A pull back in risk sentiment saw stocks markets drop globally last week, led by the big winners of the last few years, technology companies.
This provided currency investors with another excuse to buy safe haven currencies, led once again by the dollar, with the Swiss franc not too far behind. The moves were, however, generally modest. Oil prices continue to plummet as panic about shortages reverses, and spot markets seem awash with oil. The tit-for-tat violations of the US-Iran ceasefire are doing little to support prices there, even though there seem to be clear cut differences between the parties about what they have actually agreed to. At any rate, investors seem eager to look past the messy outcome of the war.
Macroeconomic data takes front and center this week. In the US, this is Jobs Week: a number of key labour market indicators will be released throughout, culminating in the June payrolls report on Thursday - a day earlier than usual due to Independence Day. Markets expect a modest pullback from the strong pace of job creation of the last three months, to a level still consistent with a robust jobs market. In the Eurozone, flash inflation for June will be released on Wednesday. The first positive impact of lower energy prices is expected to filter through to both the headline and core indices. As for the UK, all eyes will be on Andy Burnham's pick for Chancellor to gauge the strength of his commitment to the fiscal rules.
GBP
Sterling continues to trade well against other European currencies and, for now, no additional fiscal risk premium is being attached to the pound. This suggests to us two things, firstly markets are relieved at the avoidance of a protracted leadership contest, and secondly that Andy Burnham's professed respect for the UK fiscal rules is being taken seriously. We believe that investors are being too kind, and are not pricing in the pressure from Labour's left to increase spending, whether that comes at the expense of even higher taxation on business or increased gilt issuance.
Although the data calendar is light, this week should provide a key test of this assumption. Focus has turned to Number 11, and the identity of the new chancellor of the exchequer. Initial optimism that centre-left pragmatist Wes Streeting could be set to land the role has faded amid reports that energy secretary and former Labour leader Ed Miliband is now the favoured choice. We see this as bearish for the pound given his preference for looser fiscal policy, a green industrial agenda and a more interventionist state. Either way, we see little room for further sterling appreciation against the euro.
EUR
The June PMIs of business activity rebounded to levels that have been recently consistent with modest growth, at an annualised rate of around 1%. We are somewhat optimistic that growth in the Euro Area economy will stabilise in the second half of the year. The easing in energy prices is a structural positive for the common bloc economy and should act to both ease inflationary pressures and boost disposable incomes. We are also quietly confident that the slow diffusion of Germany’s stimulus package will begin to push these numbers up modestly, even if it is hard to see it in the data yet - infrastructure spending tends to have a high multiplier that takes time to be realised.
This week's inflation data should offer some relief to the ECB, but perhaps more important for markets will be the latter's many speeches and communications at its annual forum in Sintra, Portugal. Swap markets are continuing to largely price in another 25 basis points rate hike from the ECB at its September meeting. We are not at all convinced, however.
USD
A string of positive data surprises last week (PMIs, GDP, personal spending, durable goods orders) suggests that the US economy continues to power ahead on the back of strong investment, not all of it driven by AI. It is also acting to support the narrative that the European economy will suffer a greater lingering damage from the Iran war than its US counterpart, which continues to appear almost immune to the impact of higher energy prices.
The key test comes this week, however, with the release of the June jobs data on Thursday, set for release a day ahead of the Fourth of July Independence Day holiday. Now that FOMC chair Kevin Warsh has vowed to significantly reduce the flow of information and forward guidance from the Federal Reserve to markets, key data points like this week's payrolls release take on added importance for investors. Consensus suggests a net job creation number around the 114k level, which while a slowdown from the previous month would still be comfortably sufficient in order to more than keep up pace with the pace of growth in the labour force.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- FOMC June Meeting Reaction
- Keir out, Burnham in - what happens to the pound?
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