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The relief rally in the wake of the first round in the French elections shifted in lower gear as the session went. It dawned that an RN absolute majority remains a possibility after next Sunday. This evening we’ll know more about how Macron’s centrists and the far-left seek to prevent that from happening by tactically withdrawing candidates. The final list is due by 6 PM and will give a clearer view, including for the pollsters. European stocks pared a 1.8% gain (EuroStoxx50) to just 0.74%. The common currency traded as high as 1.0776 before closing at 1.074 against an overall solid dollar. USD/JPY strengthened towards a new 34-yr high at 161.46. The only European financial variables that closed near or at intraday highs were core bond yields. German yields sprinted between 9.1 and 10.7 bps higher, unwinding some safe haven gains. Semi-core and peripheral spreads dropped with France’s tightening 6 bps on the day. Bunds underperformed Treasuries where an unexpectedly declining US manufacturing ISM (48.5) kept front-end yields at bay (+0.3 bps for the 2-yr). Longer tenors took the lead ever since the debate between Biden and Trump brought victory for the latter. A Trump presidency raises the specter of increased spending, which is pressuring the long-end in particular through risk premia.

The economic calendar today features the June European inflation reading. After several national numbers printing bang in line with expectations (including Germany’s yesterday), any deviation from a 0.2% m/m and 2.5% (headline, from 2.6% in May) consensus should be small. Core inflation is expected to marginally ease to 2.8%. We keep a close eye at services inflation (4.1% in May) for possibly having the biggest market moving potential. Inflation takes center stage at the ECB Sintra conference as well today with a deep dive into its drivers and the impact of geopolitical shocks. In her opening speech yesterday, ECB president Lagarde warned not to be complacent on the matter. She said that uncertainties remain and that “It will take time for [the ECB] to gather sufficient data to be certain that the risks of above-target inflation have passed.” Quotes coming from the symposium may trigger some intraday volatility in a trading session that’s going to be predominantly technically inspired. As the French dust settles (for now, that is), focus is now shifting towards the elections in the UK on July 4th. Sterling in recent weeks has been steadily losing ground vs the euro. EUR/GBP is currently closing in on the 0.85 barrier. This compares to the failed test of the 0.84 support mid-June.

News & Views

UK shop prices declined by 0.2% M/M in June, with both food (-0.1%) and non-food prices (-0.2%) contributing. The Y/Y-pace (0.2% from 0.6%) is the slowest since October 2021. On the non-food part, retailers tried to drive sales by discounting. This was particularly true for TVs with great deals to capitalize on the Euros fever. Food prices are still 2.5% higher than a year ago, but the disinflationary process continues. Non-food prices are down 1% Y/Y. Chief executive at the British Retail Consortium, Helen Dickinson said the slowdown is shop price inflation is at least partly due to improvements in operations and supply chains at the height of the cost of living crisis to compensate for the impact of global shocks on input costs. These investments are now paying off. In a clear message to the next UK government, the BRC advices to address some of the remaining major cost burdens weighing down the retail industry (eg broken business rates system) to help reduce the cost of living pressures.

Hungary took over as president of the EU council yesterday in the 6-month rotating role. In a column in the Financial Times, Hungarian PM Orban launched the view to “make Europe competitive again” building on work/popular themes since the start of the year. A new green deal, involving industrial stakeholders, and fixing heavy tax burdens for corporates is key to making Europe a more attractive investment destination again which could be the step-up to new economic success. Apart from the competitiveness, Orban suggest to curb illegal migration, shape the future of cohesion policy to achieve greater convergence among regions and establish the foundations of a farmer-oriented EU agricultural policy.

Graphs

GE 10y yield

The ECB cut its key policy rates by 25 bps at the June policy meeting. A more bumpy inflation path in H2 2024, the EMU economy gradually regaining traction and the Fed’s higher for longer US strategy make follow-up moves difficult. Markets are coming to terms with that. Meanwhile, some of the save haven bids were reversed after the first round in the French elections. The 2.34%-2.4% support zone looks a solid one.

