Good morning,
The recent diplomatic crisis between Ecuador and Mexico, culminating in a police raid on Mexico’s embassy in Quito, has ignited scrutiny over potential violations of the Geneva Convention. The conflict stemmed from Ecuador’s attempt to arrest former Vice President Jorge Glas, who had sought refuge in the embassy. Despite Ecuador’s authorisation for the raid, Mexico granted Glas political asylum, prompting the forceful entry by Ecuadorian police. The incident raises questions about adherence to diplomatic norms and conventions, with Mexico condemning the raid as a blatant contravention of the Geneva Convention, while severing diplomatic ties with Ecuador.
Last Week
US inflation data sparked a surge in the dollar’s value as expectations for a summer rate cut dwindled. Market sentiment shifted dramatically from anticipating four cuts at the year’s onset to now pricing the first cut in September. This transformation propelled the dollar to 5 and 6 month highs against the euro and sterling, with a 2% surge against major trading partners. Lawrence Summers, former Treasury Secretary, cautioned against complacency amidst the inflation decline, predicting a bond selloff as investors brace for further monetary tightening. He emphasised the unexpected vigour of the US job market, underscored by a robust payroll increase of 209,000 in June and wage growth of 4.4% for the year. Despite some signs of economic softening, buoyant indicators like housing market strength and consumer confidence bolster the case for restrained Fed action, thereby keeping the dollar resilient.
The European Central Bank (ECB) maintained its stance, holding interest rates steady for a fifth consecutive meeting, signalling an imminent rate cut amidst uncertainty surrounding the U.S. Federal Reserve’s actions. With inflation in the bloc inching towards 2% amid sluggish demand and a tepid economy, a summer rate cut seems increasingly probable. The ECB’s confidence in inflation converging to the target has prompted considerations for easing monetary policy restrictions. This growing disparity in policy expectations between the Fed and ECB could further depreciate the euro. Analysts, like David Kohl from Julius Baer, advocate for immediate rate cuts given the persistent low inflation driving real rates higher.
The dollar soared to a 34-year high against the yen in New York, briefly surpassing a crucial support level and igniting speculation about potential intervention by Tokyo authorities. This showcases the dollar’s continued safe haven status amid global market turbulence. Analysts are closely monitoring the Japanese ministry of finance for signs of a “rate check”, a potential precursor to official currency intervention. The dollar’s robust performance this week, marks its strongest showing since 2022. This resurgence, with a 1.5% gain against major currencies, underscores the significant shift in market sentiment regarding Federal Reserve rate adjustments. Meanwhile, the euro and sterling tumbled to their lowest levels against the dollar since November, amidst a broader landscape of economic uncertainty.
This Week
Following yet another robust CPI report in the United States, inflation data takes the spotlight in the upcoming week, with the United Kingdom joining the fray. Kicking off the UK agenda is the February employment report, where declining employment in the three months to January raised the jobless rate to 3.9%. Despite signs of a rebounding economy, the labour market has notably slowed, posing challenges for jobs growth. While wage inflation has moderated, with average weekly earnings growth declining, softer wage growth is just part of the sterling story. Investors await Wednesday’s CPI readings, anticipating a further decline in UK inflation. A favourable UK inflation outlook could pressure the pound below $1.25, requiring stronger economic recovery or US slowdown to support its defence.
Anticipation surrounds Japan’s forthcoming CPI release, with hopes pinned on its potential to uplift the struggling yen. February witnessed a notable surge in inflation, with core CPI climbing to 2.8% from 2.0%, marking a significant departure from its year-long decline. However, projections suggest a slight easing to 2.6% in the core figure set to unveil on Friday. Despite this optimism, investors remain cautious, questioning whether Japan’s inflationary momentum can be sustained. The Bank of Japan’s subtle hints at a second rate hike later in the year, alongside plans to revise inflation forecasts upwards in April, provide some reassurance. Yet, the yen’s fate hinges on the CPI data’s ability to validate these expectations, with significant attention drawn to future wage negotiations and energy subsidy developments as potential drivers of inflationary pressures.
Key Events
Monday April 15th
13:30 US Retail Sales & Manufacturing Index
Tuesday April 16th
03:00 Chinese Industrial Production
13:30 Canadian CPI
18:00 BOE Governor Bailey Speaks
18:15 BOC Governor Macklem & Fed Chair Powell Speaks
23:45 New Zealand CPI
Wednesday April 17th
07:00 UK CPI
17:00 BOE Gov Bailey Speaks
Thursday April 18th
02:30 Australian Unemployment Rate
13:30 US Unemployment Claims
Friday April 19th
07:00 UK Retail sales
Have a great week,
The Garton Team.