March 28, 2024

“The Fed’s Waller has come through with another influential speech last night, where he argued that there is no rush to start cutting rates, pushing the dollar’s Q1 gain above 3% against a basket of its peers. The Bank of England’s Haskel mirrored his ideas this morning.”

Tim Hallinan – Trading Director

Main Headlines

US Treasury Secretary Janet Yellen announced that a federal supply chain task force would convene on Wednesday to evaluate the Baltimore bridge collapse and subsequent port closure. Yellen said that the US government would ‘do everything as quickly as we possibly can’ on a trip to Georgia as she emphasised the importance of reopening the Port of Baltimore, which is one of the most significant in the US.

Official figures this morning confirmed that Britain’s economy experienced a shallow recession last year, presenting Prime Minister Rishi Sunak with the task of reassuring voters about the economy’s stability ahead of an anticipated election later this year. The Office for National Statistics reported that gross domestic product (GDP) contracted by 0.1% in the third quarter and by 0.3% in the fourth quarter, consistent with preliminary estimates.

GBP

Sterling has eased slightly against the dollar this morning in some choppy trading, but received a modest boost versus the euro from some hawkish pushback from the BoE’s Haskel. We received a grim reminder of the poor economic performance in Q4 with a confirmation of the technical recession, but it is central bank speakers behind the pound’s moves overnight. The MPC’s Haskel, who finally dropped his vote for a hike at last week’s meeting, cautioned in an FT interview this morning that rate cuts are ‘a long way off’ despite recent falls in headline inflation, contending that he does not think that ‘the headline figures give a good guide to the (inflationary) persistence’. This stands in stark contrast to Bailey’s newfound optimism that cuts were ‘in play’ last week and has given a modest boost to the pound, although Haskel’s well-known hawkishness means that it is the agreement of his more neutral colleagues that would really be required to but a floor under sterling.

EUR

The euro has slipped to a four-week low as the dollar extends its yield advantage on some hawkish Fedspeak. An upside surprise on Spanish inflation yesterday eventually drove the common currency lower, as the core measure slipped more than expected from 3.5% to 3.3% and reinforced the disinflationary direction of travel. We will need to see similar signals across the bloc over the next week to tip the scales towards a cut in the April meeting, while market-implied probabilities for a cut in June have been ramped up to 85%. Today, there is some private lending and Belgian inflation data out this morning, but we are really looking to German and eurozone CPI figures early next week and what they are likely to mean for the ECB’s policy trajectory.

USD

Fed Governor Waller’s hawkish speech late in the North American session has propelled the dollar to a six-week high this morning, after he claimed that it may be ‘prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought’ in a speech entitled ’There’s Still No Rush’. The markets were waiting for some hawkish pushback against Powell’s overly dovish tone last week, and Waller delivered – unlike Powell, who was rather undeterred by the recent strong data, Waller was more convinced that it bolsters the case to hold off and take stock of the situation, afforded to policymakers by the strong US economy. If, as he argues, it would take a few months of easing to gain the confidence, disinflation would have to be virtually immaculate between now and June to get the first cut pencilled in by the markets. Today, we get a final estimate for Q4 GDP, the weekly unemployment claims data, and pending home sales, although the markets are laser-focused on core PCE and Powell’s speech tomorrow.

Markets

Global equities are on track for their second quarterly gain after the S&P 500 notched a fresh record high. Economists at JP Morgan noted yesterday that the US index has already breached their year-end target, and the views floating around range from a sharp corrective decline this year to a 2024 close as high as 5800. Japan’s Nikkei – one of the top performers of the quarter and up over 20% – took a breather yesterday, however, as a modest recovery dented the allure of its cheap valuations.

Main Economic Events (All Times CET)

1:30am: Australian Retail Sales
8:00am: UK Final GDP q/q
1:30pm: Canadian GDP m/m
1:30pm: US Final GDP q/q
1:30pm: US Unemployment Claims
3:00pm: US Pending Home Sales
3:00pm: US Revised UoM Consumer Sentiment

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