May 31, 2024

“It’s all about inflation today, with heightened potential for some intraday volatility as markets shift rate expectations around. The eurozone CPI release comes first this morning, before the US follows up with their most closely watched inflation gauge.”

Tim Hallinan – Trading Director

Main Headlines

A unanimous guilty verdict in Donald Trump’s New York hush money trial made him the first former US president to be convicted of a crime yesterday, following two days of deliberation from jurors. A fine is the most probable sentence, and Trump can still run for re-election in November. Wealthy Republican donors and avid supporters have rallied behind him since, with millions so far being pledged to support his campaign.

VAT is set to be fixed whichever the outcome in the UK election. British Shadow Chancellor Rachel Reeves confirmed yesterday that Labour would not increase VAT if it won the July election, after the Conservatives’ Hunt had ruled out VAT rises earlier in the week and said that the Labour Party had not done the same.

GBP

Sterling has started on a weaker footing this morning and trades around the lowest range of this week ahead of some big inflation data in Europe and the US. The UK data drought is set to end this morning, with mortgage approvals and lending figures due from the Bank of England. While the numbers are unlikely to shift the dial for the pound too much, they have been indicative recently of an improvement in lending conditions as rate cuts have come into view this year, with mortgage approvals recently ticking up to 61K from a low of 43K back in October. It is likely that sterling is kept busier by fluctuating rate expectations abroad as traders watch for eurozone CPI and US core PCE.

EUR

Inflation data will be key for the euro today. The consensus is for a modest uptick in the headline figure from 2.4% to 2.5% and a stable 2.7% core print. Without a huge upside surprise, next week’s rate cut will almost certainly still be the obvious bet, and markets are unlikely to be too concerned about the lack of progress – a bumpy path is to be expected, and inflation remains in a good place. The crucial factor for the common currency is how the evolution of both the domestic CPI data and developments elsewhere over the next several months influence the pace at which policymakers continue to chip away at the 4% policy rate, once the first rate cut has arrived. Markets are positioned for a methodical, once-per-quarter cutting cycle in the second half of the year, with only two fully priced before the end of the year.

USD

The dollar trimmed its gains yesterday as a spike in Treasury yields unwound, but it is back on a firm track ahead of this afternoon’s core PCE inflation data. Investors were handed a stark reminder that the US data is on a softening trend with a downward revision to Q1 GDP, which slowed considerably to 1.3% from 3.4% in Q4. Initial estimates had put the release at an even lower level, but rate cuts were on the market’s mind nonetheless. The focus switches to core PCE today for the biggest clues on the Fed rate path, however, with a good spread of estimates around the 0.3% mark, where we have been for the past two months. A weaker-than-expected release of the Fed’s favourite inflation measure could reignite excitement about the chances for rate cuts later in the year and put the final nail in the coffin for the dollar’s May, which is already set to be the first monthly drop of the year so far. We get a GDP release from its northern neighbour, too, with the Canadian economy likely to have stagnated in March but to have notched some healthy growth in Q1 as a whole.

Markets

A pullback in from the spike in US yields earlier in the week lifted stocks in the UK and Europe, but bad news was bad news in the US a downward revision to Q1 GDP saw Wall Street take a hit. The FTSE 100 managed to break its downward trend – it is down nearly 3% from the record high notched only a couple of weeks ago, weakened by shifting rate cut expectations.

Main Economic Events (All Times CET)

1:30am: Tokyo Core CPI
3:30am: Chinese PMIs
8:00am: German Retail Sales
8:30am: Swiss Retail Sales
8:45am: French CPI
10:30am: UK Mortgage Approvals & Consumer Lending
11:00am: Eurozone Flash CPI
2:30pm: Canadian GDP
2:30pm: US Core PCE Price Index

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