Powell not so dovish but door open for a September cut, tomorrows US CPI release hugely important

Good morning

Feds Powell testified to Congress yesterday, not quite as dovish as some would have hoped, making it clear the Fed are cautious of cutting rates too early but not fully ruling out a cut later this year.  He said he sees the labour market as strong but not overheated, he also mentioned that inflation is not the only risk US are facing, perhaps a nod to some of the recent softer economic data and the idea of the Fed’s dual mandate. 

Market reaction wasn’t huge but USD buying was enough to take GBPUSD from 1.2820 to 1.2780 and EURUSD from 1.0825 to 1.0805, they are now both 20 pips or so higher as I type.  A Fed rate rise certainly looks well off the table now, a cut is really all about timing.  Goldman Sachs looks for a September cut of 25bps and then perhaps another 25bps cut in December.   

Powell does speak again today, the bulk of the speech is the same but there may be a twist in the Q&A which will keep the market on its toes as we continue to seek clues as to the potential for September rate cuts.

RBNZ did indeed leave rates unchanged at 5.5% as expected, although they did come across slightly more on the dovish side this time, noting that they see persistent inflation easing over time and that inflation should fall within the 1-3% target area in H2 2024.  There was also acknowledgement of a slowing economy.  NZD is lower across the board as the market begins to price a rate cut in October.  GBPNZD is now 2.1030, AUDNZD 1.1085 and NZDUSD 0.6085.  Next week we have the latest NZ CPI release, a softer reading will reinforce the potential for rate cuts.  On the subject of New Zealand, a very happy birthday to the regular reader who lives on the opposite side of the world.   

Other than Powell, we do have some other central bank officials speaking today including BoEs Pill and Mann.  It is possible Pill could sound more on the dovish side, while the historically hawkish Mann is likely to remain in the ‘no change’ camp.  UK GDP early tomorrow morning is expected to move up from zero to +0.2%, unlikely to have significant market impact.  US CPI inflation out tomorrow is far more likely to see market reaction.

Congratulations to Spain for their win over France yesterday, including a fantastic goal from their 16 year old superstar, putting them in the finals of Euro 2024.  Their opponents will be decided this evening as England take on the Netherlands.  A tough call, England slight favourites but as we know it is anyones guess as to which England team will show up, the fast flowing, attacking, dangerous team or the slow, pass it around the back team.  So far we’ve really only seen the latter, now is the time for the former to make an appearance. 

Speaking of a rare appearance, the fossil of a new species of plant-eating dinosaur that roamed the earth some 125 million years ago has been uncovered in the Isle of Wight.  The find, with 149 bones, makes it the most complete UK dinosaur discovery in 100 years.  Makes you wonder what else is lurking under our feet?

-  14.30 BoEs Pill speaks

-  15.00 Feds Powell speaks

-  16.30 BoEs Mann speaks

-  19.00 Fed Beige Book

-  19.00 US monthly budget statement

-  19.30 Feds Bowman speaks

-  23.30 Feds Cook speaks

-  02.00 AUS consumer inflation expectations

-  07.00 UK GDP, industrial production

-  07.00 German HICP

Will Powell open the door for a Fed rate cut in September ?

Good morning

Well yesterday was another fairly quiet day, the key highlight being a bit of GBP strength against both USD and EUR.  GBPUSD crept up to 1.2845, not far short of the June highs around 1.2860, while GBPEUR pushed up to the 1.1850 level.  The new UK Chancellor Reeves spoke, assuring us there would be no rises in VAT, NI or Income Tax.  I’m thinking corporation tax and tax on dividends could well increase though, they’ll get the money from somewhere, that’s for sure. 

BoEs Haskell also spoke yesterday, he is generally hawkish and gave the usual warnings about a tight labour market and wage prices, and that although there were some encouraging signs on inflation he’d be happy to keep rates on hold.  The next meeting in August will be his last, I don’t think he’s yet been replaced, I believe Reeves gets to make that appointment.  Not sure she’ll want anyone quite as hawkish as Haskel.

Once again, GBP has been unable to capitalise on its gains and is now a little off those highs, as I type GBPUSD is back to 1.2805 and GBPEUR is around 1.1830.

My USDJPY downside option managed to just about break even, you may remember we’d paid 40 yen pips for the Monday expiry 161.00 USDJPY put, hoping to see some intervention by Japan in the less liquid markets over the US holidays last week, but that was not to be.  Spot was just low enough to make 40 pips on the spot on exercise to recoup the premium paid.

The French left wing supporters prepared a riot in case the right wing got elected.  As we know, the left wing did far better than expected so their supporters rioted anyway.  Incredible.  Some press reports suggests the French left are looking at imposing a 90% tax on any earnings over EUR400,000, among other radical proposals, however with the vote as it is neither the right nor the left are likely to be able to get their ideas approved in Parliament, which perhaps explains the stability of EUR since the weekend.  EURUSD is now 1.0825.

Fed Powell speaks today in his monetary policy report to congress.  The testimony comes amid signs of a slowdown in the US economy, it will be interesting to see whether he makes any reference to the recent weaker data, and indeed to US inflation which we’ll get on Thursday.  It is possible he’ll mention the ongoing political situation in the US, or indeed the UK and France for that matter.  The key is really how much he opens the door to a September rate cut.  Its unlikely he’ll do so too much but any comment at all will certainly be closely watched, he has recently mentioned the Fed’s mandate is to help employment as well as inflation, after the weaker nonfarms last week any repeat of this could lead markets to assume a september cut is on the cards.

