Market Commentary

The Euro is up a bit over 0.5% to 1.0770 versus the Dollar in this morning’s trading. Sterling is also up slightly versus the Dollar, to about 1.2680, leaving the euro up about 0.3% against sterling to £0.849. The Dollar versus Yen, the focus of much market attention of late, was broadly unchanged since Friday trading at just over Y161. The market will continue to be on guard regarding the possibility of intervention by the Japanese authorities.

Yesterday’s Events

In France the election results confirmed what the polls had been indicating, with the right wing RN party of Marine Le Pen winning the largest share of the vote. The left wing block came second, with President Macron’s party beaten into third place. There will now be a second round of voting, with the possibility that electoral agreements between the left wing and Macron’s party may eat into the RN’s seat tally. As such a hung parliament looks like a distinct possibility. The French 10-year bond yield is not much changed despite the election results, trading at close to 3.25%. The French stock market, the CAC40, has opened with gains of over 2.5% this morning.

In the US PCE inflation came in in-line with expectations for May. Headline inflation on this measure came in at 0% month-on-month and 2.6% on an annual basis. Core PCE inflation was 0.08% m-on-m and the y-on-y rate declined to 2.6%. Personal income rose a healthy 0.5% on the month, though consumer spending was a bit lower than this at 0.2% m-on-m.

In terms of other data the University of Michigan Consumer Sentiment came in at 68 for June, down marginally on 69 in May, though a touch above expectations. UK Nationwide house prices rose 0.2% in May in month-on-month terms, and was up 1.5% on an annual basis. The German unemployment rate rose 0.1pp to 6% in May, a touch above consensus expectations.

The Day Ahead

Today we have German inflation data as well as credit and mortgage approvals data for the UK. Later on we have the ISM manufacturing and non-manufacturing data for the US. ECB President Lagarde is also speaking.

Market Commentary

The recent ups and downs for the euro continued yesterday.  In the 8 or so trading days since the European elections, while it has come under pressure at times, it has held up at around $1.07 and not broken more than 0.5 cent above and more than 0.2 cent below for any significant time. The political risk is still very much there but for now it’s bouncing around that level and dipped from $1.0740 to $1.07 this morning. It’s also been in a fairly tight range versus sterling over the past week or so and is still trading around 84.4p. There has been a touch more volatility in the GBPUSD cross, but not by much, and it’s largely unchanged from yesterday at just below $1.27.

Yesterday’s Events

There was not much movement in the Government bond markets either. Generally speaking, European yields were unchanged with German 10-year yields down 1bps and French 10-year yields down 2bps. US equities had lost some ground on Monday, on foot of some corrections for the sky-high valuations in AI stocks but bounced back again on Tuesday with investors piling back into some of those stocks. The S&P took back all of its 0.3% loss on Monday, rising 0.4% yesterday, taking the index back towards its record high, albeit that was set just last week.

US consumer confidence edged down in June, held back by weaker optimism about the economic outlook. The conference board measure fell to 100.4 in June from 101.3 in May. The report specifically warned that while consumer’s view of the current labour market situation was broadly positive if there was a material weakness in the jobs market then confidence could weaken quickly. In better news for the US, the Philadelphia Fed measure of non-manufacturing activity showed a sizable pickup this month, coming in at 2.9 from 0.6 in May, with sales, new orders and employment indicators all rising sharply.

ECB Governor Olli Rehn gave a very clear view of how he thinks the ECB will act over the rest of this year. He said that the market is pricing for two more rate cuts to take the deposit rate to 3.25% by the end of this year and a terminal rate of somewhere around 2.25% or 2.50% and added ‘in my view, they are reasonable expectations’. He said that a disinflationary process is going on and the ECB ‘always knew that it’s going to be a bumpy road’ but it’s reasonable with what is going on that further rate cuts can be expected.

Fed Governor Lisa Cook said that ‘at some point it will appropriate to reduce the level of policy restriction to maintain a healthy balance in the economy’. She failed to mention when that might be, but timing would be dependent on ‘how the economic data evolves’. She did say she expects inflation to move lower ‘on a bumpy path’ during the rest of this year on a month-to-month basis but that annual inflation will move ‘roughly sideways’. She also said the Fed was ‘attentive’ to the risk that things can ‘change quickly’ particularly in the labour market.

