CAPITALDIGEST MARKET REVIEW, 10/06/2024

STERLING TICKS LOWER AS WAGE GROWTH EXPECTATIONS EASE

The pound softened versus the euro on Thursday ahead of a European Central Bank meeting and after data showed a fall in British businesses’ expectations for wage growth in the coming year. The euro was last up 0.12% on sterling at 85.09 pence, though still at the weak end of its recent range, after May saw the British currency strengthen against most major peers, as hotter-than-expected services inflation caused markets to give up on expectations of a June Bank of England rate cut. Versus the dollar, the pound was a touch softer down 0.07% on the day $1.2784, but close to Tuesday’s two-and-a-half-month top of $1.2818. The main British macro news of the day was the release of a Bank of England survey showing British businesses’ expectations for wage growth over the coming year fell sharply last month to 4.1% in May from 4.6% in April, while on a three-month average basis, the measure fell to 4.5% from 4.8%. Both were the lowest since the current series started in May 2022, and may ease policymakers’ worries that it will be hard to keep inflation on target and make it easier for them to cut interest rates. Market pricing currently reflects expectations of one or two 25 basis point Bank of England rate cuts this year, with the first most likely to come in September. So far the British election, due 4 July has had fairly little effect on the pound, though the election was announced the same day as the hotter-than expected inflation data. Polls are currently pointing to a large majority for the opposition Labour Party, an outcome analysts at MUFG said in a Thursday note would be positive for the British currency. “It (a Labour landside) would lead to political stability and would raise expectations in the market of increased fiscal spending.”It would potentially reduce BoE rate cut expectations given the increased expectations of fiscal spending and over the medium-term would put the Labour Party in a better position to tackle the thorny Brexit topic in order to try and reduce frictions and improve relations,” they wrote. The main event in markets Thursday is the ECB policy decision. A rate cut is all but certain, but markets will be watching to see what President Christine Lagarde says about their future path.

DOLLAR FLAT AHEAD OF US JOBS REPORT, EURO DIGESTS ECB CUT

The dollar traded sideways on Thursday ahead of Friday’s U.S. employment data that could help the Federal Reserve set a timetable for easing, while theeuro held steady after a widely anticipatedEuropean Central Bank rate cut. The euro EUR= rose 0.17% to $1.0887, approaching the 2-1/2 month peak of $1.0916 hit earlier in the week. Against the Japanese currency it was off 0.09% at 169.57 yen. The dollar index =USD, which measures the greenback against a basket of currencies including the yen and euro, was 0.09% lower at 104.16, barely reacting to news that applications for unemployment benefits rose more than expected last week to 229,000. Weekly jobless claims were also slightly above last week’s upwardly revised 221,000. The data supported this week’s market narrative that labor market tightness is ebbing, which would be good for inflation and helped benchmark U.S. Treasury yields edge lower. Inflation in the 20 countries that share the euro has fallen from more than 10% in late 2022 to just above the European Central Bank’s 2% target in recent months, largely thanks to lower fuel costs and a normalization in supply after post-pandemic snags. That progress has stalled recently and what had looked like the start of a major ECB easing cycle a few weeks ago now appears more uncertain due to signs that euro zone inflation may prove sticky, as has been the case in the United States. It was so much as expected, what ECB has said and done, that when you make the adjustments for the 25 basis point cuts right now the swaps market hasn’t changed all that much,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

