Market Commentary

The euro and sterling both drifted down against the dollar during the course of yesterday’s session, hitting lows for the day of around $1.0510 and $1.2630 respectively while remaining within their recent relatively narrow trading ranges. They are both a bit firmer this morning, at around $1.0540 and $1.2640, while EURGBP is once again not much changed trading at £0.8330.

Yesterday’s Events

Government bond yields were little changed yesterday, ending largely flat overall, while it was something similar in equity markets, with US indices closing unchanged to marginally higher and European stocks finishing modestly lower.

Fed Governor Cook believes “it likely will be appropriate to move the policy (interest) rate down toward a more neutral stance over time,” but adds that the “magnitude and timing” of rate reductions is uncertain.” Her Fed colleague Bowman  is similarly cautious, saying her preference is to lower interest rates gradually, especially in light of still “elevated” core inflation (currently running at 2.7%).

ECB member Stournaras says “inflation is now more likely to converge sustainably to the target (2%) sooner than earlier expectations — by the beginning of 2025 instead of the last quarter of next year, as was anticipated in the most recent ECB projections,” adding that “our policy focus may have to increasingly take account of economic conditions so that we don’t undershoot our inflation objective.”

The Day Ahead

It is relatively quiet on the economic data front today, with consumer confidence due in the Euro area and jobless claims and existing home sales scheduled in the US. There are a number of ECB and Fed members speaking during the course of the day also.

Market Commentary

The dollar and other ‘safe-haven’ currencies (Japanese yen, Swiss franc) rose for a time during yesterday’s session on the back of escalating Russia-Ukraine tensions before giving up ground again. The euro is little changed against the dollar from this time yesterday morning trading at about $1.0570, though it did briefly rebound to over $1.06, while sterling is trading just shy of $1.27, having recovered from yesterday’s low of about $1.2615, helped by slightly firmer than expected UK inflation data for October released a short while ago. All of this leaves EURGBP trading a little softer at about £0.8330 this morning.

Yesterday’s Events

Government bonds also rallied briefly on the back of the Russia-Ukraine situation before reversing course, with German, UK and US 10-year yields finishing off their lows though still slightly down on the day overall. In equity markets, European stocks rebounded from their lows to close down around 0.8%, while in the US the S&P 500 reversed early losses to end in the black with gains of around a half a percent.

Regarding the latest inflation data in the UK released earlier this morning, the annual rate of headline inflation re-accelerated to 2.3% in October from 1.7% in September, slightly ahead of the expected 2.2%, mainly reflecting rising energy prices last month (compared to falling prices in October 2023). Core inflation, which excludes  energy and food prices, nudged back up to 3.3% from 3.1%, reflecting a slight increase in both goods and services inflation (to 0.5% and 5% respectively).

The UK inflation data won’t have come as a surprise to the Bank of England (BoE), which expects headline inflation to end this year at about 2.5% according to its latest forecast. They do mean though that the BoE is likely to lower interest rates gradually – as indeed its Governor, Andrew Bailey, indicated in remarks yesterday – with the market not pricing in another full 25bps cut until March of next year.

ECB member Panetta – who is a noted ‘dove’ – says ‘restrictive monetary conditions are no longer necessary,’ and that “we need to normalize our monetary policy stance and move to neutral – or even expansionary territory – if necessary.” The neutral interest rate for the Euro area is generally considered to be around 2%, with ‘expansionary territory’ below 2%.

The Day Ahead

Looking to the day ahead, economic data due include the ECB’s index of negotiated wages – which will be closely watched – and construction output for the Euro area, while a number of ECB and Fed members are scheduled to speak also.

Market Commentary

The euro briefly rose above the $1.06 level yesterday and is trading around $1.0585 this morning, slightly firmer than yesterday morning helped by a modest paring back of expected ECB rate cuts. Sterling is also a touch firmer against the dollar, trading at about $1.2670, with EURGBP is little changed hovering around the £0.8350 mark.

Yesterday’s Events

German government bond yields edged higher yesterday – by around 5bps in the 2-year area – and UK yields ended broadly flat, while US yields nudged down for a second day running. Yields generally are lower at the start of play today.

In equity markets, European stocks ended yesterday’s session largely unchanged while US stocks partially recovered from Friday’s steep enough decline (with the S&P 500 up around half a percent or so).

