Forex Fundamental News Facts for 02nd July, 2024
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[Quick Facts]
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1. Lagarde says ECB needs time to weigh inflation uncertainties.
2. ECB’s Wunsch would need convincing for more than two 2024 cuts.
3. U.S. manufacturing activity contracts in June.
4. Next UK Government Poised To Benefit From Fall In Inflation And Fuel Prices.
5. French Election: Public Spending Not Set to Rise Significantly.
6. Global Investment Banks Retreat From China Expansion.
7. Gold Prices Tick Lower With Powell, Payrolls In Focus; Copper Weak.
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[News Details]
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ECB President Christine Lagarde acknowledges that inflation threats haven’t fully subsided.
Despite a robust job market, the ECB remains cautious.
Uncertainties persist regarding future inflation, including the interplay between profits, wages, and productivity, as well as potential supply-side shocks.
The ECB needs more data to confidently assess whether above-target inflation risks have diminished.
Their assessment considers forecasts but isn’t limited to them.
Policymakers won’t be swayed by isolated pieces of information.
Lagarde’s recent remarks cooled expectations for a July rate cut.
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ECB Governing Council member Pierre Wunsch requires strong evidence that inflation will return to the 2% target.
The first two rate cuts are manageable if inflation remains around 2.5%, but further reductions are uncertain.
Markets expect one or two additional cuts this year, but timing remains uncertain.
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The U.S. ISM Manufacturing PMI declined to 48.5 in June (below expectations).
The ISM Manufacturing Prices Paid Index also dropped significantly.
However, the rebound in the ISM New Orders Index suggests stabilization.
Manufacturing employment declined, indicating ongoing struggles due to borrowing costs and restrained business investment.
The ISM manufacturing survey fell short of expectations.
While new orders showed slight improvement, the inventory sub-index declined.
Manufacturing remains sluggish, and inflation shows signs of cooling
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The UK’s next government stands to benefit from easing financial pressures due to a slowdown in inflation and falling fuel prices. While annual shop price inflation cooled to 0.2% last month, retailers cut prices on key products like butter and coffee. Petrol and diesel prices also fell for a second consecutive month, although filling up remains expensive in England, Wales, and Scotland. The average petrol price at the end of June was just under 145p per liter, with diesel dropping to about 150p. Despite these reductions, fuel prices are still significantly higher than in Northern Ireland. The Conservatives’ election campaign focuses on lower inflation, while the shadow chancellor highlights the ongoing financial strain for households.
Inflation and Retail Prices:
Annual UK shop price inflation cooled to 0.2% last month, the slowest pace since October 2021.
Retailers reduced prices on key products, including butter and coffee.
Food inflation slowed to 2.5% in June, down from 3.2% in May.
Non-food prices were in deflation, benefiting consumers.
Fuel Prices:
Petrol and diesel prices fell for a second straight month in June.
Despite this, filling up remains “too expensive” in England, Wales, and Scotland.
Average petrol price at the end of June: just under 145p per liter.
Diesel dropped from nearly 154p to about 150p.
Regional Disparities:
Fuel prices are significantly lower in Northern Ireland (4.5p cheaper for petrol, 8p cheaper for diesel).
Forecourts owned by Shell and BP are the most expensive in the UK.
Political Focus:
Rishi Sunak emphasizes lower inflation as a cornerstone of the Conservatives’ election campaign.
Shadow chancellor Rachel Reeves highlights ongoing financial strain for households.
Retailer Efforts:
Retailers have cut prices on key products, aiming to ease the cost of living for households.
Deals on items like TVs capitalize on events like the Euros.
The Pound’s prospects are looking up, thanks to recent developments, according to MUFG Bank. They’ve upgraded their forecasts against the Euro and Dollar in their mid-year research update. Historically, the UK hasn’t been synonymous with political stability since 2016, which has negatively affected the Pound. However, this might change soon.
Here’s what’s happening:
Labour Party’s Potential Victory: MUFG predicts that the Labour Party will secure a substantial majority in the UK general election on July 4th. This expectation is based on improved political stability and signs of stronger economic growth. Keir Starmer is likely to become the next Prime Minister.
Labour’s Economic Policies: Despite recent declines in Labour’s poll numbers, households and businesses are now looking to the party for an economic plan. Labour aims to build trust by focusing on “wealth creation.”
