Rock The Vote

July 04, 2024

Rock The Vote

  • The UK holds general elections today. Polling stations close at 10:00pm (London time) with exit polls results announced shortly after.
  • Rising expectations of Fed policy easing is boosting global financial market risk sentiment.
  • Swiss disinflationary pressures quicken in June. SNB on track to cut rates again in September.

USD is consolidating near yesterday’s lows amid thin 4th of July holiday trading. The surprised contraction in US services activity in June dragged USD lower against all major currencies and triggered a rally in Treasuries and stocks as Fed funds futures raised odds of a September rate cut 10pts to 80%. Rising expectations of Fed policy easing has also boosted global financial market risk sentiment with stock markets in Asia and Europe powering forward.

The US ISM services index unexpectedly plunged in June below the 50 boom/bust level to 48.8 (consensus: 52.7, prior: 53.8), the lowest since July 2009. The details showed demand and employment contracted while price increases cooled. As a result, the Atlanta Fed's GDPNow model is now tracking annualized Q2 growth of 1.5%, down from 1.7% on July 1.

Meanwhile, the FOMC June meeting Minutes suggested the bar for a Fed funds rate cut in September is low. The Minutes highlighted that “the vast majority of participants assessed that growth in economic activity appeared to be gradually cooling”. Additionally, “participants suggested that a number of developments in the product and labor markets supported their judgment that price pressures were diminishing.”

Tomorrow’s US June non-farm payrolls data will be a key driver of US interest rate expectations. Overall, we remain cyclically bullish on USD, but in the near-term softer US economic activity is a USD headwind.

The UK holds general elections today. Polling stations close at 10:00pm (London time) with exit polls results announced shortly after. Labour is expected to win an outright majority ranging from 100 to 200 seats. In our view, a Labour government would be positive for GBP. The Labour Party under Keir Starmer has moved away from left-leaning economic policies since taking over from Jeremy Corbyn. See here for our election primer.

The Bank of England (BOE) releases its decision maker panel (DMP) survey on inflation expectations (9:30am London). Inflation expectations remain contained, with 1-year ahead expected to fall a tick to 2.8%. Easing inflation expectations will raise odds of an August policy rate cut, which is currently 62% priced-in money markets.

EUR/USD failed to sustain a break above key resistance at 1.0800 weighed down by ECB/Feb policy divergence. The ECB’s account of its June 6 decision will offer more details behind the ECB’s hawkish cut (12:30pm London). At that meeting, the ECB delivered the widely expected 25 bp policy rate cut but tempered expectations that an aggressive easing cycle is underway. The decision to start easing policy was not unanimous as ECB Governing Council member Robert Holzmann objected to the cut.

CHF underperformed after Swiss inflation cools more than expected. Headline CPI was unchanged in June (consensus: +0.1% m/m) and printed at 1.3% y/y vs. 1.4% y/y in May. Annual headline inflation rate was a tick lower than consensus and the Swiss National Bank’s (SNB) Q2 projection and the lowest since October 2021. Core CPI fell 0.1% m/m and unexpectedly eased to a 29-month low at 1.1% y/y (consensus: 1.3% y/y) from 1.2% y/y in May. Bottom line: the SNB has scope to slash the policy rate further as inflation remains well within the bank’s stability range of 0 and 2%. The swaps market raised odds of a September rate cut to over 80% from roughly 60% ahead of the CPI data.

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