Bullish Buzz

July 03, 2024

Bullish Buzz

  • The S&P 500 and Nasdaq indexes closed at record highs yesterday just in time for Independence Day fireworks.
  • Australia May retail sales growth overshot expectations.
  • China’s private survey June Caixin services PMI points to a sluggish growth outlook.

USD is adrift a little under recent highs underpinned in part by higher US Treasury yields relative to that of other major economies. Fed Chair Jay Powell continued to urge patience before easing. Yesterday, Powell noted the latest data “do suggest that we’re getting back on a disinflationary path”, adding “the strong economy and job market give us the ability to take time” before starting to cut rates. Indeed, the US JOLTS job openings data showed labor demand unexpectedly increased in May. The June ADP private sector job estimate is up next (1:15pm London). Employment is expected to rise 165k vs. 152k in May.

The US June ISM Services index is the other main data highlight today (3:00pm London). Services activity is projected to dip to 52.6 vs. 53.8 in May. Softer US economic activity is a near-term headwind for USD. Ahead of the data, New York Fed President John Williams speaks on a panel about the drivers of equilibrium interest rates (12:00pm London).

The FOMC June meeting Minutes will offer more details behind the Fed’s hawkish hold (7:00pm London). Recall, the Dot Plots shifted to show only one 25 bp cut was expected this year versus three previously, while updated macro forecasts saw higher headline and core PCE inflation projections for 2024 and 2025. In contrast, Fed funds futures continue to price-in 45 bp of cuts by December 2024. In our view, the favourable US macro backdrop and easy financial market conditions justify a reassessment in Fed funds rate expectations in support of USD and Treasury yields.

EUR/USD is unlikely to gain material upside momentum as the ECB has room to ease policy further. Yesterday, ECB President Christine Lagarde downplayed sticky Eurozone services inflation which held at 4.1% in June. Lagarde remarked “Obviously, we don’t need to have services at 2% because manufacturing goods are below 2% and at the end of the day it’s going to be a balance between goods and services.” Overall, the Eurozone disinflationary process is well on track and supports the case for the ECB to cut rates again in September. The swaps market continues to imply roughly 70% odds of a 25 bp ECB rate cut for September 12. Today, Lagarde gives closing remarks (3:15pm London).

The Riksbank releases its June 27 meeting minutes (8:30am London). At that meeting the Riksbank delivered a dovish hold. It kept rates steady at 3.75%, as expected, but warned “the policy rate can be cut two or three times during the second half of the year.” Previously, the policy guidance was “the policy rate is expected to be cut two more times during the second half of the year.” Macro forecasts were update, with both CPI and CPIF inflation revised down significantly for 2024 and 2025. There are four more policy meetings in H2.

National Bank of Poland (NBP) is expected to keep rates at 5.75% (between 1:00 and 3:00pm London). The bank will likely reiterate that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” Following the June meeting, Governor Adam Glapinski said the likelihood of rate cuts by the end of this year is “nil”, adding “my comments today are hawkish. There is no reason to expect the message will change this week. The swaps market is pricing in 25 bp of easing over the next six months. Governor Glapinski holds a press conference tomorrow and the Minutes of the meeting will be released Friday.

AUD/USD is trading near the top-end of its multi-week 0.6575-0.6700 range as Australian 10-year government bond yields is closing in on 10-year US Treasury yields. Australia retail sales growth overshot expectations. In May, retail sales rose 0.6% m/m (consensus: 0.3%) following a 0.1% increase in April, boosted by early end-of-financial year promotions and sales events. The swaps market continues to price-in 25% odds of a 25 bp RBA policy rate increase at the next August 6 meeting. Bottom line: monetary policy divergence between the RBA and BOC suggests AUD/CAD can edge higher.

China’s private survey Caixin services PMI points to a sluggish growth outlook. In June, the Caixin services PMI fell to an 8-month low at 51.2 (consensus: 53.4) vs. 54.0 in May. As a result, the Caixin composite PMI fell to 52.8 vs. 54.4 in May. For comparison, the official composite PMI fell to 50.5 vs. 51.0 in May. The official PMIs tends to be more closely correlated to real economic activity than the Caixin readings. Bottom line: with the PBOC still in easing mode and the Fed staying hawkish, downside pressure on CNY and CNH are intact.

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