Euro Uncertainties: The Euro has faced challenges due to increased political uncertainties following the EU Parliamentary elections. Meanwhile, in France, Emmanuel Macron’s snap vote decision has caused anxiety among market participants.
UK Economic Strength: The UK economy is expected to strengthen, potentially preventing the Bank of England from cutting interest rates as aggressively as previously anticipated.
Rate Cuts and Inflation: MUFG believes the first rate cut will likely occur in August. The Pound’s performance will depend on subsequent rate cuts. Generally, the Pound appreciates against currencies of central banks with deeper cuts. Additionally, inflation rates are expected to rise by year-end, while real incomes improve.
Forecasts: MUFG raises its Pound to Euro forecast for end-Q3 from 1.17 to 1.19 (EUR/GBP: 0.8550 to 0.84). The year-end forecast is also raised from 1.1630 to 1.19 (EUR/GBP: 0.86 to 0.84). For the Pound to Dollar, the end-Q3 forecast is adjusted from 1.2870 to 1.2860, and the year-end target is lowered from 1.3020 to 1.2980. However, there’s a 3% uplift for the end-Q1 2025 forecast, now at 1.3250
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French Election Outcome and Public Spending:
Initial projections suggest a ‘hung parliament,’ where no party achieves an absolute majority.
National Rally (RN) won the first round with around 33.5% of votes, but an absolute majority remains uncertain.
Left-wing New Popular Front (NPF) and Macron’s centrist alliance (Ensemble) also performed well.
Public spending in France is unlikely to rise significantly due to the divided outcome.
Three Scenarios and Their Impact on Markets:
Hung Parliament Scenario (55% probability):
New government will seek ad-hoc support for legislation.
Large spending increases are unlikely due to division in parliament.
Expect 10-year yield spread between France and Germany to tighten within 3 months.
Cohabitation Scenario (35% probability):
RN wins absolute majority, gradual implementation of party program.
Bardella softens rhetoric on EU and public spending.
Fiscal policy expansion dampened by risk of exclusion from EU/ECB support programs.
Expect yield spread to tighten within 3 months.
Left-Wing Majority Scenario (10% probability):
Anticipate increased public spending and potential EU confrontations.
Left-wing alliance aims to lower the pension age and increase taxes.
Immediate reaction likely significant yield spread increase between France and Germany.
Uncertainty about coalition’s ability to govern effectively
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Western financial institutions operating in China have significantly reduced their investment banking workforce due to a market slowdown. In 2023, five out of seven Chinese securities units affiliated with Wall Street and European banks reported losses or tumbling profits. These cuts affected 1,781 employees, representing a 13% decline from 2022. China’s capital markets have slowed due to economic weakness, prolonged property downturn, and geopolitical tensions. Western investment banks face challenges due to weak deal flow, limiting further investment. Some banks are exploring opportunities in India, Southeast Asia, and the US. Despite global job cuts, earlier hopes of sustained growth in China have been challenged. Jamie Dimon, JPMorgan’s CEO, described part of their China investment banking business as having “fallen off a cliff.” Staff numbers at various units fluctuated, with Credit Suisse’s unit experiencing a 46% reduction, while UBS’s mainland unit remained steady. Morgan Stanley’s China unit reported its first loss since 2019, and Goldman Sachs China, despite recovering from 2022 losses, had lower profits than previous years. The investment bank units’ performance may not fully reflect the banks’ overall China business, as some generate revenue through relationships formed in the mainland but booked elsewhere. The 2023 figures contrast sharply with 2021, a record year for global investment banks, where six of the seven made profits in mainland operations. HSBC’s mainland unit, however, bucked the trend by turning a profit for the first time, driven by a growing client base and expanded product capabilities.
Key Points:
Market Slowdown and Workforce Reduction:
Western financial institutions in China have cut their investment banking workforce significantly due to a market slowdown.
Five out of seven Chinese securities units affiliated with Wall Street and European banks reported losses or tumbling profits in 2023.
The total workforce declined by 13% compared to 2022.
Challenges and Opportunities:
Weak deal flow limits investment in onshore capability, creating a vicious cycle for Western investment banks.
Some banks are exploring opportunities in India, Southeast Asia, and the US.