The Day Ahead

Economic data due today includes CBI sales data in the UK and new home sales in the US, while on the speaker front, we have Philip Lane from the ECB.

Market Commentary

The Euro reversed its losses from Friday yesterday with the single currency bouncing off below $1.07 back to around $1.0740. Once again, there was relatively little change against sterling, continuing to trade in a tight range around 84.6p. Sterling picked up against the dollar and is trading just below $1.27 this morning.

Yesterday’s Events

10-year Government bond yields ticked down very marginally yesterday, but there wasn’t much movement overall. US 10-year yields were down 1bps to remain around 4.25%, UK 10-year yields were unchanged at 4.08% with German 10-year yields were up 1bps, again remaining around 2.4%. Equities had a more volatile day with equities markets in Europe rallying and the Eurostoxx gaining 0.9% and the FTSE up 0.5%.

The IFO index weakened in June, with the German sentiment index dipping slightly from May. The expectations index fell to 89 in June from 90.3 in May, the first fall in five months. The institute said that the data was a disappointment with recent improvements appearing to stall, with negative data coming from manufacturing in particular. This ties in with the recent PMI data which showed that industry in Germany is continuing to struggle.

ECB executive board member Isabel Schnabel said yesterday that it was unlikely that interest rates in the euro area would take a significantly different path than in the US. This has been become a much-discussed scenario over the past year with the ECB having cut rates once already and the market pricing for two more this year while the Fed is guiding for a just a single cut in 2024. Schnabel said she thinks while the macro economies in both are ‘not all that similar’ the inflation side ‘doesn’t look all that different’.

San Francisco Fed President, and 2024 voting member of the FOMC, Mary Daly was also out with a pessimistic view of the US labour market, warning that inflation is not the ‘only risk we (the Fed) face’. She said that restrained demand was needed to return inflation to target but that risks stressing a labour market which she described as ‘no longer frothy’. She said that while unemployment has only edged up so far, the US labour market was near an inflection point where unemployment could rise and a ‘benign outcome could be less likely’.  

The Day Ahead

Economic data due today includes house prices and consumer confidence in the US as well as the Philly Fed non-manufacturing index while speakers include Cook and Bowman from the Fed and Nagel from the ECB..

Market Commentary

Political uncertainty continues to be the main theme at play in the Euro Area, in particular with the upcoming French elections. The uncertainty has weighed on the single currency, which dropped below $1.07 for a time on Friday and is trading around that level this morning. With the French elections first round next weekend, and second round a week after, we could see more volatility in the days ahead. The $1.068 level has held firm so far, but could be tested again should political uncertainty continue. Against Sterling, the Euro has stabilised around 84.6p for the time being. That meant Sterling has also eased back against the Dollar and is now trading at $1.2650 this morning.

Yesterday’s Events

There wasn’t much movement overall in Government bond yields during last week. US 10-year yields were up just 3bps for the week to 4.25%, UK 10-year yields were also up 3bps to 4.08% with German 10-year yields up 5bps to 2.4%. French Government bonds yields have been volatile since the elections were called two weeks ago but seem to have settled around 3.2% for now.

Euro area flash PMI’s showed an easing of activity in the zone in June. The composite index dropped to 50.8 this month, just above the 50 expansion/contraction line, from 52.2 in May. That was a fourth month of expansion but the slowdown in pace was unexpected. The Euro Area economy is in a nascent recovery, with GDP expanding by 0.3% in Q1 following a 0.1% dip in Q4 of last year, but this data suggests some of the momentum is waning. The easing in the index in June was largely due to a slowdown in manufacturing which slipped further back into contractionary territory to 45.6, from 47.3, with a low print in Germany, 43.4 down from 45.4, weighing down activity. Industry in the EU’s biggest economy has been suffering a prolonged slowdown and while the reading is up from the low of 38.8 last summer, it’s now two years since the German manufacturing PMI pointed to any expansion in activity in the sector. The survey also pointed to slower activity in services in the Euro Area, 52.6 from 53.2, though it managed to stay in expansionary territory.

