Stock gains limited with 2-year yield at 5%
Global equities have paused their three-week sell-off ahead of the most valuable chipmaker (Nvidia) publishing its earnings results on Wednesday on hopes that the tech firms have profited from the AI boom in the last quarter. However, stock gains have been muted with the US 2-year government bond yield rising above 5% again and the dollar trading at 2-month highs.
The benchmark 10-year yield has been pushed to a 16-year high (4.36%) on Monday. Sticky core inflation, resilient economic data and an increasing bond issuance from the treasury have put the fixed income space under pressure, just before Jerome Powell is expected to take the stage at the annual Jackson Hole symposium. While markets expect the Federal Reserve to be done raising rates, expectations about the first easing measures have been pushed back significantly. Some months ago, markets expected policy makers to cut rates three times this year. Today, the first rate cut is penciled in for June 2024.
The only data point from yesterday were US existing home sales, which dropped 2.2% to a 6-month low in July. Today’s economic calendar features the number of mortgage applications and new home sales, which will give us a better insight into the development of the US housing market. The purchasing manager index is expected to have remained in positive territory in August, with economists expecting the barometer to have remained unchanged at 52.
Europe’s problems. Cyclical or structural?
Today will be the first day of the week where economic data out of Europe might prove market moving. The flash release of the German, French and European purchasing manager indices, especially for the manufacturing sectors, will be important to gauge how the broader economies have developed in August. The composite indices for all three regions have been in negative territory as of late, suggesting weak private activity growth. However, the services sector has continued to expand on the basis of households’ excess savings and a booming tourism sector. It will be interesting to see if this trend continued into the second half of the year.
Europe is currently struggling with globally high interest rates and the Chinese slowdown due to its pro cyclical and trade dependent nature. Apart from the worries over the short-term economic outlook, turning structurally bullish on Europe vs. the US will have to be accompanied by underlying growth in the former picking up significantly over the next years. The current cycle of US economic and financial asset outperformance has lasted for 15 years now. And while some mean reversion cannot be ruled out, growth prospects will have to improve for investors to feel more comfortable investing into long term projects in Europe.
Consensus expects a higher EUR/USD in 12 months’ time based on 1. US inflation slowing and 2. the Fed cutting rates before the ECB. However, as we highlighted before, an appreciation to $1.12 – $1.15 must be induced by a growth uptick in Europe and China as the Fed cutting would not be enough of a reason to favor the euro. Watching incoming macro data will be key in the upcoming months.
GBP/EUR eying fresh 1-year highs
It was a mixed day for sterling on Tuesday, buoyed by easing risk aversion at first but surrendering gains against the US dollar as US Treasury yields continued to surge. GBP/USD’s 50-day moving average, just shy of $1.28, acted as a tough resistance level. Meanwhile, GBP/EUR has rallied nearly 2% from its August low of circa €1.15 and is stretching north of €1.17 in an attempt to test fresh 1-year highs.
Yesterday, gloomy readings from the Confederation of British Industry (CBI) surveys weighed on the pound against safe haven currencies like the dollar and yen. Total order book balance in August fell short of market expectations and the gauge measuring output for the past three months dropped to the lowest point since September 2020. However, the survey’s measurement of price expectations also hit its lowest point since February 2021, contributing to indications of a slowdown in inflation among manufacturers. Easing price pressures will bring some relief to many manufacturing firms and the broader economy and points to headline UK consumer price inflation falling to 4% by the start of 2024. Still, money markets are currently factoring in a probability of over 80% that the BoE will implement a 25 basis-point rate hike at its September meeting given the strong wage growth and service inflation data last week.
Today, all eyes will be on the flash PMI surveys published this morning. We expect the UK PMIs to highlight ongoing problems in manufacturing and mounting stagnation in the services sector. Any downside surprises could drag the pound lower, potentially sending GBP/USD back under $1.27, though GBP/EUR looks primed for a test of €1.18 due to the ongoing economic woes in Europe.
GBP/EUR outperforming as of late
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: August 21-25
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