We have a rate announcement from New Zealand in the early hours of tomorrow morning.  They kept rates unchanged at 5.5% last time out in May, indeed as they have since the last 25bps rise back in May 2023, but they have been pretty hawkish at most meetings this year, warning of the ongoing risk for further upside inflation and making it clear they are leaving the door open for rate rises.  I see no reason for there to be any change in this stance, so unless they surprise with a more dovish message I’d expect NZD to find support.  For the record, GBPNZD, AUDNZD and NZDUSD are 2.0900, 1.1000 and 0.6125 respectively.

We still have a couple of days until the key US inflation numbers.  In the meantime, the small matter of the Euro 2024 semi-finals, starting with Spain v France this evening.  France had been second favourites at the start of the tournament but they have been a bit disappointing and Spain have put in some decent performances, which makes the latter marginal favourites for this match.  It’s likely to be another tight one.

Have a great day.  If you go outside do be careful of the extreme July temperatures.  They are likely to be up near 20°c.  With a bit of rain. 

-  14.15 Feds Barr speaks

-  15.00 Feds Powell speaks

-  18.30 Feds Bowman speaks

-  02.30 China CPI

-  03.00 RBNZ rate announcement

Downward revisions to nonfarms keep USD under pressure, while France swings from right to left

Good morning

US dollar continued to weaken after Friday’s nonfarm payrolls.  On the face of it, the headline looked decent at +206k compared to an expected +190k, and the initial move was a push higher in USD.  However the previous reading was revised sharply lower from +272k to +218k, indeed the revisions lower to the previous two months data totalled some 111k.  The unemployment rate also ticked higher to 4.1%.  The overall softer readings serve to underline the recent feeling that the US are seeing something of a slow-down and strengthen the idea that we could see a cut by the Fed in September. 

GBPUSD traded up to 1.2815, EURUSD up to 1.0840, while USDJPY dipped to 160.35.  On the open we again saw a bit of USD strength but as I type GBPUSD is 1.2810, EURUSD 1.0830 and USDJPY 160.90. 

In France, the elections provided something of a surprise, as Le Pens RN party failed not only to win a majority but came in third in the overall voting behind the left wing New Popular Front (NFP) and Macrons Ensemble.  It is a bit of an ‘out of the frying pan, into the fire’ situation.  There were the usual cheers that the more right wing parties failed to capitalise on their gains at the elections last week, however it must be said that the far-left now hold more sway, with their leader Melenchon likened to a more radical, Corbyn-style of thinking, which could well undermine some of the economic work Macron has put in place.  Indeed Melenchon immediately said he wanted to implement his manifesto in full and wanted nothing to do with a coalition with Macron.  It is a huge swing from what at one point looked like a far-right win, to a far-left win.  With no majority, France could well struggle with a lack of political direction and inability to make decisions in the coming months.  Many expect a new election inside a year as the current political positon is likely to be unworkable.

The single currency has held up well.  It lost a little ground initially, with GBPEUR trading up from 1.1825 to 1.1850 but since the move on the open it has come back to the 1.1825 area.   

So from the left wing victory in France to the UK, where of course Labour are now in power after an election with a low turnout and little support for any party despite Labour’s huge majority.  The Tories are going to have to go into full rebuild mode, they’ll be looking for a new leader following Sunak’s resignation.  Who is willing to take on that poisoned chalice?  Anyway, today we will hear from the new Chancellor, Rachel Reeves, at around 10.30 as she outlines her plans for the economy.   That is likely to be highlight of the day given the very sparse calendar today, while the highlight of the week will certainly be US CPI release on Thursday.

In sport over the weekend we saw Englands rugby team lose by just one point to the All-Blacks, which isn’t a bad result although with a couple of better penalty kicks we could have won it.  Lewis Hamilton won the British Grand Prix which was something of a surprise but hopefully signals an end to the domination of the sport by Red Bull.  And of course, Englands football team got through to the semi-finals of the Euro’s with a win on penalties over Switzerland.  The overall performance was mildly better than in previous games, we’ll face Netherlands next and will need to show another step up in performance if we are to make it into the finals.  Spain will take on France in the other half of the draw, Spain are now favourites after their victory over hosts Germany.  Spain v France is Tuesday, England play on Wednesday.

I have to admit I was a bit miserable over the weekend.  I’ve been back about a week from holidays where temperatures were in the high-20’s/low 30’s, my weekend was spent sitting indoors looking out at the torrential rain falling from the skies.  OK, so it is Wimbledon and the British GP, so of course its going to rain, but I’m now really fed up with this lack of summer, particularly when I had planned on playing more golf to build up a small degree of fitness.  Of course, its sunny this morning, now I’m sitting at my desk.    

Enough of my moaning, life could be worse, I guess.  Let’s see what Reeves has to say before I pack up my things and move to somewhere warmer.

-  10.30 UK Chancellor Reeves speaks

-  00.01 UK BRC retail sales

-  01.30 AUS Westpac consumer confidence