June 19, 2024

“UK inflation hit a critical milestone this morning as it cooled to the Bank of England’s 2% target for the first time in nearly three years. Stubbornness in the services sector means that policymakers should retain an air of caution a tomorrow’s meeting, but the market is still looking for rate cuts this year.”

Sam Cornford – Head of Trading

Main Headlines

AI euphoria in the equities markets has fuelled a surge in chipmaker Nvidia to become the world’s most valuable company yesterday. It rose by 3.5% yesterday and is now up 170% this year as markets bet on its AI dominance, increasing its market capitalisation to more than $3.3tn.

Outgoing Dutch prime minister Mark Rutte, one of the biggest influences behind European support for Ukraine, looks set to become the next secretary-general of NATO. Known for a big presence in EU dealmaking and for pushing back against Russia, Rutte will formally leave his current post when the new right-wing coalition replaces his government.

GBP

The pound has gained this morning despite UK inflation cooling to the BoE’s 2% target for the first time since July 2021. While it’s a key threshold that undoubtedly makes a policy hold a hard sell to the public tomorrow, stubborn services inflation, a still tight labour market, and the upcoming election mean that keeping rates at 5.25% is the most likely scenario tomorrow. Services inflation again beat both the market’s and the BoE’s expectations, falling only from 5.9% to 5.7%, and the core measure – excluding food and energy – is still at 3.5%. A significant fall would likely have been required to put a rate cut on the table – with no press conference or new projections at tomorrow’s meeting, a quiet affair is the current consensus. Bets are still on for August, however, with two more CPI reports to come before the next meeting.

EUR

The euro was confined to a tight range yesterday and struggled to recover any more losses associated with the French political outlook. The ZEW survey gave a mixed picture, as the eurozone figure surprised to the upside for the ninth consecutive time while the German print disappointed with only a small gain. Today, the ECB’s Centeno speaks – a known dove – and we get an EU announcement of the members set to be placed under the Excessive Deficit Procedure, based on the Stability and Growth Pact fiscal rules. France is a likely inclusion, so the focus will be on any impact on EU bond spreads that could send the euro lower.

Elsewhere in Europe, the Swiss National Bank and the Norges Bank both meet for rate decisions tomorrow morning. SNB cut bets have crept higher to nearly 70% recently, despite some upside surprises in inflation, with most assuming that there remains some extra room to remove policy restrictiveness. Cuts in Norway are not expected until later in the year, putting focus on the language.

USD

A US bank holiday should keep trading in the dollar thin today ahead of a packed economic schedule in the second half of the week. US retail sales came in soft for May, undershooting the 0.3% forecasts with a 0.1% print and starting from a lower base, given the downward revision to the previous result to -0.2%. The steady softening in the US consumer raised hopes for further disinflation and prompted swaps traders to up their bets on a September rate cut to almost 70%, although dollar managed to hold off any significant weakness. Fed speak returned yesterday with several cautious speeches – Williams acknowledged the encouraging signs in the recent data, but also stressed that more data was needed and warned that rates would come down only gradually. The federal holiday means a quiet domestic calendar today, although traders will keep their eyes on unemployment claims tomorrow and the PMIs on Friday.

Markets

Continuing the theme from last week, further gains in tech fuelled fresh record highs in the S&P 500 and the Nasdaq as Nvidia became the most valuable company in the world. Asian stocks followed the US’ lead this morning, rising to a one-month high. Oil, meanwhile, has risen to a seven-week high.

Main Economic Events (All Times CET)

1:50am: Bank of Japan Monetary Policy Meeting Minutes
8:00am: UK CPI Inflation
10:30am: UK House Price Index
7:30pm: Bank of Canada Summary of Deliberations

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