US 10y yield

The Fed needs more evidence than just one slower-than-expected (May) CPI is providing. Upgraded inflation forecasts and a higher neutral rate complicate the timing of a first cut further. June dots suggest one move in 2024 and four next year. The long end of the curve is supported by increased odds of a Trump presidency after the debate with Biden. The spectre of increased spending (risk premia) pulled the 10-yr away from the 4.2% support area.

EUR/USD

EUR/USD is stuck in the 1.06-1.09 range. The desynchronized rate cut cycle with the ECB exceptionally taking the lead, strong US May payrolls and a swing to the right in European elections pulled the pair away from 1.09. The Fed meeting balanced the weaker than expected US CPI outcome. The increased probability of a hung French parliament after the first round offered the euro some relief.

EUR/GBP

Debate at the BOE is focused at the timing of rate cuts. May headline inflation returned to 2%, but core measures weren’t in line with inflation sustainably returning to target any time soon. Still some BoE members at the June meeting appeared moving closer to a rate cut. This might cap further sterling gains. The euro’s vulnerability to political event risk going into the French elections eased for now. EUR/GBP 0.84 is becoming solid support.

Daily Pivots: (S1) 1.3683; (P) 1.3716; (R1) 1.3769; More...

USD/CAD's rebound from 1.3626 resumed by breaking through 1.3733, but stays below 1.3790 resistance. Intraday bias remains neutral first. Consolidation from 1.3845 could extend further. While another fall could be seen, downside should be contained by 1.3589 cluster support (38.2% retracement of 1.3176 to 1.3845 at 1.3589) to bring rebound. Break of 1.3790 resistance will argue that larger rise is ready to resume and target 1.3845 resistance.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern. In case of another fall, strong support should emerge above 1.2947 resistance turned support to bring rebound. Firm break of 1.3976 will confirm up resumption of whole up trend from 1.2005 (2021 low). Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3176 at 1.4149.

Daily Pivots: (S1) 0.6639; (P) 0.6664; (R1) 0.6684; More...

No change in AUD/USD's outlook as sideway consolidation continues below 0.6713. Intraday bias remains neutral for the moment. Further rally is in favor with 0.6578 cluster support (38.2% retracement of 0.6361 to 0.6713 at 0.6579) intact. On the upside, firm break of 0.6713 will resume whole rise from 0.6361 to 0.6870 resistance next. However, sustained break of 0.6578 will dampen this bullish view, and bring deeper fall to 61.8% retracement at 0.6495.

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern to the down trend from 0.8006 (2021 high). Fall from 0.7156 (2023 high) is seen as the second leg, which could have completed at 0.6269 already. Rise from there is seen as the third leg which is now trying to resume through 0.6870 resistance.

Daily Pivots: (S1) 1.0715; (P) 1.0745; (R1) 1.0771; More....

Intraday bias in EUR/USD remains neutral for the moment. On the upside, firm break of 55 D EMA will argue that pull back from 1.0915 has completed. Further rise should be seen back to 1.0915 resistance. However, break of 1.0665 will resume larger down trend through 1.0601 low instead.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern that's still in progress. Break of 1.0601 will target 1.0447 support and possibly below. For now, this will remain the favored case as long as 1.0915 resistance holds, in case of rebound.

Daily Pivots: (S1) 1.2622; (P) 1.2661; (R1) 1.2690; More...

Intraday bias in GBP/USD stays neutral and outlook is unchanged. On the upside, firm break of 1.2702 resistance will argue that pull back from 1.2859 has completed, and bring retest of this high instead. Nevertheless, rejection by 1.2702 will keep risk on the downside. Sustained trading below 1.2633 resistance turned support will argue that whole rise from 1.2298 has completed, and target 1.2445 and below.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern that is still in progress. Break of 1.2445 support will confirm that another falling leg has started and target 1.2036 cluster support again (38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075. Nevertheless, break of 1.2892 resistance will argue that larger up trend from 1.0351is ready to resume through 1.3141.

