Euro in narrow range
The recent ups and downs for the euro continued yesterday. The single currency was under pressure following the European elections two weeks ago that saw it drop from $1.09 to $1.07 to the dollar over the course of a week. In the 8 or so trading days since then, while it has come under pressure at times, it has held up at around $1.07 and not broken more than 0.5 cent above and more than 0.2 cent below for any significant time. The political risk is still very much there but for now it’s bouncing around that level and yesterday dipped from $1.0740 to $1.0700 this morning. It’s also been in a fairly tight range versus sterling over the past week or so and is still trading around 84.4p. There has been a touch more volatility in the GBPUSD cross, but not by much, and it’s largely unchanged from yesterday at just below $1.27.
Not much movement in the Government bond markets either. Generally speaking European yields were unchanged to down a basis point or two with German 10-year yields down 1bps and French 10-year yields down 2bps. US 10-year yields edged up but, again, the changes were marginal with 10-year yields up about 1bps to remain at 4.25%. US equities had lost some ground on Monday, on foot of some corrections for the sky high valuations in AI stocks, but bounced back again on Tuesday with investors piling back into some of those stocks. The S&P took back all of its 0.3% loss on Monday, rising 0.4% yesterday, and taking the index back towards its record high, albeit that was set just last week.
US consumer confidence edged down in June, held back by weaker optimism about the economic outlook. The conference board measure fell to 100.4 in June from 101.3 in May. The expectations index fell to 73 from 74.9 while the present situation showed an uptick, to 141.5 from a revised 140.8 in May. Confidence has been more subdued in the post-Covid era as compared to pre the pandemic as consumers dealt with cost of living issues followed by swiftly increasing interest rates. Confidence this month did fall back a little but it’s still in that narrow subdued range we have seen over the past two years with concerns about the future still holding back consumers now even as inflation drops back. Moreover, the report specifically warned that while consumer’s view of the current labour market situation was broadly positive if there was a material weakness in the jobs market then confidence could weaken quickly. In better news for the US, the Philadelphia Fed measure of non-manufacturing activity showed a sizable pickup this month, coming in at 2.9 from 0.6 in May, with sales, new orders and employment indicators all rising sharply.
ECB Governor Olli Rehn gave a very clear view of how he thinks the ECB will act over the rest of this year. He said that the market is pricing for two more rate cuts to take the deposit rate to 3.25% by the end of this year and a terminal rate of somewhere around 2.25% or 2.50% and added ‘in my view, they are reasonable expectations’. He said that a disinflationary process is going on and the ECB ‘always knew that it’s going to be a bumpy road’ but they have ‘see the forest for the trees’ and it’s reasonable with what is going on that further rate cuts can be expected.
Fed Governor Lisa Cook said that ‘at some point it will appropriate to reduce the level of policy restriction to maintain a healthy balance in the economy’. She failed to mention when that might be but timing would dependent on ‘how economic data evolve’. She did say she expects inflation to move lower ‘on a bumpy path’ during the rest of this year on a month-to-month basis but that annual inflation will move ‘roughly sideways’. Further out, she see inflation slowing sharply next year with core goods inflation being slightly negative and core services easing back. Restrictive monetary policy have put downward pressure on demand but the economy remains resilient in her view with a ‘tight but not overheated’ labour market. There are signs that higher rates have slowed home building and the mortgage market and the Fed is ‘not yet concerned’ but ‘it bears watching’ rising mortgage delinquency rates. She also said the Fed was ‘attentive’ to the risk that things can ‘change quickly’ particularly in the labour market. Her colleague, Governor Bowman was also out but she give no signs of considering a cut in rates anytime soon. She said she sees a number of upside risks to the inflation outlook and that there was a need to keep borrowing costs elevated ‘for some time’. The Fed was ‘still not yet at the point where it’s appropriate to lower rates’ she said adding ‘ given risks and uncertainties, I will remain cautious’ in considering policy changes.
Economic data due today includes CBI sales data in the UK and new home sales in the US. on the speaker front we get Philip Lane from the ECB.