The early UK PMI readings for June also point to an easing pace of expansion. The composite fell to 51.7 this month from 53.0 in May. Unlike the Euro Area, services was the weak point in the UK in June with the index coming back to 51.2 from 52.9, while manufacturing was pretty much unchanged, ticking up slightly to 51.4. The survey indicated that costs are still a concern for businesses with input and output prices indices rising. Services inflation is a key concern for the Bank of England with wages remaining the key driver of costs in the sector. The MPC minutes last week indicated that the Committee may be moving towards a cut in the next few meetings but data such as this will remind members that businesses, particularly in the services sector, are still seeing price pressures.

In the US, the PMIs remained in expansionary territory with the composite picking up marginally to 54.6 in June from 54.5 in May. There were small pickups in both services, to 55.1 from 54.8, and manufacturing, 51.7 from 51.3. The services PMI rose to indicate that the sector expanded at the fastest pace in over two years. Current demand is picking up in both manufacturing and services with the report also showing prices pressures easing and the outlook improving, with the index for future activity rising this month in the services sector. Optimism was more subdued in the manufacturing sector with businesses concerned about future demand prospects and also potential changes in policy post the election in November.

The Day Ahead

Economic data due today includes the IFO index in Germany while a number of ECB and Fed members are due to speak.

Market Commentary

The Bank of England kept the bank rate unchanged yesterday at 5.25%, as expected. However, the minutes showed that for some members who voted to maintain the policy stance the decision was ‘finely balanced’ causing markets to price in a 50/50 chance of a rate cut at the next meeting in August. Sterling fell slightly post the meeting and is trading around 84.6p to the euro, having reached year-to-date lows below 84p last week. The dollar did gain some ground yesterday both against the euro and sterling with the former trading down to just above $1.07 and the latter to $1.2660.

Yesterday’s Events

The MPC voted 7-2 to keep rates on hold at 5.25% yesterday with 2 members (Dhingra and Ramsden) preferring an immediate rate cut of 25bps. While inflation had returned to target in May the Bank still expects inflation to rise slightly in the second half of this year. Some members of the group of 7 voting to keeping policy on hold believed the high levels of services inflation would mean that second-round effects would maintain persistent upward pressure on inflation. For them, wage growth continued to exceed forecasts and indicators of domestic demand were stronger than expected and they wanted to see more evidence of diminishing inflationary pressures before reducing monetary policy restrictiveness. However, for others in the group of 7 the upside surprise in services inflation did not alter significantly the disinflationary trajectory and the policy decision was ‘finely balanced’. This caused the market to move in a first rate cut by the BoE from November to virtually fully priced in by September and a 50/50 chance of a cut at the next meeting in August. UK Government bond yields also ticked down with 2-year yields down c.4bps to around 4.10% this morning and 10-year yields down marginally to 4.05%.

The Philly Fed business outlook survey showed a dip to 1.3 in June from 4.5 in May when an increase was expected. The details showed that current activity indicators were stable but the index of future activity fell to 13.8 from 32.4, its lowest level for 4 months while the future shipments index also dropped sharply. The readings for prices paid and received rose further in June, to their highest levels since mid-2022. The survey suggests not only are businesses more pessimistic than they were about the outlook for the US economy they are also concerned about a revival in inflation.

Euro Area consumer confidence rose, just slightly, to -14.0 in June from -14.3 in May. Consumer sentiment remains on an upward trend from its lows in mid-2022 but is still at relatively low levels, with the index below its long term average. The index has moved up for five consecutive months now and is at the highest rate for two years. With the ECB reducing rates, inflation moving down and real incomes rising the tailwinds are positive for consumers in the second half of the year.

There was a strong rebound in UK retail sales in May, increasing by 2.9% on the month following 3 months of declines, which left the annual rate at 1.3%. Consumers went back to the shops after a rainy April seemed to dampen demand and the rise in consumption of goods was broad based. Consumer confidence in the UK has picked up to its highest level in three years as rising income and easing inflation has supported households in spite of softening in the labour market.

Minneapolis Fed President Kashkari, who is not voting on monetary policy this year, said that while he was ‘confident’ that inflation will return to the Fed’s 2% target it is likely to take a year or two to get there. He said that US economic fundamentals were ‘sound and strong’ though there was some softening ‘at the margins’.

The Day Ahead

Economic data due today includes existing home sales in the US and early June PMI readings in UK, Euro Area and US. Speakers include Nagel and Simkus from the ECB.