September 27, 2024

“Some considerably weak inflation data from France and Spain this morning has ramped up expectations for the ECB to start cutting at consecutive meetings, which is weighing on the euro. The focus turns to the US this afternoon, with the Federal Reserve’s favourite gauge of inflation.”

Tim Hallinan – Trading Director

USD

Trading has been unusually choppy as we head towards the close of Q3. The dollar dropped against the entire G10 yesterday after rising on Wednesday, including some >1% dips against AUD and NZD, and a 0.9% gain for the Chinese yuan on the back of Beijing’s pledge to up their fiscal intervention. There has been a lot of activity in USD/JPY this morning, with the yen jumping over 1% on the election of new PM Ishiba, who the markets see as broadly supportive of further BoJ rate hikes. Looking at the US data yesterday, Q2 GDP held at 3.0%, durable goods orders surprised to the upside with a flat reading, and initial unemployment claims came in relatively strong again at 218K. Today, markets will be looking towards the Fed’s preferred measure of inflation, core PCE, and a consumer sentiment survey this afternoon. The 0.2% m/m consensus on the inflation print should simply be enough to keep the Fed on track for further rate cuts – anything lower would potentially give the Fed more room to cut rates rapidly, but next week’s jobs data is more likely to move the dial in this respect.

GBP

Sterling quietly notched another 2.5-year high against the dollar yesterday and in the short term seems to be moving in line with wider market gyrations rather than any specific macro news. Moves above 1.34 have been short-lived so far, but pound bulls have become more and more vocal recently. Goldman Sachs has been making headlines with the most aggressively bullish stance on sterling, targeting a return to 1.40 over the next 12 months, while several of its peers are eyeing at least the 1.35 level. Speculative traders’ long positions also remain stretched, according to the CFTC. Today is quiet in the UK, so we will be looking to the data releases in the US and the eurozone.

EUR

The euro is down nearly half a percentage point this morning as a result of some softer-than-expected September inflation figures from France and Spain. French CPI slipped to well below the 2% target at 1.5%, versus an expected 1.9%, and Spain’s fell from 2.4% to 1.7%. There are two details that are particularly dovish for the ECB. The first is that French services inflation, which is the last sticky component that policymakers are still hung up on, fell from 3.0% to 2.5%. And the second is Spain’s core, underlying CPI figure (i.e. excluding food and energy, which are volatile) shrank to 2.4% from 2.7%, despite expectations that it would rise. Alongside the increasingly poor growth outlook, the case for an October rate cut has built up considerably this week. The market-implied probability has shot up to 81% this morning, having been far closer to zero last week.

Markets

Beijing’s promise for a ramp up in fiscal spending and a rosy forecast for chipmaker Micron helped to drag global equity indexes to fresh record highs yesterday. The S&P 500, the Euro STOXX 600, and MSCI’s world equities index all touched intraday record peaks on Thursday, while mainland Chinese stocks have surged dramatically, with the CSI300 jumping 15% only this week and wiping out its losses year-to-date.

Main Economic Events (All Times CET)

8:45am: French CPI Inflation
9:00am: Spanish CPI Inflation
2:30pm: Canadian GDP
2:30pm: US Core PCE Inflation
4:00pm: US UoM Consumer Sentiment

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