation does not fall too much’.

Markets

A poor earnings picture has brought the tech-led equity rally to a rapid standstill this week, dragging down indexes globally. The Magnificent Seven, which has driven the majority of gains in the US, all fell at least 2.8% yesterday, and Tesla slipped 12% as profit margins were squeezed by Chinese competition. This pulled the Nasdaq down 3.6% in the session and the S&P 500 by 2.3%. European stocks held up better and the STOXX 600 fell only 0.6%, but the selloff spilled over to Asia, where Japan’s Nikkei 225 slumped 3% as the yen firmed.

Main Economic Events (All Times CET)

10:00am: German ifo Business Climate
12:00pm: UK CBI Industrial Order Expectations
2:30pm: US Advance Q2 GDP q/q, Unemployment Claims, & Durable Goods Orders
5:00pm: ECB President Lagarde speaks

To learn more about Ballinger Group, please visit our website or our LinkedIn page.