Daily Pivots: (S1) 160.90; (P) 161.31; (R1) 161.89; More...

Intraday bias in USD/JPY remains on the upside at this point. Current up trend should target 61.8% projection of 146.47 to 160.20 from 154.53 at 163.01. On the downside, below 160.25 minor support will turn intraday bias neutral and bring consolidations again, before staging another rally.

In the bigger picture, long term up trend is still in progress. Further rise is expected as long as 154.53 support holds. Next target is 100% projection of 127.20 (2023 low) to 151.89 (2023 high) from 140.25 at 164.94.

The week started on a positive note but the positive vibes will likely leave their place to the chatter of scenarios regarding how the French will prevent Marine Le Pen from gaining a majority in the parliament in the second round of the legislative election this weekend. Will the opposition parties form a sufficiently convincing alliance to prevent National Rally from gaining an outright majority, or will Marine Le Pen’s National Rally amass the majority despite all efforts? Both scenarios mean some political uncertainty for France and beyond its borders, but investors’ hearts are pounding toward the first option: a hung government – which would at least prevent Le Pen from exploding the national debt and jeopardize/reverse Macron’s efforts to pull the national debt back to levels acceptable by EU rules. The latter would help tame the spread between the French and the German bonds – which already retreated below 80pb on Monday on hope and pricing that Le Pen won’t secure a parliamentary majority, and support euro. The EURUSD rallied to 1.0776 yesterday, flirted with its 50-DMA but retreated to around 1.0730 this morning. The CAC 40 opened the week with a bang, gained as much as 2.7% before paring losses and closing just 1% up. The European futures are in the negative this morning.

On the data front, European Central Bank (ECB) Chief Lagarde warned that the bank doesn’t have enough evidence that inflation threat is over, hinting that the ECB will probably bypass a second rate cut when it meets later this month. Inflation numbers revealed by major Eurozone countries since Friday are mixed: as expected in France, a bit higher than expected in Spain and a bit lower than expected in Italy and Germany. So far, the actual CPI numbers didn’t deviate much from expectations – clearly not enough to deviate the attention from the French election jitters. The aggregate inflation figure for early June is due today, both headline and core inflation are expected to have eased slightly in June. If that’s the case, we could see the ECB doves breathe a sigh of relief, if not, the euro could see a minor support but in both cases, the euro will remain under the pressure of French political uncertainties throughout the week, and any rally attempts could limited into the second election weekend in France.

In the US, data released yesterday posted softer-than-expected ISM manufacturing numbers in June and a decline in construction spending in May. Atlanta Fed’s GDP Now plunged to 1.7%. All that softness could’ve pulled the US yields lower but the political news – there - interfere with the market pricing as well. According to the latest, the Supreme Court said that Donald Trump will benefit from some immunity from criminal charges for trying to reverse the 2020 election, making him a step closer to winning this year’s presidential election after last week’s worrying debate for Joe Biden. The Trump win expectation makes US curve steeping an active bet according to Morgan Stanley analysts who say that Trump in the White House will slow growth and boost inflation – with increased trade tensions and more tariffs.

In the FX, the US dollar index fell yesterday on a kneejerk jump in the euro but is upbeat this morning. The USDJPY continues its hike above the 161.50 level, preparing to test the 162 with limited upside potential given the direct FX intervention threat. The franc is giving back the safe haven gains of late. The euro-franc is back above the 100-DMA while the USDCHF takes over the 50-DMA offers. The Swiss National Bank’s (SNB) dovish stance should keep the franc on a softening path, apart from periods of sudden appreciation due to safe haven flows.

In equities, the S&P500 consolidated gains near record on Monday, s Tesla jumped more than 6% to above its 200-DMA ahead of quarterly deliveries report that’s due today, and that could confirm a second quarter decline in deliveries. The Chinese rival BYD on the other hand is down in Hong Kong after announcing to have sold 1 million cars in Q2 – around 426K of them being purely electric.