STERLING SET FOR FOURTH WEEKLY RALLY AHEAD OF US PAYROLLS

The pound was headed for a fourth consecutive weekly gain against the dollar on Friday, its longest rally since March last year, as investors prepared for data on the health of the U.S. labour market that could shape the outlook for U.S. rates. Sterling GBP=D3 was unchanged at $1.2789 at 0915 GMT. On a weekly basis, sterling is set for a rise of 0.4% and is around its highest since March, having topped $1.28 earlier in the week. But much of that rally has been the result of dollar weakness, rather than pound strength. Against the euro EURGBP=D3, sterling has performed far more modestly recently. It is roughly flat against the single European currency, a day after the European Central Bank delivered its first rate cut in five years. That said, the pound is not far off its strongest against the euro since October 2023, largely down to the expectation among investors that the Bank of England will not lower interest rates until later this year. Money markets show traders currently believe UK rates could fall to around 4.82% by December, from 5.25% right now. ECB rates are now at 3.75% and are expected to fall by at least another quarter point, and possibly by half a point, by year-end. 0#BOEWATCH, 0#ECBWATCH Friday’s session will be dominated by U.S. non-farm payrolls, which economists expect to have risen by 185,000 in May. Traders are currently pricing in two quarter-point rate cuts from the Federal Reserve this year, with the first most likely in September.There is a slimmer chance of two UK rates this year, given that some metrics, such as wage growth and service-sector price pressures, are still well above the Bank of England’s comfort zone, even if headline inflation has slowed substantially. Next week brings data on UK economic growth and employment, which could offer investors a steer on what to expect from the BoE in the coming weeks.

US DOLLAR BOUNCES AS STRONG JOBS REPORT LIKELY DELAYS FED EASING THIS YEAR

The U.S. dollar rebounded on Friday after data showed the world’s largest economy created a lot more jobs than expected last month, suggesting that the Federal Reserve could take time in starting its easing cycle this year. The dollar index , which tracks the currency’s value against six major peers led by the euro, rose 0.8% to 104.91, its best daily gain since April 10. For the week, the index was on track for a 0.2% gain, with the strong jobs number offsetting a run of weaker macro data that had earlier prompted investors to put two quarter-point Fed rate cuts back on the table in 2024. U.S. nonfarm payrolls expanded by 272,000 jobs last month, data showed, while revisions showed 15,000 fewer jobs created in March and April combined than previously reported. Economists polled by Reuters had forecast payrolls advancing by 185,000. Average hourly earnings rose 0.4% after having slowed to a 0.2% rate in April. Wages increased 4.1% in the 12 months through May following an upwardly revised 4.0% annual rise the prior month. The unemployment rate, however, edged up to 4% from 3.9% in April, breaching a level that had previously held for 27 straight months. “The markets and the Fed bow down to the holy grail of one number, and it is the payrolls report. Of course, it is not just about that headline print but also the higher-than-expected wage number,” said David Rosenberg, founder and president of Rosenberg Research in Montreal. “But as they say — ‘it is what it is.’ And because we know what the Fed is laser-focused on, and how the Fed is so omnipresent when it comes to market activity in stocks and bonds, consider this to be a bearish report because it simply will embolden the hawks on the FOMC (Federal Open Market Committee).” The FOMC is not expected to make any change at its policy meeting next week, Following the jobs data, the rate futures market has priced in just one cut of 25 basis points this year, either at the November or December meeting, according to LSEG’s rate probability app.

EURO SLIPS TO ONE-MONTH LOW AS MACRON CALLS FRENCH ELECTION

The euro fell to $1.0764, its lowest since May 9, in early trading in Asia. It was last down 0.24% at $1.0776 as investors weighed the implications of renewed political uncertainty in the euro zone’s second-biggest economy in a key election year. Eurosceptic nationalists made the biggest gains in European Parliament elections in the Sunday vote, an aggregated exit poll showed, prompting Macron to take a risky gamble to try to reestablish his authority. The prospects of a far right victory in France’s snap elections may keep the euro under pressure in the near term,” said Mansoor Mohi-Uddin, chief economist at Bank Of Singapore. But the exchange rate is still more likely to be influenced by this week’s U.S. inflation data and FOMC meeting.” The European Central Bank cut rates last week in a well-telegraphed move, but offered few hints about the outlook for monetary policy given that inflation is still above target. The dollar index, which measures the U.S. currency against six rivals, was at 105.09, the highest since May 30, after rising 0.8% on Friday following data that showed the world’s largest economy created a lot more jobs than expected in May. U.S. nonfarm payrolls expanded by 272,000 jobs last month, data showed, while economists polled by Reuters had forecast payrolls advancing by 185,000.