International financial groups now have full control of their mainland securities houses.
Mixed Performance and Contrasts:
Morgan Stanley’s China unit recorded its first loss since 2019, while JPMorgan’s venture in China saw profits fall.
Deutsche Bank’s China unit owns only 33% of its mainland joint venture.
Goldman Sachs China recovered from 2022 losses but had lower profits than previous years.
HSBC’s mainland unit turned a profit for the first time, driven by a growing client base and expanded product capabilities.
Broader Context and Outlook:
The investment bank units’ performance may not fully reflect the banks’ overall China business.
Despite global job cuts, earlier hopes of sustained growth in China have been challenged.
Overseas listings require approval from China’s regulators, and cross-border activity remains weak
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The price of gold experienced fluctuations in June due to concerns about rising U.S. interest rates, which boosted the dollar and Treasury yields. Spot gold hovered around $2,300 per ounce, with futures showing similar trends.
Here are the key points:
Interest Rate Focus: Gold remained rangebound as investors closely monitored interest rate cues. Federal Reserve Chair Jerome Powell’s upcoming speech at a European Central Bank conference was anticipated, although no major rate-related revelations were expected.
Fed Meeting Minutes: The minutes from the Fed’s June meeting were due, following a cautious stance on rate cuts. Nonfarm payrolls data, also scheduled for release, would provide insights into the robustness of the labor market—a critical factor influencing the Fed’s decisions.
September Rate Cut Expectations: Despite recent expectations of a September rate cut, gold found limited support. Traders using the CME Fedwatch tool priced in a 60% chance of a 25-basis-point rate reduction.
Challenges for Precious Metals: High interest rates negatively impact gold and other precious metals by increasing the opportunity cost of holding non-yielding assets.
Central Bank Purchases: Despite these challenges, gold maintained strong gains, partly due to increased central bank buying, especially in Asia.
Other Metals: Platinum and silver futures declined slightly on Tuesday. Meanwhile, copper prices continued to sink due to negative sentiment toward China, coupled with concerns about global economic growth.
China’s Economic Recovery: Mixed signals from China’s purchasing managers index data highlighted uncertainties about the country’s economic rebound.
Chinese Communist Party’s Third Plenum: Scheduled for July, this high-level meeting is expected to provide further insights into China’s economic direction.
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🔥Important News releases on This WEEK :
02/07 Tue 7:30am AUD Monetary Policy Meeting Minutes
02/07 Tue Tentative NZD GDT Price Index
02/07 Tue 3:00pm EUR Core CPI Flash Estimate y/y
02/07 Tue 7:30pm CAD Manufacturing PMI
02/07 Tue 7:30pm EUR ECB President Lagarde Speaks
02/07 Tue 7:30pm USD Fed Chair Powell Speaks
02/07 Tue 8:00pm USD JOLTS Job Openings
03/07 Wed 7:30am AUD Retail Sales m/m
03/07 Wed 6:15pm USD ADP Non-Farm Employment Change
03/07 Wed 6:30pm CAD Trade Balance
03/07 Wed 6:30pm USD Unemployment Claims
03/07 Wed 6:30pm USD Trade Balance
03/07 Wed 7:45pm USD Final Services PMI
03/07 Wed 8:00pm USD ISM Services PMI
03/07 Wed 8:15pm EUR ECB President Lagarde Speaks
03/07 Wed 8:30pm USD Crude Oil Inventories
03/07 Wed 10:00pm USD Natural Gas Storage
04/07 Thu 12:00am USD FOMC Meeting Minutes
04/07 Thu 12:30pm CHF CPI m/m
04/07 Thu All Day GBP Parliamentary Elections
04/07 Thu 2:30pm GBP Construction PMI
04/07 Thu All Day USD Bank Holiday
05/07 Fri 3:40pm USD FOMC Member Williams Speaks
05/07 Fri 6:30pm CAD Employment Change & Unemployment Rate
05/07 Fri 6:30pm USD Average Hourly Earnings m/m & Non-Farm Employment Change & Unemployment Rate
05/07 Fri 8:00pm CAD Ivey PMI
05/07 Fri 11:15pm EUR ECB President Lagarde Speaks
N.B. Time mentioned here is on Gmt +6
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Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc
Prepared to you by “Akif Matin“
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