June 03, 2024

“It’s a huge week ahead for FX. The ECB is set to cut interest rates for the first time this cycle and eyes are on the pace of cuts in the second half of the year. In the US, we have a raft of headline labour market numbers.”

Sam Cornford – Head of Trading

Main Headlines

A landslide election victory means that Claudia Sheinbaum is set to become Mexico’s first female president. The former climate scientist and mayor of Mexico City earned around 60% of the vote – set to be the best election win in the history of Mexican democracy. The peso gained as a result.

India’s Nifty 50 stock index surged nearly 3% to a record high on Monday after exit polls over the weekend pointed to a strong victory and a third term for incumbent Prime Minister Narendra Modi. India is one of the fastest-growing economies in the world – it expanded at a 7.8% annualised pace in the first quarter – and booming sentiment has helped equities to a 7% gain year-to-date.

GBP

A rapid pricing out of rate cuts from the Bank of England to just over one this year helped sterling to jump 2% against the dollar in May. The market must wait until wage growth and GDP data next week for the next clues on the domestic inflation and rates environment, however, and traders will be thankful for a data deluge in the US and Europe to keep the pound moving. We get a final manufacturing PMI figure this morning, where activity has been improving this year and ticked up into expansionary territory at 51.3 at the first estimate last month. Election campaigns will undoubtedly dominate the British headlines, although the biggest FX impacts are likely to come from the prospects of a closer relationship with the EU following the July vote, as this is likely the most economically impactful variable with headroom being too limited for big fiscal pledges.

EUR

The ECB is very likely to cut interest rates for the first time in almost a decade on Thursday, and to lead the Fed for the first time ever. CPI inflation rose more than projected in May from 2.4% to 2.6% which, whilst emboldening the case for caution post-June, should not deter policymakers from trimming the policy rate by 25bps this week. President Lagarde herself has attached a ‘strong likelihood’ to the outcome and rate-setters have backed themselves into a corner with a myriad of speeches and a soft pledge at the previous rate decision. Expect an air of caution in the press conference about the post-June trajectory, however, and a possible nod to holding steady in July as they wait for further confirmation that inflation is on a sustainable track to the 2% target. The final manufacturing PMI is the only data point for today, where there have been some strong upward revisions for individual countries so far.

USD

Softening US data handed the dollar its first monthly loss of 2024 in May, as the Fed soothed fears about further rate hikes and traders become tentatively more optimistic about rate cuts later in the year. On Friday, it tracked cooling Treasury yields lower early on and then remained largely unaffected by a slight downside surprise on the Fed-favoured core PCE inflation gauge. The consensus varied between 0.2-0.3% depending on the outlet you were reading it from, and 0.2% was the reading we got – it’s the right direction but ultimately did not materially move the dial on rate expectations. The attention turns to the labour market this week, with the familiar raft of data including JOLTS, ADP non-farms, wage growth, non-farm payrolls, and unemployment. Last month’s data came in softer across the board and saw the labour market move into better balance with vacancies falling, jobs growth slowing, and unemployment inching higher. For today, it’s the ISM manufacturing PMI on the market’s radar, where the consensus is for another sub-50 print.

Markets

May was a good month for world stocks, with US stocks back in the green and boosted on the final day by a weaker-than-expected core PCE print. Asian and European shares have all broadly benefitted since the inflation figure, and India’s Nifty 50 is the standout winner this morning amid signals of a strong election win for Modi’s governing party.

Main Economic Events (All Times CET)

10:00am: Eurozone Final Manufacturing PMI
10:30am: UK Final Manufacturing PMI
3:45pm: US Final Manufacturing PMI

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