Euro on the front foot
The Euro reversed its losses from Friday yesterday with the single currency bouncing off below $1.07 back to around $1.0740. Once again, there was relatively little change against sterling, continuing to trade in a tight range around 84.6p. Sterling picked up against the dollar and is trading just below $1.27 this morning. Jitters about tech stocks meant US equities markets had a volatile day but it was a relatively quiet day otherwise as markets await further developments on the political front in Europe and there was also not much data to digest yesterday.
10-year Government bond yields ticked down very marginally yesterday, but there wasn’t much movement overall. US 10-year yields were down 1bps to remain around 4.25%, UK 10-year yields were unchanged at 4.08% with German 10-year yields were up 1bps, again remaining around 2.4%. Equities had a more volatile day with equities markets in Europe rallying and the Eurostoxx gaining 0.9% and the FTSE up 0.5%. However, with some of the shine coming off the sharp gains made by AI companies, notably NVIDIA, the NASDAQ lost 1.1% while the S&P also made a small loss, -0.3%, for the day as tech stocks dragged down the index in spite of gains in several sectors outside of ICT.
The IFO index weakened in June, with the German sentiment index dipping slightly from May. The expectations index fell to 89 in June from 90.3 in May, the first fall in five months. The institute said that the data was a disappointment with recent improvements appearing to stall, with negative data coming from manufacturing in particular. This ties in with the recent PMI data which showed that industry in German is continuing to struggle. The IFO said that the manufacturing sector was reporting a weakening in orders while the retail sector data showed that the rebound from consumers on the back of rising real incomes was ‘just not happening’. Services sentiment outlook did improve in June, offing some hope that it can drive the recovery forward even as manufacturing continues to struggle.
ECB executive board member Isabel Schnabel said yesterday that it was unlikely that interest rates in the euro area would take a significantly different path than in the US. This has been become a much discussed scenario over the past year with the ECB having cut rates once already and the market pricing for two more this year while the Fed is guiding for a just a single cut in 2024. Schnabel said she thinks while the macro economies in both are ‘not all that similar’ the inflation side ‘doesn’t look all that different’. She added that ‘even though there may be a slight divergence which is temporary, overall I’m not so sure that it’s actually going to happen’.
San Francisco Fed President, and 2024 voting member of the FOMC, Mary Daly was also out with a pessimistic view of the US labour market, warning that inflation is not the ‘only risk we(the Fed) face’. She said that restrained demand was needed to return inflation to target but that risks stressing a labour market which she described as ‘no longer frothy’. She said that while unemployment has only edged up so far, the US labour market was near an inflection point where unemployment could rise and a ‘benign outcome could be less likely’. Daly also said it’s hard to know if the US is ‘truly on track to price stability’. Her comments suggest that she remains in the ‘wait and see’ camp for further inflation data before adjusting policy but her concerns about the labour market suggest she may quickly turn dovish if she sees more data that points to the inflation situation improving.
Economic data due today includes house prices and consumer confidence in the US as well as the Philly Fed non-manufacturing index while speakers include Cook and Bowman from the Fed and Nagel from the ECB.