June 10, 2024

Market run-through

As my esteemed friend Michael Brown refers to, in his note below, four of the G10 central banks have already delivered interest rate cuts, almost all being well-telegraphed. The ECB followed suit last week, cutting by .25%. However, Christine Lagarde was less than clear on the future path of rates, leaving this observer feeling that she may have some regrets over having boxed herself into this month’s rate cut. With recent inflation and wage figures staying stubbornly elevated, increasing numbers of traders feel this may have been a cut too early. Indeed, ING’s Carsten Brzeskti warned that this could be “a reverse Trichet moment” with the cut soon to be reversed.

This week, Jay Powell and the US Federal Reserve step up to the plate after their monthly meeting concludes on Wednesday. Until Friday afternoon’s release of the latest Labor market statistics, a few optimists were still looking for the Fed to become the fifth central bank to cut. With the figure beating nearly all expectations on the upside and unemployment only just now reaching the 4% threshold, the Fed will no doubt wait to see further evidence that inflation and the employment markets are cooling. Adding to what should already be a lively session on Wednesday, the US also releases CPI. However, whatever the number, it will be too late to influence the committee. Alongside Jay Powell’s press conference, the market will focus on the dot plot, not an Eastenders storyline but the guesstimates of the future path of rates from individual members. It would be massively refreshing if they admitted, “We don’t know as the data is too contradictory to forecast a future path of interest rates with any confidence”, but they won’t.

There is, of course, the little matter of the US Presidential election in November, which is starting to overshadow all things American. Naturally, the Fed will want to avoid being seen as political, making any interest rate moves more challenging. The BoE is in a similar position with an election less than a month away; it would seem that any cuts that may have been pencilled in for this month or next will most likely be put on hold, and the earliest opportunity now looks to be the end of Summer, possibly September. This week, GDP and employment data will be released here, but being brutal, recent results from the ONS are about as reliable as those from the England football team! Finally, staying on football, we wish all the teams participating in the European Championships the best of luck, and we will, of course, remain neutral in our support! C’mon England!

Richard Matthews, Head of FX and Payment Partnerships

Chart of the week

Last week saw both the Bank of Canada, and European Central Bank, deliver 25bp cuts, each marking their first steps towards policy normalisation, in moves that had been well-telegraphed, and hence caused little by way of market reaction. Nevertheless, four G10 central banks have now delivered rate cuts since the SNB became the first to cut back in March, with the BoE potentially being the next to move on 20^th June – though, this now appears a longer shot than a few weeks back, given the nasty upside surprise in April’s inflation figures, and that the meeting comes in the middle of the general election campaign. In any case, the direction of travel for G10 rates is clear, and the ‘summer of easing’ now seems well underway. As discussed at length previously, this dovish bias from G10 policymakers should continue to provide support to global equities, with the central bank ‘put’ well and truly back, while also keeping a lid on FX vol, with divergences between said central banks likely to be relatively narrow, at best – carry trades, therefore, should remain favoured for the time being.

Michael Brown, Market Analyst at Pepperstone

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