May 10, 2024

“A strong return to growth in the UK is the main story this morning after the Bank of England hinted that a rate cut could come next month at yesterday’s press conference. Eyes are on the US rate outlook today as always, where the data is starting to turn towards some degree of softening.”

Tim Hallinan – Trading Director

Main Headlines

The US House of Representatives Speaker Mike Johnson survived an attempt to oust him this week as a house majority voted to keep him in the position, after Republican Greene called for his axing amid tensions within the Republican party. He had spent hours listening to her demands in closed-door meetings this week as part of an open-door strategy.

Britain’s FTSE 100 stock index posted a record high yesterday as the Bank of England’s next step towards rate cuts pleased investors looking forward to lower borrowing costs. Shares in companies ranging from the defence industry to homebuilders helped to lift the index, which is up nearly 10% this year

GBP

Weaker jobs data in the US and an emphatic return to growth in the UK last quarter have put sterling on the front foot this morning. The Bank of England held rates steady at 5.25% again yesterday but took another step forward towards cutting this summer as Dave Ramsden joined Swati Dhingra in voting for a cut, putting the split at 7-2 in favour of a hold. The key points made in the press conference were that a cut in June is ruled neither in or out, and that markets risk underestimating the speed and volume of rate cuts over the next few years. Boosted hopes for rate cuts meant that the pound took a small knock after some choppy trading against the euro, but a consensus-beating 0.6% quarterly growth figure this morning has helped it to a swift recovery as the UK economy secured an exit from last year’s technical recession. A return to growth had been widely expected given the rapidly improving business indicators, rising real wages, and looser financial conditions compared to last year, but few were forecasting a recovery that consigned recessionary conditions to the past so forcibly. A critical point to note here is that the 0.6% figure annualises to a rate materially higher than the Q1 growth achieved in the US. The economic story has very much been one of divergence in terms of inflation, where the UK has managed to keep progressing, but the gap is tentatively beginning to close on the growth channel, and this is putting a dent in the US economic exceptionalism story. Today, look out for speeches by Huw Pill and Swati Dhingra.

EUR

The euro continues to take cues from the US data, lifting by around 0.3% yesterday on some softer labour market figures. The key impulse for the single currency today is the ECB policy meeting accounts from last month, back when the central bank all but pre-confirmed that a cut was arriving in June. The impact of any dovish signals will likely be limited given that markets are already all in on the pricing for a rate cut next month, and once again the focus will be on the path after the first move, with any strong sense of hesitation around diverging from the Fed likely to trim some of the euro’s gains from yesterday.

USD

With few other directional clues this week for the dollar, traders took a surprisingly soft unemployment claims figure as an excuse to sell off the greenback yesterday. The weekly figure hardly gets any mention from this report – largely because it has been fused to the 200-210K range since last autumn – but yesterday’s 231K print was the highest since August. On its own it would likely be brushed off as a blip rather than a real trend, but the figure’s recent low volatility and the growing array of softening US labour data meant that another tentative piece of weaker evidence helped to bolster the rate cut optimism. The question for today and next week is whether consumer sentiment, inflation expectations, and – most importantly – the hard inflation data join the pool of data points signalling a material softening, or if sticky inflation and US exceptionalism remains the name of the game. Traders will also have their eyes on Bowman, Kashkari, and Barr at the Fed when they speak today.

Markets

World equities rallied yesterday fuelled by rate cut optimism, as a surprise tick higher in US unemployment claims put markets in risk on mode. This led the S&P 500 higher by 0.5% and the European Stoxx 600 up 0.2%, while a dovish step from the BoE helped lift the FTSE 100 by 0.3% to fresh record highs.

Main Economic Events (All Times CET)

8:00am: UK GDP q/q
1:15pm: BoE’s Pill speaks
1:30pm: ECB Monetary Policy Meeting Accounts
1:45pm: BoE’s Dhingra speaks
2:30pm: Canadian Employment Change
3:00pm: Fed’s Bowman speaks
4:00pm: US Prelim UoM Consumer Sentiment & Inflation Expectations

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