May 16, 2024

“Yesterday’s US CPI report has sent ripples across financial markets. Investor mood is through the roof this morning, having latched on to the cooler-than-expected figure that has reignited hopes for rate cuts and a soft landing in the US.”

Tim Hallinan – Trading Director

Main Headlines

US President Joe Biden and his Republican challenger, Donald Trump, have agreed to participate in two debates scheduled for June 27 and September 10, marking pivotal moments in the 2024 presidential race. Biden confirmed the debates on social media, echoing Trump’s previous challenge with the phrase, “As you said: anywhere, any time, any place.”

Britain’s opposition Labour leader, Keir Starmer, is set to outline six key priorities for his party if it wins power, aiming to challenge the ruling Conservatives ahead of an anticipated election later this year. In a speech in Essex today, Starmer will emphasise the need for economic stability and an overhaul of the health service. He will pledge to address long NHS waiting times and to grow the economy while maintaining low taxes, inflation, and mortgage rates.

GBP

Sterling is now at a five-week high against the dollar, having gained 1.5% almost entirely as a result of softer US data. For GBP/USD, the USD leg is firmly in the driving seat for now and the momentum is in the upward direction for the pound. The next big cues for the domestic economy are going to come from Governor Bailey and a crucial April CPI figure next week, and until then there are a couple of speeches to come from Greene this afternoon and Mann tomorrow morning. Mann is a notorious hawk – she only dropped her vote to keep hiking two months ago – and Greene has been in the same camp recently, arguing that inflationary risks are still significant, and that caution is warranted. Provided that neither begin to materially soften their stance, the pound should stay well bid through the end of the week.

EUR

A sparse eurozone economic calendar has been enough for the euro to climb to a near two-month high versus the flailing dollar. With few impulses to go off in the bloc, traders will be thankful for the US keeping markets busy – the second estimates for eurozone Q1 GDP and unemployment both remained unchanged at 0.3% yesterday, while a downward revision to the EU inflation forecasts was unsurprising. Eyes will be on an array of ECB speakers today. De Cos and Centeno have been particularly dovish over the past few months – they should confirm that a June cut is a near certainty, and possibly opt to call for a string of moves thereafter. Villeroy has already beamed his confidence about June this week but speaks again today, while Nagel is typically on the hawkish side.

USD

May has not been kind to the dollar, and a slight downside miss to US CPI inflation was all that markets needed to accelerate the slide. A 2% slump this month has almost completely reversed the gains that followed the March CPI report in mid-April, where a 3.5% print spooked traders into slashing hopes for rate cuts this year. Anyone would be forgiven for their shock that it was a 3.4% figure yesterday that catalysed the move, and some have naturally accused markets of overinterpreting a slight variation in the data. Nevertheless, risk appetite ballooned as investors ramped up their bets for September and December cuts, while even putting July back on the table – the two-year Treasury yield fell to a six-week low. Much of this was the culmination of building optimism that has resulted from softer data signals this month which has overall provided some relief that the direction is not still upward. Flat retail sales also boosted the ‘goldilocks’ narrative that the Fed will be able to bring inflation down without doing too much damage to the economy. Today, unemployment claims are set to be closely watched after cooling off last week, while we can also expect speeches from Barr, Mester, and Bostic.

Markets

Yesterday’s US CPI miss lit a fire under the equity markets, spurring a global risk rally that lifted the major indexes to record highs in Europe and the US. The S&P 500 jumped more than 1%, having fully recovered its April dip, and is up 11% on the year as markets continue to price in a soft landing scenario for the US economy.

Main Economic Events (All Times CET)

1:50am: Japan Prelim Q1 GDP
3:30am: Australian Employment Change
1:00pm: BoE’s Greene speaks
2:30pm: US Unemployment Claims
3:15pm: US Industrial Production
4:00pm: Fed’s Barr speaks
6:00pm: Fed’s Mester speaks
9:50pm: Fed’s Bostic speaks

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