29 April 2025
News
US Soft Landing Remains Intact, Boosting Equities and Investor Confidence
Stronger retail sales and lower-than-expected jobless claims numbers suggest that the US soft landing remains intact, serving as a positive catalyst for equities and broader investor sentiment. This renewed risk-on sentiment has driven US yields higher, as expectations of rate cuts by the Federal Reserve (Fed) have been scaled back, lending support to the US dollar.
Overall, the current dynamic indicates that the Fed is more likely to deliver a 25-basis point cut, rather than a 50-basis point cut, when it begins easing, likely in September. While the prospect of fewer rate cuts had previously weighed on stocks, this time it is being driven by the idea that recession risks may have been overstated. The labour market is cooling gradually, defying expectations of a sharper slowdown, with initial jobless claims coming in lower than anticipated at 227,000. Meanwhile, consumer spending continues to reinforce the narrative of US exceptionalism, with retail sales exceeding expectations by posting a 1% gain in July, the strongest reading since January 2023. Following declines seen after this week’s lower Producer Price Index (PPI) and cooler Consumer Price Index (CPI) data, two-year yields have surged back above 4%, as the data not only dispelled growth concerns but also reignited inflation worries, with import prices rising more than forecast.
Swaps tied to the Fed’s September meeting show traders trimming their bets on a cut, with approximately 31 basis points priced in. They are also now pricing in less than 100 basis points of Fed cuts in 2024. The upcoming Jackson Hole Economic Policy Symposium next week is expected to provide further insights into the economic and monetary outlook, which will continue to guide market trends.
Sterling Adjusts Lower Against Euro Amid Rate Differentials and Softer UK Inflation
Rate differentials had suggested that sterling was overvalued against the euro, leading to a correction in the GBP/EUR exchange rate to a more balanced level around €1.16-€1.17, down from over two-year highs above €1.19. This adjustment has resulted in the pair declining for five consecutive weeks, marking its worst performance since Q3 2022. Contributing to the decline was a softer-than-expected UK services inflation reading, which boosted expectations of Bank of England (BoE) easing and dragged the UK-German 2-year yield spread to its lowest level in over a year.
However, the 200-week moving average appears to be a strong support at €1.1609. While the 200-day moving average had been a tough short-term resistance at €1.1692, the pair reclaimed €1.17 yesterday as EUR/USD dropped back below $1.10. Despite sterling’s difficulties in August, the 1-year UK-US rate differential suggests that GBP/USD’s approximate 3% drop since mid-July may have been overdone. Indeed, the downward momentum slowed near the 100- and 200-day moving averages, allowing the pair to break a four-week losing streak and rebound over 1.5% from last week’s lows, moving back above its five-year average of $1.28. The pair is now testing the 200-week moving average resistance, and a decisive close above it could support further gains in the short term. Stable equity markets and a sustained global easing bias are likely to remain supportive of the pro-cyclical currency, particularly against its safe-haven peers. However, sterling will need a new positive catalyst to bolster its upward trajectory from the first half of 2024.
On the macroeconomic front, July retail sales rose by 0.5% month-on-month, in line with market expectations. Sales at non-food stores increased by 1.4%, particularly in department stores and sports equipment stores, driven by summer discounting and sporting events. Excluding fuel, retail sales rose by 0.7%, stronger than the 0.6% rate economists had expected. The proportion of sales made online also edged up to 27.8% from 27.4% the previous month.
European Stocks Rally as US Economic Data Eases Concerns
European stocks rallied and bonds sold off as encouraging data from the US alleviated investors’ worries about a rapidly deteriorating US economic outlook. The STOXX 50 index is up nearly 1.6% week-to-date, having recovered close to 90% of the losses incurred in August. Meanwhile, the two-year German bond yield rose to a two-week high of 2.45%, following the upward movement in US Treasury yields. The front-end spread widened to 165 basis points but remains structurally narrower compared to levels seen before the non-farm payroll (NFP) reports at the end of July. Nevertheless, the move pushed EUR/USD to a session low of $1.095 before the pair recouped some of its losses.
No macroeconomic reports were released today in the Eurozone, but there was still plenty of market interest as the Norges Bank held its monetary policy meeting. The committee decided to keep its key policy rate steady at a sixteen-year high of 4.5% for the fifth consecutive meeting. The Bank warned that the interest rate would likely remain at the current level for some time, as policymakers are concerned about a weaker krone and its potential implications for inflation. However, there are also worries that overly tight monetary policy could restrain the economy more than necessary, as signs of slowing are already apparent, with unemployment edging higher. Given the largely unsurprising outcome of the meeting, EUR/NOK closed only 0.05% lower on the day.
The prospect of the US economy and interest rates converging toward lower levels, similar to those in the rest of the world, along with a renewed risk-on sentiment, is proving supportive for EUR/USD. The pair continues to be driven almost entirely by US macroeconomic data and expectations of Fed rate cuts, as investors largely disregard increasing risks to the Eurozone outlook. Regarding the Fed, yesterday’s partial pricing out of near-term easing expectations was welcomed, given that the pricing appeared to be stretched. With 90 basis points still factored into the overnight index swap (OIS) curve, there appears to be more room for further scaling back of expectations. However, it remains uncertain whether this will be realised this week, given the lack of market-moving data on today’s agenda. The Jackson Hole symposium next week, historically a hawkish event for the dollar, may serve as the next catalyst.
