H4L: EU Edition

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Disinflation in Europe has stalled. Wage growth is strong. Energy prices are no longer a disinflationary contribution. The runup into ECB should reflect expectations for a hawkish cut.

by Brent Donnelly

May 31, 2024

Happy weekend!

Current Views

Long EURUSD @ 1.0870

Stop loss 1.0744

Take profit 1.1074

EU Inflation

The ECB is in an interesting spot as they have promised a cut next week just as inflation picks back up. Inflation this month came in high relative to expectations and looks like it might be turning a corner. It’s way too early to make any conclusions with any conviction, but if inflation is a falling maple seed, it just caught a small updraft.

That services inflation figure, at 4.1%, isn’t particularly reassuring and now that the cyan line shows YoY energy disinflation has stopped for now, my bet is that we get a hawkish cut from the ECB.

The market has taken out most of the post-June ECB cuts with just 2.2 cuts now priced from now until December 2024, but there is a possibility of a higher-for-longer narrative taking hold in Europe as this inflation, and German wage growth solid above 6% for the past two years don’t scream “CUT!”

I think this means that the runup trade into ECB will be higher EU yields and a stronger euro.

With US Core PCE coming in as expected, EURUSD higher next week makes sense to me as we look set to take out the big resistance 1.0685/95 at some point soon. I’m adding long EURUSD with a stop at 1.0744 and take profit at 1.1074 to my Current Views. As always, see sidebar for details on trade ideas.

NVDA

Stocks are nervy this week, and the NVDA chart is fascinating with a rare double gapper up through $1000 and then up again through $1063. It’s hard to get excited about NVDA downside as long as we are above $975, but through there would be an epic reversal of massive post-earnings gains on huge volume.

Election

Biden got a small bump from the Trump conviction, but woe to anyone who bets that negative news for the Donald means fewer votes. Voters will spin the verdict based on their priors. It’s not like this Stormy Daniels story is new.

While I have seen some arguments that a conviction will impact the median voter, I doubt it. Here are the updated gambling odds from electionbettingodds.com:

Calendar

Next week is punctuated by at least one big event per days with 2 X ISM, Swiss CPI, Bank of Canada, ECB, and data about US jobs on every day but Monday. Auto Sales haven’t mattered for eons, but with the focus moving to the demand side of the US economy, that figure might matter a bit from now on.

Final Thoughts

I was off yesterday, so Peter Farac took my spot on the Macro Trading Floor Podcast. Here’s the link.

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Have a reflective weekend.

https://x.com/DemetriMartin