In energy, crude oil started the week strong ahead of the July 4th holiday in the US, which AAA predicts will see a record number of drivers, and Hurricane Beryl, which is not expected to impact operations in the Gulf of Mexico immediately but could cause disruptions later in the week. US crude rallied 2.4% and hit the $84pb mark for the first time since April. Risks remain tilted to the upside, the next target for the bulls stands at $85pb level, where we should see support and rebound given that the soft manufacturing data from the US and China at the start of the week don’t give a further support.

Elsewhere, Cable remains under pressure ahead of Thursday’s general election while the FTSE 100 couldn’t really benefit from a softer sterling and a rapid rise in oil prices yesterday and closed the session near flat. The election uncertainty seemingly keeps the bulls on the sidelines even though a Labour win is seen as a net positive for the British stocks. The price pullbacks in the FTSE 100 are likely interesting opportunities to strengthen long positions in energy-heavy British stocks that should fully benefit from reflation trades once the election is behind. Zooming out, the FTSE 100 didn’t do bad at all over the past few quarters. The index posted a fourth quarter gain in the Q2, has hit a record high in May and remains upbeat as we enter the second half on expectation of more political stability, an upcoming Bank of England (BoE) rate cut and improved reflation flows.

The RBA’s strategy relies on assessing gaps between supply and demand. There are uncertainties involved in this approach, but so far, the inflation outlook hasn’t changed enough to spur a rate increase.

The minutes for the RBA Board’s June 2024 meeting highlighted that levels matter in the RBA’s view of the economy, as well as growth rates. The brief section on international developments noted that it was the economies with negative output gaps (where aggregate demand is below aggregate supply), such as Canada and Sweden, where services inflation was still declining. On the domestic side, the minutes started by noting that the staff assessed that ‘aggregate demand had continued to exceed aggregate supply’. Likewise, the labour market ‘was still assessed as tight relative to full employment’. Both the output gap and the labour market tightness were assessed as narrowing.

The discussions on considerations for monetary policy are increasingly being framed as assessments of these gaps. This is not a complete departure from past approaches, but as the apparent gaps narrow, the evidence base for these estimates will face intensified scrutiny. So will the Board’s assessment that global growth has troughed, noting the current uncertainties around trade policy and geopolitics more broadly.

Given the uncertainties around these ‘gap’ estimates, the point at which the gaps are assessed to have closed will be something of a judgement call, a point acknowledged in the minutes. The June quarter CPI and the revised forecasts will, therefore, be important inputs to the August Board meeting.

One point to watch in future RBA communication is how the central bank reconciles its view that the labour market is still tighter than the full employment level, with its view – which we share – that wages growth has peaked. The minutes also noted the easing in growth in unit labour costs, as has been previously highlighted by Westpac Economics colleague Pat Bustamante. These developments might help explain why the Board highlighted that it was not following the practice of other central banks in assuming that ‘some spare capacity was necessary to bring inflation back to target within a reasonable timeframe’.

The RBA had been surprised by the stronger durable goods inflation in the April inflation indicator. However, there was little new information on services inflation, which has been more of a focus recently. The May monthly inflation indicator, which was released after the meeting, was above consensus, but the services component showed further moderation; that said, the pace of decline is slow, as it has been overseas. Again, we expect that the Board will look to the full quarterly data to form a revised view.

The minutes highlighted an increased risk that inflation could take longer to return to target than previously expected. However, actual outcomes implied that ‘the economy was still broadly tracking on a path consistent with returning inflation to target in 2026’. If future developments point to this no longer being the case, the Board would act. But as the output and labour market gaps narrow, the case to take out insurance against heightened perceived risks alone would weaken.

