Morning Report

May 15, 2024

“The effects of PPI inflation and a speech by Fed Chair Powell created some market wobbles yesterday that ultimately left the dollar trading lower again. Today’s crucial US CPI inflation is a new test, however, and a surprise either way could spur some big swings.”

Sam Cornford – Head of Trading

Main Headlines

On Tuesday, US President Joe Biden announced significant tariff hikes on a range of Chinese imports, targeting products such as EV batteries, computer chips, and medical equipment. This move, seen as an effort to appeal to voters critical of his economic policies, risks escalating tensions with Beijing in an election year. In response, China expressed strong opposition and vowed to retaliate.

A government-commissioned report released on Tuesday warned that some British universities might face collapse if restrictions on international student members continue, after a significant drop in foreign student registrations for the upcoming academic year. According to the report, the number of international postgraduate students who have paid deposits to study in the UK this September has plummeted by 63% compared to the previous year, following new government restrictions on education visas.


Yesterday’s labour market data was the highlight domestic development for sterling this week, which left it relatively flat on the balance of stickier wage data and loosening employment. A more optimistic speech from Huw Pill put the pound under some pressure with his comments that a rate cut this summer was ‘not unreasonable’, and that the more persistent components of inflation were coming down at a steady pace. The UK macro data flow has dried up today and we’ll have to wait until tomorrow for a speech by the BoE’s Greene, so US CPI inflation is the primary focus for sterling. The combination of a mixed PPI report and Powell’s optimism in the US have lifted the pound to around its highest levels achieved in May this morning – a weaker CPI number could take the pair to a one-month high.


A tenth upside surprise on the run for the German ZEW economic sentiment indicator was lost in the noise of the US inflation story for the euro, which is now trading at a one-month high against the dollar. The cyclical backdrop is a growing tailwind for the single currency, and this is a big part of the reason why it has held firm against the dollar over the past month or two, despite concerns at times that the ECB would create a gaping rate differential with early cuts. As with the rest of FX, today is all about the US data. This morning brings some revisions to Q1 employment and GDP data, but we would not normally expect a significant market reaction. Some speeches come from the likes of Rehn and Villeroy, too, but it’s a potential repricing of the Fed’s rate trajectory at the top of the agenda today, and this will dominate EUR/USD.


Given the headline PPI figures yesterday, anyone would be forgiven for their surprise that the dollar is inching even lower this morning. Both the core and headline measures printed at 0.5%, significantly above cooler expectations for 0.2% and 0.3% respectively. Yet, having fallen nearly 0.4% since the release, the dollar has now almost fully reversed its 2% post-CPI surge from only a month ago, back when a third round of hot inflation data had traders wondering if a further hike was on the cards. There are a few reasons why: the March print was revised down to -0.1%, many of the components fed into core PCE were softer, it is poor at predicting the immediate CPI figure, and Chair Powell did not seem flustered at a later interview, calling it ‘mixed’. Powell only repeated everything the market had already heard before, in that further hikes were unlikely, cuts were still on the cards this year, and it is simply a waiting game until restrictive policy takes inflation in the right direction. Markets seem keen to sell the dollar, though, and any encouragement seems to be relatively effective in putting on further downward pressure. All eyes are on the CPI print today, and a hotter-than-expected number could throw out some obstacles to the greenback’s bearish momentum. Bloomberg analysis yesterday showed that the options markets are positioned for an expected drop in the dollar, however. Markets are looking for a 0.3% core month-on-month print, and a 3.4% yearly headline.


US and European bourses were lifted by Powell’s comments yesterday afternoon, despite the sticky PPI print, as markets got what they wanted to hear from Jay Powell in terms of the next move still likely to be a rate cut. A soft CPI print today could take the S&P 500 back to a fresh record high, having recovered almost all of the April dip.

Main Economic Events (All Times CET)

3:30am: Australian Wage Price Index
11:00am: Eurozone Flash Employment Change and GDP q/q
2:30pm: US CPI Inflation & Retail Sales
9:20pm: Fed’s Bowman speaks


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