Morning Report
May 21, 2024
“A data lull puts the focus on Federal Reserve speakers in the early stages of the week but some fresh cues are soon on their way, with Canadian and UK inflation coming up over the next few days and a string of PMIs on Thursday.”
Sam Cornford – Head of Trading
Main Headlines
In Germany, data from BNP Paribas Real Estate showed that international investors are steering clear of property deals, compounding the economic woes in Europe’s Largest economy. Only 35% of commercial real estate purchases were from foreign buyers in Q1 – the worst figure since 2013.
A PwC research report suggested that businesses most likely to utilise AI technology are seeing almost five times quicker productivity growth. IT and financial services productivity jumped 4.3% from 2018-2022, while the figure for construction, manufacturing, and retail was only 0.9%.
GBP
While most in the G10 have conceded some ground against the dollar this week on recovering US yields, sterling has held firm near a two-month high and pushed on to a three-week high against the euro. An introspective speech from Deputy Governor Broadbent yesterday was relatively confident that rate cuts were coming this summer, owing to a softening in wage and labour market effects that has been somewhat quicker than previously expected. Markets will be more interested in Bailey’s words this evening, however, with a focus on whether a first rate cut arrives in June or August, when ideally he will give a flavour for the Bank’s likely reaction function to the 2.1% expected inflation figure tomorrow morning. CPI is critical to sterling’s direction this week, both because of its high uncertainty and high consequentiality for the Bank of England’s rate path this summer. If inflation does fall to 2% – or even undershoots – it will become incredibly difficult to communicate holding rates steady this month, even if signs point to underlying pressures that are not fully quashed.
EUR
The euro has cooled off modestly this week as the US inflation-induced boost to sentiment has waned. Traders are in a bit of a holding pattern now, until the data lull is broken when some fresh clues arrive on Thursday with the purchasing manager surveys. We do get a speech from ECB President Lagarde this morning but, even if she does discuss policy post-June, it is unlikely that she arrives with some fresh insights to move the dial.
USD
The dollar has settled marginally higher this week, but has so far been unable to trace a full recovery in short-term US Treasury yields after both dipped on a small fall in inflation last Wednesday. Equity and risk rallies have held despite expectations for policy easing this year falling back to around 40bps with a likely September start. Thursday’s PMIs and next week’s core PCE print hang over markets and, until then, Fed speakers are again the highlight today. Yesterday, Jefferson and Bostic were both content with the view that demand will ease, inflation will slow, and rate cuts will eventually come, but struck a decidedly more cautious tone than the exuberance exhibited in the markets last week. Christopher Waller is the headline on the docket today – his closeness to Powell tends to give his words an outsized impact on expectations for rates and has triggered a few swings of late, most recently with some ‘no rush’ rhetoric regarding easing policy.
Markets
A recovery in US Treasury yields following last week’s post-CPI slump drained the tank for stocks’ bullish momentum yesterday, which remained well supported but paused on calmed expectations for policy easing at the Fed. While S&P 500, FTSE 100, and STOXX 600 all finished in the red yesterday, however, the Nasdaq clinched a record high close as traders piled into tech stocks in anticipation of Nvidia earnings this week.
Main Economic Events (All Times CET)
3:30am: Australian Monetary Policy Meeting Minutes
10:00am: ECB President Lagarde speaks
12:00pm: UK CBI Industrial Order Expectations
2:30pm: Canadian CPI
3:00pm: Fed’s Waller speaks
3:05pm: Fed’s Williams speaks
7:00pm: BoE Governor Bailey speaks
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