Sovereign International Daily Market Report
Harris seen edging US election debate, as markets await CPI data
The dollar is trading a touch weaker on its major peers so far this week, as investors look to today’s US inflation report, while digesting the fallout from last night’s presidential election debate.
Highlights:
While fed fund futures now see a 25-basis point cut from the Fed as the most likely scenario this month, market participants have not completely ruled out the possibility of a jumbo cut. This will, however, likely be contingent on a miss in today’s CPI report for August. Yet, with economists already bracing for a relatively sizable drop in the headline number, the bar for an even weaker print seems rather high.
The euro has edged on the greenback, and its lowest level since mid-August, ahead of tomorrow’s ECB announcement. With another rate cut fully priced in by markets, the euro will take its cue from Lagarde’s comments on the pace of future rate reductions, as well as the Governing Council’s latest macroeconomic projections.
In the UK, this morning’s GDP figures for July were a clear disappointment, showing a second straight month of flat growth. Sterling came off modestly, although continues to print near its highs in trade-weighted terms.
USD
The dollar traded largely sideways following last night’s hotly anticipated TV debate between presidential candidates Harris and Trump. Most of the snap polls in the immediate aftermath of the debate suggest that Kamala Harris put in the better onstage performance, which will be a big relief for the Democrats given her relatively poor showings in these types of arenas in the past. A Harris election win is seen as the low-risk and low-volatility outcome of the vote, so any hint of a shift in support away from Trump could act to limit swings in FX, though we do think that her presidency could be mildly bearish for the dollar - more on that during our upcoming US Presidential Election Preview report.
All eyes now turn to this afternoon’s US inflation report for August. Economists are eyeing a drop in the main inflation measure to 2.6% (from 2.9%), with the core measure set to remain unchanged at 3.2%. As mentioned, we think that we would probably need to see a relatively large miss in one or both of these indicators for the market to see a 50bp Fed cut as the baseline scenario - a 0.1 p.p downside surprise in either or both of these data points may not be enough to shift the balance in favour of a large cut. August PPI inflation and the weekly jobless claims data will follow on Thursday.
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EUR
We see another 25bp cut from the ECB as set in stone tomorrow - this remains fully priced in by swap markets. Lagarde will likely stress data dependence, although she may give hints as to the pace of future rate reductions during her press conference. We think that an increased emphasis on the risks to the growth outlook, as well as sentiment that expresses greater confidence on inflation and wage developments, may hint at back-to-back cuts in September and October. The latter is only 40% around priced in, so there is clear room for euro downside, particularly should the ECB issue larger than anticipated downward revisions to the GDP and/or inflation projections.
On the other hand, any hint from Lagarde that future cuts may be gradual could trigger some upside in the euro. For now, we are pencilling in cuts on a quarterly basis, particularly given elevated services inflation and the still tight Euro Area labour market. At any rate, we expect Lagarde and co. to keep their options open this week, and to not commit to any concrete path for policy. This could place greater emphasis on the aforementioned macroeconomic projections, which may be of outsized importance on this occasion.
GBP
Sterling traded a touch weaker on the dollar yesterday following a rather mixed UK labour report. The unemployment rate eased to 4.1% (from 4.2%) in the three months to July, as anticipated, while the claimant count number of jobless benefit claims impressed, declining to just 24k (well below the 96k estimate). Earnings growth also dropped again. Wages excluding bonuses fell to 5.1% (from 5.4%), while the number including bonuses dropped to 4% (from 4.6%), just below the 4.1% consensus and its lowest level since November 2020.
Meanwhile, today’s GDP figures for July were underwhelming to say the least. The economy posted no growth at all in July, matching the flat growth registered in June - economists had been anticipating modest expansion of 0.2%. This will be a slight concern for market participants, as it appears that momentum in economic activity may be stalling following a strong first half of the year. The outperformance in the UK economy has been one of the main drivers of the GBP rally so far in 2024, so any signs of a slowdown could leave the UK currency exposed to some near-term downside.
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