July 31, 2024

“Today is perhaps the busiest day for markets so far this year. The Bank of Japan has triggered sharp moves in the yen and the franc this morning, ahead of a big eurozone inflation print and a Federal Reserve decision that could see some official hints about a rate cut in September.”

Sam Cornford – Head of Trading

Main Headlines

In a double whammy of hawkish moves this morning, the Bank of Japan hiked interest rates by 15bps to 0.25% and set out plans to halve the pace of bond buying to 3tn yen by Q1 2026. Policymakers have become increasingly confident that wages will continue to grow and fuel domestic inflation, while the weakness of the yen has led politicians and economists in Japan to pile the pressure on the BoJ to provide some support.

Following an announcement to MPs detailing a £22bn hole in public finances on Monday, British Chancellor Rachel Reeves confirmed yesterday on a podcast that she plans to raise taxes in her October budget. The party has previously ruled out hikes to income tax, national insurance, or VAT, which means that further revenue will need to come from the likes of capital gains or inheritance tax.

GBP

The biggest trend in the UK markets right now is rising bets on a Bank of England rate cut tomorrow. The decline in two-year gilt yield, which largely reflects the average interest rate expected over that period, has accelerated this week, having fallen from 4.28% to 3.83% over the past month without any UK data that has been particularly supportive of rate cuts. Perhaps investors are looking over to Canada, where weak growth has become a primary motivator for rate cuts, or the US, where the resumption of the disinflation trend has seen markets go all in on a September rate cut. The 60% implied probability of a policy move tomorrow appears to be grounded in the expectation that the BoE can lean into a more optimistic longer-term inflationary outlook, and frame the decision as a modest adjustment to the level of restrictiveness. The stakes remain particularly high for the meeting, and overnight implied volatility in the sterling options markets has spiked to the highest level in almost a year.

EUR

The euro has been treading water since its 0.5% fall on Monday, even as GDP data trickled in yesterday. That’s because eyes are on this morning’s CPI inflation release, where the consensus is looking for a stable 2.5% print but markets are banking on a cooling in the core measure from 2.9% to 2.8% to keep their bets on further rate cuts in September and December in play. It’s worth nothing, however, that it has surprised to the upside versus the forecasts in five of the last six releases. GDP growth yesterday beat the forecasts at 0.3% quarter-on-quarter but remained sluggish as a result of a drag from Germany, where economic activity returned to contraction with a -0.1% decline. Spain continued to fuel eurozone growth, expanding at a 0.8% rate.

USD

All roads lead to the Federal Reserve decision this evening for the US dollar, after a couple of data points this afternoon: ADP non-farms, which has a spurious correlation to Friday’s payrolls number, and the employment cost index, which is a key quarterly indicator of wage costs to businesses. While it’s the overwhelming expectation that rates will be kept on hold today, the crucial element of the decision for markets is the extent to which Fed policymakers are prepared to signal a rate cut in September. That outcome is fully priced by the rates markets and then some, and a clear endorsement probably isn’t required to keep the market’s conviction firm here. Chair Powell has tended to be more dovish in the press conference than the policy statement this year, so any giveaways that hurt the greenback could be more likely to come from him.

Markets

Equities slipped globally in jittery trading yesterday as markets geared up for a packed diary of event risk today. Microsoft stock slid even as it beat quarterly revenue estimates amid concerns from analysts that heavy capital spending on AI may take a long time to pay off. Oil prices have surged this morning amid reignited fear of a wider escalation in the Middle East.

Main Economic Events (All Times CET)

3:30am: Australian CPI
5:30am: Bank of Japan Rate Decision
8:45am: French Prelim CPI
11:00am: Eurozone CPI
2:15pm: US ADP Non-Farm Payrolls
2:30pm: Canadian GDP
2:30pm US Employment Cost Index q/q
4:00pm: US Pending Home Sales
8:00pm: Federal Reserve Rate Decision

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