The revisions to overseas holiday spending were seen as bringing household consumption behaviour more in line with past relationships. But the implications for future household spending are not clear. The implied level of household saving is now very low, though this is often revised and extra payments into mortgages are higher than the pre-pandemic average. There is probably a distributional angle here; the minutes do not tease this out but did mention ‘clear evidence that many households were experiencing financial stress’. Also noteworthy in the minutes is the mention of household debt growing more slowly than incomes, especially once extra payments into offset accounts were included.

Several of the developments mentioned in the minutes highlight the awkwardness of the current policy environment. This is not a situation of needing to lean against strong private sector demand that is driving inflation higher. Rather, we see weak demand and declining inflation. The policy decision therefore rests on views on whether demand is weak enough to bring inflation down fast enough, given the factors working in the wrong direction.

Among these factors, it is noteworthy that the minutes highlighted the role of public sector demand in driving both GDP and employment growth. In addition, the minutes noted that if aggregate supply were more constrained than previously assumed, this might also strengthen the case to raise rates. Ongoing slow (but positive) productivity growth was also highlighted. If that scenario does play out, the case for other policymakers to do what they can to repair the supply side becomes more urgent.

Overall, these minutes confirm our view that the Board would raise rates if the outlook shifted to imply a slower or stalled decline in inflation. But it has not come to that point yet. And given the increased focus on the Bank’s full employment mandate, one can readily imagine that the Board is hoping that it doesn’t come to that point, either.

Daily Pivots: (S1) 0.8986; (P) 0.9016; (R1) 0.9057; More…

Intraday bias in USD/CHF remains on the upside for the moment. Fall from 0.9223 might have completed as a three-wave corrective move to 0.8825. Sustained trading above the near term falling channel resistance will bring further rally to 0.9157 resistance next. On the downside, below 0.8977 minor support will turn intraday bias neutral gain first.

In the bigger picture, focus remains is now on 0.9223/9243 resistance zone. Decisive break there would complete a head and shoulder bottom pattern (ls: 0.8551; h: 0.8332; rs: 0.8825). That would indicate larger bullish trend reversal. Nevertheless, rejection by 0.9223/43 will keep medium term outlook neutral at best, for more range trading between 0.8332/9243 first.

Dollar surged across the board overnight and stayed firm in Asian session, fueled by the strong rally in benchmark US Treasury yields. This rally is partly attributed to rising expectations of a Donald Trump victory in the upcoming presidential election. Analysts suggest that a Trump win would likely lead to heightened tariffs and expanded fiscal policies, both of which could stimulate inflation. Trump's performance in the recent debate against President Joe Biden has boosted these expectations, prompting some economists to recommend hedging against inflation as a precautionary measure.

Conversely, Kiwi faced substantial selling pressure following release of sharply deteriorated business confidence report for Q2. RBNZ had projected the timing for the first rate cut to be in Q3 next year, but the worsening business confidence and economic outlook have led some analysts to speculate that this cut could be brought forward to as early as Q1. There is even speculation that the first rate cut might occur as soon as Q4 of this year.

Across the broader currency markets, Euro is following closely behind Dollar as the second strongest currency of the day. However, it remains volatile due to ongoing political developments in France, where uncertainty is still high. Canadian Dollar is currently the third strongest currency. Conversely, Aussie is the second weakest, following Kiwi, despite hawkish minutes from RBA that highlighted significant concerns over upside inflation risks. Swiss Franc, British Pound, and Japanese Yen are mixed, occupying middle positions in the currency rankings.

Technically, the surprisingly strong rally in US 10-year yield overnight argues that fall from 4.737 has completed with three waves down to 4.188. That came just ahead of 61.8% retracement of 3.785 to 4.737 at 4.148. More importantly, this development suggest that rise from 3.785 is not over and could be seen to resume. Further rise is now expected as long as 55 D EMA (now at 4.376) holds. Next target is a retest on 4.737 resistance.

In Asia, at the time of writing, Nikkei is up 1.03% and back above 40k handle. Hong Kong HSI is up 0.40%. China Shanghai SSE is up 0.13%. Singapore Strait Times is up 0.52%. Japan 10-year JGB yield is up 0.0193 at 1.084. Overnight, DOW rose 0.13%. S&P 500 rose 0.27%. NASDAQ rose 0.83%. 10-year yield jumped sharply by 0.136 to 4.479.

