Digest – Thursday saw the ECB cut 25bp as expected, while stocks rallied, and gold surged to a fresh ATH, as a quiet calendar awaits today to wrap up the trading week.
Where We Stand – Another choppy day for financial markets yesterday, albeit a risk-positive one once more, as participants continued to digest Wednesday’s CPI figures, while also looking ahead to next week’s FOMC decision, where at this stage a 25bp cut seems a done-deal.
We did have a handful of catalysts yesterday, though, chiefly with the ECB delivering their second cut of the cycle, reducing the deposit rate by 25bp to 3.50%, its lowest level since last summer. The cut was accompanied with the usual assertions that the Governing Council would follow a ‘data-dependent’ and ‘meeting-by-meeting’ approach to future policy shifts, as well as the now-familiar refrain that policymakers are not ‘pre-committing’ to any particular rate path.
President Lagarde’s post-meeting press conference was as dull as ever, and offered little information of value.
That said, it does seem that the ECB are going to plot a relatively cautious path towards removing policy restriction, with the EUR OIS curve still looking too hawkishly priced, discounting over 40bp of easing by year-end. The pricing out of these cuts, and the relatively more dovish path that the FOMC are likely to follow, could help to underpin EUR/USD over the medium-term, with a downside test of the 1.10 figure having held for the second consecutive day yesterday.
Away from the ECB, yesterday’s US releases were pretty much bang in line with expectations – PPI rose 1.7% YoY in August, initial jobless claims printed at 230k last week, and continuing claims at 1.850mln the week before. None of these datapoints move the needle, or evolve the narrative, especially much, particularly with the claims data not coinciding with the survey week for the September labour market report.
Despite this, and what were largely rudderless conditions as conviction remained somewhat lacking, gold did find healthy demand. The yellow metal has started to shine once more, with spot rising to fresh all time highs yesterday, north of $2,550/oz. Clearly, the bulls continue to believe in their soul, with the power to know, that they’re indestructible..
At least for now, that is. Gold’s gains yesterday were not supported by any particularly obvious fundamental driver, with sentiment again relatively firm, the dollar broadly flat, and Treasuries actually trading softer on the day. Central bank demand, particularly in EM, has been the apparent driver of most of the YTD gains, though long gold may equally just be turning into a momentum trade once more.
Equities, as noted, traded in relatively positive fashion, with small caps outperforming. Markets, for now, appear to have reconciled themselves with the idea that just a 25bp cut will be forthcoming next week. At the same time, with knowledge that the Fed can move in larger clips and/or at a faster pace, if so required in the future, investors remain confident to reside further out the risk curve, resulting in the ‘path of least resistance’ continuing to lead higher. The ‘Fed put’ remains a forceful impetus back-stopping risk assets.
Elsewhere, Treasuries traded broadly softer across the curve all day, with weakness led by the belly where 5- and 10-year yields rose by 3bp apiece. Selling pressure also intensified after a weak 30-year auction, which tailed by 1.4bp, bucking the trend shown by strong 3- and 10-year sales earlier in the week. Investor demand to lock in yield ahead of the first Fed cut next week appears not to have extended to the long-end.
Finally, crude rallied again, with the front WTI contract extending a solid bounce off the $65bbl handle, and notching a second straight daily gain for the first time this month. The gains, however, are not built on the steadiest of foundations, with the demand outlook still incredibly anaemic, with rallies likely to be sold into in relatively short order.
Look Ahead – It’s finally Friday! We will have to wait and see whether ‘Friday the 13th’ is unlucky for some within the market, though we can be sure of having a relatively quiet data docket to work our way through before the weekend.
This afternoon’s US UMich sentiment survey is the highlight, with consumer sentiment set to tick marginally higher to 68.4, and the closely-watched 1-year inflation expectations gauge set to fall to 2.7%, which would represent the lowest level since December 2020.
Elsewhere, catalysts look set to be lacking somewhat. In the eurozone, July’s industrial production figures are due, though are rather too stale to be of any concern. ECB President Lagarde is also set to speak, again, however if yesterday’s press conference is anything to go by the speech should be a non-event.
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