There’s A New Sheriff In Town

July 05, 2024

There’s A New Sheriff In Town

  • Labour leader Sir Keir Starmer will formally become Britain’s new prime minister later today. The latest BBC forecast gives Labour a House of Commons majority of about 170 seats.
  • The scale Labour’s majority is largely in line with pre-election polls. GBP/USD is up but that largely reflects broad USD weakness. FTSE 100 futures are higher and tracking the rally in global stocks.
  • US and Canada report June job numbers today.

Please note there will be no London edition of the BBH CurrencyView daily report the next two weeks as I’ll be away on vacation. Publication will resume July 23.

A Labour government is supportive of GBP and UK financial markets. The likely next UK chancellor Rachel Reeves emphasized throughout the election campaign her party’s pro-growth/pro-business agenda aimed at unleashing private business investment.

USD is slumping against most major currencies as the recent batch of soft US economic data reinforces money market expectations that the Fed delivers 50 bp of rate cuts by year-end. The US June non-farm payrolls data will either validate or weaken Fed funds rate futures pricing (1:30pm London).

Consensus is for a below average 190k increase in non-farm payrolls following a stronger than expected 272k gains in May. For reference, the average non-farm payrolls gain over the past 12 months is 232k. The unemployment rate is projected to stay at 4% on a higher participation rate of 62.6% vs. 62.5% in May.

Regardless, with the US labor market in better alignment, the pace of wage growth will be a bigger driver of US interest rate expectations. Average hourly earnings are forecast to rise 0.3% m/m (vs. 0.4% m/m in May) and ease two ticks to 3.9% y/y. Softer wage growth can drag US bond yields and USD lower in the near-term.

USD/CAD is down near important support at its 200-day moving average (1.3593). Canada’s June jobs report (1:30pm London) is expected to show labour market pressures are easing consistent with the Bank of Canada’s (BOC) forecasts. Consensus sees a 25k rise in jobs after 26.7k gains in May and the unemployment rate is projected to rise a tick to 6.3% on an unchanged participation rate of 65.4%. Bottom line: We doubt the BOC will deliver a follow-up policy rate cut in July, but a September rate cut is virtually fully priced-in by the swaps market.

In contrast, the swaps market continues to price-in odds of an RBA policy rate increase in August or September. As such, monetary policy divergence between the RBA and BOC supports the uptrend in AUD/CAD.

EUR/USD is firmer above 1.0800 on broad-based USD weakness. ECB President Christine Lagarde continues to signal the necessity for a cautious policy easing approach. Lagarde reiterated the ECB needs a lot more data “to be confident that inflation is continuously down”. Bottom line: A July ECB policy rate cut is highly unlikely, but the swaps market sees over 70% odds of a 25 bp ECB policy rate cut at the September 12 meeting. Eurozone May retail sales is up next (10:00am London). Retail sales volume is expected to rise 0.2% m/m in May after falling -0.5% m/m in April.

The yield premium on French 10-year government bonds versus comparable German bunds has drifted lower ahead of this Sunday’s second and final round of voting in France’s legislative elections. Polls show Marine Le Pen’s far-right National Rally is set to fall short of an absolute majority. The hard-right National Rally would get 200-230 seats out of 577 in the National Assembly; the leftist New Popular Front would get 165-190; Macron’s centrist Ensemble group would get 120-140. A hung parliament will generate more political instability and lead to policy gridlock which can further weigh on French bonds.

SEK ignored Sweden’s poor May GDP print. Sweden’s GDP increased by just 0.1% m/m in May (consensus: +0.4% m/m) after shrinking -0.7% m/m in April. The details were disappointing as household consumption expenditure was a drag to growth while lower imports was a modest growth tailwind. The data underscores the Riksbank’s guidance that “the policy rate can be cut two or three times during the second half of the year.” Bottom line: monetary policy divergence between Riksbank and Norges Bank suggests NOK/SEK can edge higher. The Norges Bank is in no rush to start easing.

JPY is outperforming as Japan’s main stocks indexes hit record highs. Overnight comments by Japanese Finance Minister Shunichi Suzuki highlight the currency/policy tug-of-war with the Bank of Japan (BOJ). Suzuki warned that inflation remains a concern as the weak yen pushes up import costs, adding he expects the BOJ to manage monetary policy appropriately.

Nonetheless, the BOJ is unlikely to tighten more than is currently priced-in which will limit JPY relief rallies. First, Japan underlying inflation is in a firm downtrend and near the 2% target. Second, consumption spending in Japan remains weak. Real household spending unexpectedly fell -1.8% y/y in May (consensus: +0.3% y/y, prior: +0.5% y/y) driven by sharp declines in utilities and household durable goods. The swaps market pricing-in 48% odds of a 10 bp BOJ policy rate hike at the next meeting July 31, and a total of 36 bp of tightening over the next 12 months.

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