RBA minutes: The narrow path is becoming narrower

Minutes of RBA's June meeting emphasize the need to remain "vigilant to upside risks to inflation". The RBA noted that the information received since the previous meeting reinforced this need, underscoring the "extent of uncertainty" in the current economic environment, which makes it "difficult either to rule in or rule out" future changes in interest rates.

Concerns were raised about the "narrow path" to bringing inflation back to target within a reasonable timeframe without significantly deviating from full employment. This path, according to the minutes, is "becoming narrower."

The decision to keep the cash rate target unchanged at 4.35% was deemed the stronger option compared to another rate hike. Data received since May meeting "had not been sufficient" to alter RBA's assessment that inflation would return to target by 2026, despite "some elevated upside risk" surrounding the forecast. Moreover, the minutes revealed that the members felt there was "not enough evidence" to suggest that the outlook for aggregate demand had strengthened.

NZIER survey shows rising pessimism among New Zealand firms

The NZIER Quarterly Survey of Business Opinion for Q2 reveals increasing pessimism among New Zealand firms. A net 44% of firms are now pessimistic about the economy's outlook over the next six months, up from 25% in Q1. Additionally, a net 28% reported a deterioration in their own trading during the three months through March, marking the weakest reading since mid-2020 during the COVID-19 pandemic.

Employment figures are equally concerning. A net 25% of firms laid off workers in Q2, the highest level since the global financial crisis in 2009. Furthermore, a net 10% expect to reduce staff numbers in the three months through September. Profit expectations are also bleak, with a net 34% of firms anticipating weaker profits in the third quarter, accompanied by falling investment intentions.

On a slightly more positive note, only a net 23% of firms expect to increase prices in Q3, the lowest since 2021. Additionally, companies are finding it easier to recruit workers, signaling reduced wage pressure. Fewer companies also reported rising costs, suggesting some relief from inflationary pressures.

ECB's Lagarde: No rush for further rate cuts as data-dependent approach prevails

At the ECB Forum on Central Banking overnight, ECB President Christine Lagarde hinted that the central bank is not in a hurry to cut interest rates again following its initial rate cut in June.

She highlighted that the central bank is facing "several uncertainties" concerning future inflation. These uncertainties primarily revolve around the dynamics of profits, wages, and productivity, and the potential impact of new supply-side shocks.

Lagarde emphasized that it will take time to accumulate sufficient data to be confident that the "risks of above-target inflation have passed."

The "strong labor market" was noted as a positive factor, allowing the ECB to "take time" to gather more information before making further decisions. However, Lagarde also acknowledged that "growth outlook remains uncertain," indicating that the ECB must remain vigilant and adaptable to changing economic conditions.

She reiterated, "All of this underpins our determination to be data-dependent and to take our policy decisions meeting by meeting."

Looking ahead

Eurozone CPI flash is the main focus of the day while unemployment rate will be released too. Canada will publiah PMI manufacturing.

USD/CHF Daily Outlook

Daily Pivots: (S1) 0.8986; (P) 0.9016; (R1) 0.9057; More…

Intraday bias in USD/CHF remains on the upside for the moment. Fall from 0.9223 might have completed as a three-wave corrective move to 0.8825. Sustained trading above the near term falling channel resistance will bring further rally to 0.9157 resistance next. On the downside, below 0.8977 minor support will turn intraday bias neutral gain first.

In the bigger picture, focus remains is now on 0.9223/9243 resistance zone. Decisive break there would complete a head and shoulder bottom pattern (ls: 0.8551; h: 0.8332; rs: 0.8825). That would indicate larger bullish trend reversal. Nevertheless, rejection by 0.9223/43 will keep medium term outlook neutral at best, for more range trading between 0.8332/9243 first.

Economic Indicators Update