May 24, 2024

“The US economy outshone the eurozone and UK in yesterday’s PMIs, injecting a sour mood into markets that are once again back to paring back bets for rate cuts this year. The biggest threat to the dollar’s recovery of the past week will be core PCE next week, but the focus today is on durable goods and Waller.”

Tim Hallinan – Trading Director

Main Headlines

The US Justice Department filed a lawsuit on Thursday aiming to dismantle Live Nation, asserting that the concert promoter and its Ticketmaster unit engaged in practices that illegally inflated ticket prices and harmed artists. This legal action highlights the Biden administration’s antitrust strategy, which is acting across various sectors, including Big Tech, healthcare, and groceries.

Starting in July, most British households will see a reduction in their energy bills after the regulator Ofgem lowered the domestic price cap by 7%, primarily due to a decrease in wholesale energy prices. While this drop may help curb inflation, which fell to 2.3% in April — its lowest since July 2021 but still above the central bank’s 2% target — the reduction might be short-lived, given a rapid increase in natural gas prices this month.

GBP

Sterling receded against both the dollar and the euro as UK activity data landed weaker than expected. A sharp dip in services growth was cushioned by a boost to manufacturing, but the composite figure came in lower than the previous month at 52.8 versus 54.0. Retail sales data this morning confirmed the more subdued outlook for Q2 growth, with a stark 2.3% decline in consumer retail spending in April, dampened significantly by wet weather. The impact of the soft data has not been significantly material om the pound, however, and we are still not too distant from the multi-month highs notched this week – market pricing in the swaps markets is now pointing to fewer cuts in the UK than the US this year, and the first one has been pushed back to September. The signals in Wednesday’s CPI report were hawkish no doubt, but this is quite the move from the June cut everybody was expecting last week.

EUR

With a hawkish read coming from the eurozone data, the euro was on track for an impressive session yesterday until the focus shifted back to higher-for-longer rates in the US. The consensus-beating PMIs rose to their highest level in a year at 52.3 as the euro area economy continues its burst back into life this year. The wage growth figure that policymakers had previously touted as the ultimate decider of the June cut also rose to 4.7% in Q1, although the ECB rapidly sought to play down the uptick in a big U-turn, with a blogpost blaming one-off payments and arguing that elevated pay growth had already been incorporated into rosy forecasts. The June cut is still priced in at more than 90%, but the expected trajectory for July onwards has become increasingly hawkish over the past couple of months – only one further cut is fully priced, and the chances of another are slim. The data calendar is quiet today after yesterday’s deluge, and the headlines are the ECB’s known hawks – Schnabel and Nagel – who are naturally likely to re-emphasise caution.

USD

A booming US economy in May catapulted the dollar to above a one-week high as familiar higher-for-longer fears crept back into the market’s psyche. Expansion in economic activity unexpectedly accelerated to its quickest pace in two years, hinting to a significant amount of residual heat still to be squeezed out of the US economy. Prices are rising in the system more quickly than last month, and businesses are passing these through to consumers, leading many to requestion the true level of monetary policy restrictiveness. Importantly, the composite PMI is back above those in the UK and eurozone, putting a spanner in the works for the growth convergence narrative that has been buoying the pound and the euro. US yields surged as a result, and the dollar is back to where it was before last week’s softer CPI report. Durable goods orders, which are expected to be weak, and a speech from the well-respected Fed’s Waller are on the calendar for today.

Markets

An initial jump in US stocks faltered yesterday after focus on a 10% surge in Nvidia stock on bumper earnings shifted to renewed higher-for-longer rate concerns, as the US economy looked hot in its best PMI print in two years. Shares in the UK, Europe, and US all dipped and signals point to a weaker open this morning as indexes retreat from recent record highs.

Main Economic Events (All Times CET)

8:00am: UK Retail Sales
9:45am: SNB Chairman Jordan speaks
2:30pm: Canadian Retail Sales
2:30pm: US Durable Goods Orders
3:35pm: Fed’s Waller speaks
4:00pm: Revised UoM Consumer Sentiment

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