Daily Brief

Lower (PCE) inflation and lower growth

Powell, Lagarde and Bailey

The ECB’s two-day Sintra forum, which concludes today, will see key speeches delivered from the mighty trio of the Fed’s Jay Powell, BoE’s Bailey and the ECB’s Lagarde, who as host, also gave an introductory speech yesterday. Interestingly, given how often and recently we have heard from Jay Powell and those key members of the Fed of late, it might just be the comments from Lagarde and Bailey that deliver the most shock and awe. 

Will the ECB confirm a 50bps hike for September?

With markets already pricing in 150bps worth of ECB tightening before the end of this year, the chances of a hawkish surprise from the ECB might be stretching it a bit. However, given that Lagarde has already committed the ECB to a 25bps hike next month, the interesting challenge is the September meeting, and whether Lagarde gives us some further colour on the ECB’s potential commitment to a 50bps hike, or not. Lagarde has openly suggested recently that the ECB are ready to move faster on hikes, if needs be. Given the recent trend by central banks to front-load rate hikes, such as that surprising 50bps move from the SNB, there is huge pressure on the ECB to accelerate their rate hiking profile. This is also becoming sensitive given those rapidly increasing borrowing costs for the Euro area’s more indebted nations, such as Italy, which will likely accelerate further as rates in the Euro area rise, sparking fears of another potential Euro area Bond crisis.

A tough speech for Bailey

Given the recent slowdown in the UK and much-publicised increases to the cost of living, the thoughts of BoE Governor, Andrew Bailey, are sure to impact the short-term profile for the pound. Whilst the BoE may have opted to ‘only’ raise UK rates by 25bps at the last meeting, at over 9%, the UK has the highest inflation amongst G7 nations. Given this backdrop, Bailey is likely to remain fairly hawkish on rates, despite those higher rates heaping further pressure on the UK consumer.

Will PCE ease?

Today also sees the release of the latest U.S Core Personal Consumption Expenditures (PCE). The PCE matters, as it is the Fed’s preferred measure of inflation, and the core reading excludes those nasty food and energy prices. Last time round it was 5.1% (QoQ/Q1), and any reduction will give markets welcome relief. At the same time, the latest growth figures from the U.S are set to be released, with a -1.5% reduction expected for Q1.

U.S Consumer Confidence crumbles

Ahead of all the expected shenanigans today, yesterday saw the release of the latest U.S consumer confidence data, which fell rapidly in June by 4.5 to 98.7. Worries over high inflation have clearly impacted the U.S consumer, which has been evidenced in other data recently, such as Retail Sales . The (short-term) expectations index, which slipped to 66.4, marking the lowest level since March 2013, points to a worryingly weaker growth profile for the second half of this year.

Market jitters boost the dollar

With that combination of key data and key speeches later today, markets were in full consolidation mode yesterday, with the major equity indices snapping the recent winning streak, which helped to boost the greenback, as is generally the case. The dollar index rallied from under 103.50 to back over 104.00. Both EUR/USD and GBP/USD slipped over 0.5% on the day, with the former hitting 1.0500, after only recently breaking above 1.0600, and the latter moving back under 1.2200 for a spell. News that Nicola Sturgeon has set a date (19th October ’23) for a potentially fresh Scottish independence referendum will have hardly have helped the pound’s cause on the day. USD/CAD bucked the trend, and with oil moving 2% higher, was able to remain below 1.2900 for the most part.

 

What else is happening today?

EUR – Business climate, Economic Confidence, Economic sentiment, Industrial Confidence, Services Sentiment, ECB’s Schnabel & De Guindos speech

GBP – BoE’s Bailey speech

USD – MBA Mortgage Applications

JPY – Foreign Bond investment, Industrial Production

 

 

 

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