With one of two main events for yesterday’s session coming in the form of UK labour market data, the attention of traders was closely focused on the implications of this latest release for the path forward for monetary policy, and by extension the pound. It was against this backdrop that rates markets modestly scaled back bets on further BoE hiking, and sterling dropped 0.35% against the dollar and 0.25% against the euro over the session, as this latest data release undershot expectations and pointed to a softening in the labour market. Most notable in the data was a fall in payrolled employees, a measure that saw a decline of 136k, despite pre-release expectations for this number to actually increase, and an unexpected tick up in unemployment which now stands at 3.9%. Whilst markets have expected for some time that monetary tightening will begin to weigh on the job market and the UK economy more broadly, in our view, yesterday’s release is suggestive that the anticipated slowdown is finally here. Given that this is just one single release, a degree of caution is warranted. But a repeat of yesterday’s soft print in the June release, combined with inflation that should fall substantially in the April report due next week, will reinforce our call for the Bank of England to hold rates constant at its next policy meeting in June. The first hint in this direction may well come later today with comments from Bank of England Governor Andrew Bailey, who is due to speak at an event hosted by the British Chambers of Commerce, the text of which will be released at 10:50 BST. Usually tight lipped, it will be interesting to see if Bailey chooses to address yesterday’s data in light of the recent upgrades to BoE forecasts, which now look as if they may underestimate the rate and degree to which the labour market and inflation could weaken. If data continues to underperform expectations and our view for BoE hiking is correct, this should provide a drag on sterling over coming weeks, with a retracement of recent gains against both the euro and dollar likely.
The single currency bounced around with little reason or rhyme yesterday, rallying into the morning’s releases which showed concerns remained elevated over a German recession in 23H1 amongst investors and that eurozone Q1 GDP was in fact meagre before selling off on the move higher in US Treasury yields and the broad dollar after the New York cross over. Today, price action in the euro is likely to remain driven by broader flow as it continues to trade within the 1.0845-1.0936 range. We take this view even as the final eurozone CPI reading for April is due at 10:00 BST and another round of ECB speakers are set to hit the wires largely because ECB commentary has had little impact on market pricing in the absence of another round of inflation data and today’s final CPI release is unlikely to show any significant revisions, as has been the case in recent months. Out of the packed ECB roster, Vice President Guindos’s appearance at the IESE Banking Industry Meeting at 16:15 BST stands out as the most impactful given the title of the speech is “Banking navigating the wave of inflation”.
It was another risk-off session within the cross-asset space yesterday as equities tumbled and the dollar firmed across the board. As has been the case for much of the past week, debt ceiling discussions were front and centre for markets. Although there continue to be some disconcerting signs from Washington, some progress was made according to official statements. Owing to the gravity of the situation, President Biden has cut short his planned overseas trip to the G7 and quad summits and will now return to the capital on Sunday. Partially reflecting the tentative optimism, yields on 1-month T-bills fell ever so slightly, but at 5.5% remain over a percentage point higher than a fortnight ago as they now encompass the potential default date. Not fitting the usual risk-off template, Treasury yields climbed higher across the rest of the curve after core US retail sales either met or beat expectations despite a miss in the headline measure, while a positive surprise in the NAHB housing market index and further pushback on rate cuts from Fed officials consolidated such a move. While fixed income markets read the latest retail sales report with the view that the US consumer hasn’t necessarily capitulated under the pressure of higher prices and interest rates, we found the report less encouraging as it showed the demand backdrop for core goods remained weak and retail sales isn’t keeping pace with inflation, meaning actual sales volumes are still falling.
Today, there remains a bullish dollar bias across the G10 space, with just the Kiwi dollar trading marginally higher against the greenback, arguably due to spill over effects from AUDNZD selling after marginally softer Australian wage data for Q1. Meanwhile, the Swiss franc, which was the main recipient of dollar outflows back in 2011 when the debt ceiling was last a primary concern for markets, continues to trade flat. Despite the continuation in USD strength, the DXY index has struggled to consistently break its April 10th high and moves overnight have been fairly limited across the board. Tight ranges may well be a theme for today, with the political headlines likely to subside and limited market-moving data in the economic calendar.
Yesterday morning, the risk we highlighted that Canadian inflation could surprise to the upside did, in fact, materialise. The print showed a mild uptick in the headline rate, from 4.3% to 4.4% in April. But don’t be fooled by the minimal change to the headline data. The underlying details were considerably worse, showing virtually every major component of the inflation basket rising above the pace consistent with 2% annual inflation on a sequential basis. Following the release of the data, the Canadian dollar began a strong rally, supported by a repricing in the market-implied odds of a Bank of Canada hike on June 7th, as well as narrowing yield spreads between US and Canadian bonds. Even with the market pricing of a hike jumping from 17% to 34% upon the release of the inflation report, we have argued that this still understates the odds. Should markets come to our view on monetary policy, we expect near term strength in the loonie to ensue. Despite spending much of the day in the green and at the top of the G10 currency board, a bout of US dollar strength mid-day brought the daily change in USDCAD back to flat. At the very least, the inflation report allowed the loonie to dodge major losses witnessed in other commodity currencies like NOK and AUD. Today, international securities transactions for March will be the only data release from StatsCan. It’s not a particularly important figure for markets, so we expect that movement in USDCAD today will most probably be dictated by the USD side of things.