We have different moods on different continents this week. The European equities remained under the pressure of heating French political tensions on Tuesday, as the Republican President Ciotto suggested that his party should consider teaming up with Le Pen’s party – a limit that many Republicans still consider as being a thick red line that should never be breached. Some ask Ciotti to resign. Bref, the unrest continues, the French 10-year yield continues to push to the upside, the spread between the French and German 10-year yield went past 60bp, the CAC 40 is at the weakest level since February while the EURUSD remains heavily offered. The pair is preparing to test the 1.07 support to the downside.
Meanwhile, on the other side of the Atlantic Ocean, the major stock indices in the US advanced to fresh records on the back of a strong 10-year auction a day before the latest CPI update and the Federal Reserve (Fed) decision. The US 2-year yield gave back a part of the post-jobs strength, the 10-year yield tipped a toe below 4.40%, the S&P500 advanced to a fresh record, helped by softer yields and a wonderful 7% jump in Apple shares on company’s AI plans that came with a 24-hour delay.
Good news is that the good mood from the US is giving a meagre smile to the European equity futures at the time of writing.
Perhaps the most important day of summer
Today is a big day in terms of economic data and Fed announcement – it could determine the global market mood for the rest of the month, and a good part of summer.
First, the US will reveal its latest CPI update: core CPI is expected to have eased from 3.5% to 3.4% on a yearly basis, but headline CPI is seen steady near 3.4%. These numbers are nowhere near the Fed’s 2% target and are not trending sufficiently fast toward that level, but a surprise to the downside could fuel the Fed cut bets for later this year.
Then, the Fed will announce that it’s not changing its rates today but will release the latest dot plot where the Fed members will plot how many rate cuts they think they could announce in the future. I am confident that the number of median rate cuts projected by the Fed members will be less than three that was plotted back in March. But whether it will be one or two is yet to be seen.
Note that the major US indices’ advance toward fresh ATH levels hides a rising stress on the banks front. In fact, the SPDR’s banks and regional banks indices both declined to the lowest levels since April as Pimco warned of a ‘very high’ concentration of troubled commercial real estate loans on the regional banks’ books. And the more the Fed waits before cutting its rates, the more the commercial real estate troubles could rise to the surface.
While the US yields are giving back the post-jobs advance, and the softer yields echo well across the major indices, the US dollar index remains upbeat by inflation and Fed uncertainties, and the political shenanigans on this side of the Atlantic Ocean.
Labour good for mood?
While the election uncertainty in France doesn’t do much good to the euro, the pound sterling looks much less battered by the idea that the Conservatives will likely say Good Bye to their majority next month. In fact, a recent survey from Bloomberg hinted that a Labour win would be better for both the pound, gilts and stocks – which is unusual. But because Brexit, Truss and endless infighting damaged Tories’ reputation over the years, it’s likely that the end of the normally-market-friendly Tories’ rule resonates well across markets. Cable is holding ground above the minor 23.6% retracement on April to June rebound and the toppish view is mostly due to the US dollar’s strength.
Britain has 22 more days to go until the UK election and Labour holds more than 20 points lead over the Tories, and yesterday’s big claimant count change and the rise of the unemployment rate to 4.4% certainly didn’t help improve Tories popularity, even though the softening inflation has clearly helped Rishi Sunak hold his promise to halve inflation (but we know that falling inflation was mostly due to global dynamics and – partly – to the Bank of England’s (BoE) tight monetary policy). Anyway, this week’s weak jobs data increases the chances of a BoE cut once the election dust settles while the pound sterling is expected to be better off in the scenario of changing government than status quo. Whether Cable could continue to rise, however, depends on where the US dollar is headed. And where the US dollar is headed depends on the US inflation, the health of the US economy and the Fed.
