What happened last week.
(A forex, index, and commodity market review)
UK assets and Sterling reacted to the better-than-expected GDP data for May whilst the Bank of England’s chief economist warned that high service inflation and wage growth might hamper the Bank’s ability to cut rates. US markets experienced the opposite effect as better-than-expected inflation data increased the probability of a rate cut this September and with the possibility of a third rate cut being priced in by year end.
Weekly change (amount change and percentage change on the week)
FTSE +30 +0.37%
DAX +205 +1.10%
DOW +690 +1.75%
S&P +55 +0.98%
NASDQ -44 -0.22%
NIKKEI +192 +0.47%
Hang Seng +521 +2.94%
UK markets weakened on the back of Huw Pill’s comments about strong service sector inflation
Increasing the risk of more persistent inflation. Monthly GDP data for May came in double forecast at +0.4% which may pose a problem for the Bank of England as it prepares to deliberate about a possible rate cut at its meeting on August 1st. The problem is that with a stronger than expected economy the symptoms also include prices pressures that is something the Bank of England will be mindful of when considering the first cut in interest rates since the pandemic era. Following Pill’s comments, the forward swap rates implied a 50/50 probability of a rate cut on August 1st, down from 65% before Pill’s comments.
US markets continued to forge ahead into record territory as equity markets reacted positively to the better thane expected inflation data. Headline data fell 0.1% month-on-month June whilst the important core inflation came in at a monthly +0.1% versus +0.2% expected as the housing inflation finally easing as rent increases slowed. The Fed and the market were pleased with this data especially on the back of a cooling jobs market. Forward inter rates softened as investors priced in a near-certain rate cut with the probability of a third rate cut in December at 50%. The increase in optimism about potential rate cuts was underlined by fed officials last week with Jay Powell, the Federal Reserve chair, testifying in his Semi-Annual Monetary Policy Report before Congress, by talking more assuredly about tacking inflation. Powell said he believes inflation is slowing but said in his testimony “ “The question is: Are we sufficiently confident that it is moving sustainably down to 2%? And I’m not prepared to say that yet.” Economist can afford to be bolder and believe that inflation data will support two if not three interest rate cuts by year end.
EURUSD +0.66 +0.61%
GBPUSD +1.74 +1.35%
USDJPY -2.86 -1.78%
Sterling rallied against both the Euro and the US Dollar last week, touching a one-year high versus the US as strong UK data and better than expected US inflation cause the US Dollar to weaken and Sterling to strengthen. Traders backed sterling as the probability of a first rate cut in the UK receded to 50/50, increasing the appeal of sterling over the US Dollar and the Euro.
The Japanese yen strengthen last week, partly on the back of a weaker US dollar but also due to the risks of intervention by the BoJ to slow the Yen’s depreciation, as the Yen remains the worst performing currency this year by some margin. The Bank of Japan meet on July 31st to set interest rates.
Gold +20 +0.84%
UK OIL -2.08 -2.40%
US OIL -1.63 -1.96%
The threat of major disruption to the oil markets from hurricane Beryl abated. Chinese data revealed that factory gate prices continue to fall suggesting further deflationary pressure coming down the line which will inevitably lead to less demand from China , the world’s largest oil importer.
Gold trended higher last week as the US dollar, prompted by lower-than-expected inflation, fell further , touching the lowest level since mid-March.
Data and events in the coming week
(What traders need to look out for in the week ahead)
ECB interest rate decision whilst here in the UK we have inflation and employment data that should he3lp inform the BoE.
Monday
China Q2 GDP data. Expected at 5.1% as the Chinese economy continues to improve.
US Empire State manufacturing. Manufacturing activity in New York state. Still struggling but modest improvement since Q1. -5.5 expected.
US Jay Powell speaking the Economic Club of Washington DC. Q&A at the end which may interest markets. USD and US assets on guard.
Tuesday
US Core retail sales. Excludes auto sales which are seasonal and have too greater influence on the reading. +0.1% month on month.
Wednesday
UK Inflation CPI. Some economists expect that UK inflation may have bottomed in May although this week’s expectation is for another decline to 1.9% year on year, which would bolster the case for a rate cut in 2 weeks. Sterling and UK assets very sensitive to this release.
Thursday
UK Unemployment data. The UK’s labour market continues to deteriorate whilst wage pressure and earnings growth are moderating. Unemployment rate is now 4.4%, up from 3.8% at the end of 2023. Sterling and UK assets sensitive to this release.
Eurozone ECB interest rate announcement. No change expected as the ECB pause following the previous rate cut. Eurozone growth remains weak with recent German factory orders and industrial production data underlining the Eurozone struggles. Expectations are now for two further rate cuts, one in September and one in December the most likely scenario. Press conference to follow announcement. Euro and Eurozone assets sensitive.
US Philly Fed manufacturing data. Better than the New York state data but still pallid growth in manufacturing.
Friday
UK Retail sales. Expected at -0.6% as the weather and the Euros cause seasonal swings in consumers spending.