ECB member Stournaras says another cut in interest rates next month is ‘more or less’ a done deal with ’25 basis points the optimal reduction,’ while his colleague Makhlouf says there would need to be an ‘overwhelming’ case for a ‘big’ cut in rates (suggesting a 50bps move in December is unlikely).

The Day Ahead

It is quiet day ahead in terms of economic data with a final reading of October CPI inflation due in the Euro area and housing starts scheduled in the US. On the central bank front, Bank of England Governor Bailey and colleagues appear before the Treasury Committee to discuss the latest Monetary Policy Report, while there are a few ECB members due to speak over the course of the day.

Market Commentary

The euro and sterling shed around two and three cents against the dollar respectively last week, as the latter extended its broad-based post-election gains amid a continuing rise in US bond yields. The single currency managed to remain above the key $1.05 level on Friday and is trading at around $1.0550 at the start of play this week, while the pound is trading at around $1.2630 having hit a low for the week of just under $1.26 on Friday. EURGBP firmed gradually over the course of last week (from a low of under £0.83 on Monday) and is hovering just north of £0.8350 this morning.

Yesterday’s Events

Rising US bond yields – as the market has pared back Fed rate cut expectations – have supported the dollar over the past couple of weeks (and indeed before). US 2-year yields increased by a further 6bps last week while 10-year yields rose by almost 15bps. In contrast, German 2-year yields fell by 6bps and 10-year yields were largely unchanged, while UK 2- and 10-yields ended a touch lower and a little higher respectively on the week.

US equity markets lost some more ground on Friday, as they continued to trim their immediate post-elections gains, with the S&P 500 shedding almost 1.5% and the Nasdaq off more than 2%. European stocks also ended the week on a soft note, losing almost 1% to end lower for a second week in a row.

There was a mixed bag of US economic data on Friday. Headline retail sales rose by more than expected in October, and September’s increase  was revised up, while manufacturing output fell for a second consecutive month in October (although part of the decline was hurricane-related).

The Day Ahead

Looking to the week ahead, flash PMIs (November) for the main economies are due on Friday, while UK CPI inflation and retail sales are scheduled for Wednesday and Friday respectively. A number of ECB, Fed and Bank of England members are speaking over the course of the week, including ECB President Christine Lagarde later today.

Market Commentary

The euro fell to the very bottom of the $1.05 to $1.12 range against the dollar that has prevailed for the past couple of years before rebounding to about $1.0580, and despite having been buffeted by comments by the Fed’s Powell – who said the central bank is not in a hurry to cut US interest rates – is trading at around $1.0560 this morning. It is something similar for sterling, which hit intra-day lows and highs of $1.2630 and $1.2720 yesterday and is currently trading at around $1.2660. Meanwhile, EURGBP is a little firmer this morning at about £0.8340 following slightly softer than expected UK GDP data released earlier.

Yesterday’s Events

Powell’s remarks halted an earlier decline in US 2-year bond yields, which ended higher on the day, as the market pared back the chances of a rate cut next month (now seen at less than 50/50), though 10-year yields still ended a little lower. German and UK yields also closed lower and are only marginally higher at the open today. In equity markets, European stocks have a very strong session – up 2% – as they reversed some of their recent underperformance, while US indices gave up some more of their recent gains, shedding around half a percent or so.

In his comments yesterday, Fed Chair Powell said the central bank “is moving (monetary) policy over time to a more neutral setting but the path for getting there is not preset”, adding “the economy is not sending any signals that we need to be in a hurry to lower rates” and that the “strength we are currently seeing” in economic activity “gives us the ability to approach our decisions carefully.”

The minutes of the ECB’s October monetary policy meeting, at which interest rates were cut by 25bps to 3.25%, note that “the incoming information on inflation had shown that the disinflationary process was well on track” and that “there was increasing confidence that inflation would converge to the 2% target in a timely manner” and earlier than previously thought. The market fully expects the ECB to cut rates again next month and indeed sees them the best part of 100bps lower by March of next year.

GDP growth in the UK slowed to 0.1% quarter-on-quarter in Q3 from 0.5% in Q2 according to data released earlier this morning, though the underlying picture was better than the headline number suggests with both consumer spending and business investment posting solid increases in the quarter.

The Day Ahead

There are some important US economic data due today, including retail sales and industrial production, while the European Commission publishes its latest economic forecasts. A number of Fed and ECB members are due to speak over the course of the day also.