Bullseye

June 19, 2024

Bullseye

  • UK inflation hit the Bank of England’s 2% target for the first time since July 2021.
  • The European Commission is expected to reprimand France and Italy for breaching EU deficit rules.
  • US financial markets are closed today in observance of Juneteenth Independence Day

 

USD is consolidating near its post-US retail sales data lows. US nominal retail sales undershot forecasts in May and the prior month’s print was revised lower consistent with moderating consumer spending activity. Total retail sales rose 0.1% m/m (consensus: 0.3%, prior -0.2pts to -0.2%). Sales excluding cars and gasoline increased only 0.1% m/m (consensus: +0.4%, prior -0.2pts to -0.3%). Control group sales used for GDP calculations grew 0.4% m/m (consensus +0.5%, prior: -0.2pts to -0.5%).

Odds of a September Fed funds rate cut rose 10pts to 74% after the disappointing retail sales data. Fed funds futures also firmed up expectations for 50bps of total rate cuts this year.

Nevertheless, we still see room for a reassessment in Fed funds rate expectations in support of a higher USD and Treasury yields. The US economy and demand for labour market are strong. In fact, the Atlanta Fed's GDPNow model is still tracking Q2 growth at 3.1% (seasonally adjusted annual rate), unchanged from June 7. Next update comes tomorrow after the housing starts data. Meanwhile, Fed officials continue to urge patience before easing:

Dallas Fed President Lorie Logan noted that “from a monetary policy perspective, we’re in a good position, we’re in a flexible position to watch the data and be patient.”

St. Louis Fed President Alberto Musalem warned it “could take months, and more likely quarters” to see data supporting a rate cut.

Fed Governor Adriana Kugler cautioned that inflation “it is still too high, and it is moving down only slowly” adding, “if the economy evolves as I am expecting, it will likely become appropriate to begin easing policy sometime later this year.”

Boston Fed President Susan Collins emphasized “the appropriate approach to monetary policy continues to require patience” and “we should not overreact to a month or two of promising news.”

The US TIC data continues to show that underlying demand for USD remains robust. Net foreign purchases of long-term US securities (Treasury Bonds, gov’t bonds, corporate bonds & stocks) totalled over US$1193.5bn in April, eclipsing the cumulative US April trade deficit of US$790.4bn.

GBP/USD edged a little higher towards 1.2730 after the UK May CPI report showed further progress on inflation, which will be welcomed by the BOE. In line with consensus and BOE projections, annual headline CPI inflation slowed to 2% in May from 2.3% in April while core CPI inflation eased to 3.5% y/y (lowest since October 2021) versus 3.9% y/y in April. The swaps market pared rate cut bets for August (from 52% to 36%) because services inflation was stickier than expected falling only 0.2pts to 5.7% y/y in May (consensus: 5.5%, BOE projection: 5.3%).

Tomorrow, the BOE is widely expected to leave the policy rate at 5.25%. A surprise rate change during an election campaign is unlikely. Importantly, we anticipate the MPC vote split to remain 7-2 in favour of no rate change with Dave Ramsden and Swati Dhingra voting again for a 25bps rate cut. We also expect the BOE to reiterate that “monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term.” Our base case remains for the BOE to start easing in August which is a near-term headwind for GBP.

EUR/USD is trading sideways near 1.0740. The European Commission is expected to launch today excessive deficit procedures (EDP) against seven EU countries including France and Italy for running budget deficits larger than the 3% of GDP threshold. Countries in EDP are given a deadline of six months (or three for a serious breach) to comply with recommendations that provide them with a concrete path for correcting their excessive deficit within a set timeframe. Countries in the Eurozone that don’t course-correct could face fines of 0.2% of GDP. The Eurozone April current account data is up next (9:00am London).

NZD/USD is range-bound near yesterday’s high around 0.6150. RBNZ Chief Economist Paul Conway struck a balanced tone in his speech titled “The road back to 2% inflation”. According to Conway the progress on inflation “could occur more quickly or slowly than currently projected”. Overall, a period of restrictive policy is necessary to give us confidence that inflation will return to target over a reasonable timeframe.”

New Zealand’s annual current account deficit narrowed to 6.8% of GDP in Q1 from 6.9% in Q4 2023. Nevertheless, the current account deficit remains high by historical standards, suggesting NZD needs to keep trading at a discount to fundamental equilibrium to attract foreign investments and finance this deficit. We estimate long-term fundamental equilibrium for NZD/USD at 0.6640. New Zealand’s Q1 GDP report is the next domestic data highlight (11:45pm London).

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction