ECB On Hold As Markets Meander

WHERE WE STAND – Bored? Yep, me too. There really isn’t much to get excited about in the world of financial markets right now.

As if to make that feeling of boredom even worse, we had to sit through another tedious hour-long ECB press conference yesterday, as President Lagarde spoke largely in riddles, seeking not to ‘rock the boat’ before the summer break. It goes without saying that rates were left on hold, the depo rate remaining at 2.00%, with policy guidance also unchanged, again flagging a ‘data-dependent’ and ‘meeting-by-meeting’ approach to future decisions.

Anyway, my base case is that in an ideal world the Governing Council would wrap up the easing cycle here, though policymakers will continue to try and maintain as much flexibility as possible for the time being, lest a ‘no deal’ outcome in EU-US trade talks, or a further rally in the EUR, force their hand into a fresh dovish pivot, and further rate reductions.

Elsewhere, catalysts were relatively thin on the ground, at least in terms of those that provided fresh information. The latest round of ‘flash’ PMIs surprised to the upside in Europe, where the composite output gauge rose to an 11-month high, but to the downside here in the UK, with both the services and composite metrics missing expectations. Of more concern, the surveys noted that July was another month of ‘sharply reduced’ headcount, as the impacts of last year’s Budget continue to be felt, and increasing slack develops in the labour market.

The opposite is true across the pond, where the labour market remains resilient. Both initial and continuing claims beat expectations, with the latter print coinciding with the survey week for the July jobs report, due next Friday. Another resilient report looks to be on the cards and, at risk of repeating myself, this is further evidence that the economy really isn’t crying out for a rate cut right now.

All of this, though, is already known by market participants, and pretty well discounted by most assets.

Consequently, yesterday’s price action largely resembled a random walk, and not much else. Treasuries were initially a chunk softer, with weakness led by the long-end, though we again saw dip buyers prevail around the 5% mark in the benchmark 30-year yield, which still in my mind stands as the widest point in the trading band for the time being.

That early Treasury sell-off gave the dollar a bit of a boost, before gains fizzled out, with rally selling remaining my preferred strategy here, as the greenback likely drifts lower amid the continued erosion of Fed policy independence. The EUR, and gold, should be the biggest beneficiaries of this move.

Equities, finally, on Wall Street, ground out another day of gains, with the S&P 500 and Nasdaq 100 both notching new record highs. The path of least resistance clearly continues to lead higher here, as earnings season proceeds in strong fashion, underlying economic resilience persists, and progress towards trade deals continues.

LOOK AHEAD – It’s finally Friday! Which, this week, not only means a cold beverage or three to wrap up the week, but a day trip to the seaside for me, as I head down to (hopefully sunny) Bournemouth for a spot of lunch with my old mucker, and ‘Trade Off’ co-host, Ryan Littlestone.

Anyway, enough on my social life. There are a few events on the docket today, though none of it is likely to be especially market moving.

This morning’s UK retail sales will probably show spending having rebounded solidly in June, though with this coming after a near 3% MoM decline in sales in May, the biggest fall since Dec 2023, such a bounce is likely to be more mechanically driven than anything else. On the subject of skewed data, the same goes for this afternoon’s US durable goods orders report, where orders will probably fall about 10% MoM. Before you panic, this is simply because orders rose a whopping 16.4% MoM in May, owing to a supersized Qatari order of Boeing jets, which creates an incredibly unflattering compare for the June print. The report will likely provide little by way of signal, while the same can also be said of this morning’s IFO sentiment figures out of Germany.

Besides that, all that’s left to do is for me to note the standard warning over the potential for weekend gapping risk, should any geopolitical, or trade developments take place before markets get up and running for the new trading week on Sunday night.