Market Commentary

The main currency pairs aren’t doing an awful lot ahead of today’s key jobs report in the US. The euro did trade up to a post-Fed meeting high of about $1.1770 against the dollar yesterday and is hovering around there this morning. Sterling is trading just below $1.34 against the US currency and at about £0.8785 versus the euro, with UK labour market data released a short while ago having little impact on the pound although they do add to the case for a Bank of England rate cut this Thursday.

Yesterday’s Events

US government bond yields nudged down a bit further, with 2- and 10-year yields both a couple of basis points lower on the day, while German and UK yields were largely unchanged. European equities outperformed again, advancing by more than 0.5%, while the main US indices all ended in the red with the Nasdaq leading the decline (shedding around 0.6%).

This morning’s labour market report in the UK shows employment fell over the three months to October, while the unemployment rate rose to a near four-year high of 5.1%. Wage growth continues to moderate, with the year-on-year increase in private sector earnings – which the Bank of England monitors very closely – dipping below 4% for the first time since the end of 2020.

Fed member Williams says he expects growth in the US to pick up next year “fueled by tailwinds from fiscal policy, favourable financial conditions, and increased investments in artificial intelligence”, and sees tariffs having “a largely one-off price level effect” with inflation declining to just under 2.5% next year (from close to 3% currently). He believes monetary policy is now “well-positioned” following recent rate cuts, suggesting he’s not in a hurry to lower rates again.

The Day Ahead

Today’s jobs report in the US is expected to show payrolls rose by 50k in November according to the consensus forecast, with the unemployment rate seen nudging up to a four-year high of 4.5%. Other data due today include retail sales in the US and flash PMIs for December in the main economies.

Market Commentary

The dollar and sterling both lost some ground to the euro last week, largely related to the differing monetary policy stances of the main central banks. While the Fed and Bank of England (BoE) are in easing mode with the BoE likely to follow last week’s Fed interest rate cut with a 25bps reduction of its own at its meeting this Thursday, the ECB looks firmly on hold and is widely expected to keep rates unchanged for a fourth consecutive meeting this week (also on Thursday). The Bank of Japan meets as well this week – on Friday –  with a 25bps rate hike, the second this year, on the cards. There’ll be plenty of focus too on the US jobs report for October-November to be published tomorrow, as the performance of the labour market in particular is likely to determine the extent and timing of further Fed rate cuts. The euro starts the week trading just shy of $1.1750 against the dollar and at about £0.8775 versus sterling (up circa a cent and half a penny respectively from this time last week), while the pound is trading at around $1.3370 against the dollar.

Yesterday’s Events

Developments in government bonds markets reflected the contrasting outlooks for the central banks. US and UK yield curves both steepened last week, with 2-year yields falling by 3-4bps but 10-year yields rising by 5-7bps. In contrast, the German yield curve flattened slightly amid chat that the next move in ECB rates will be up (though not anytime soon), with 2-year yields increasing by about 7bps and 10-year yields around 5bps higher. Meanwhile, equity markets ended the week on a soft note. The Nasdaq shed 1.7% on Friday, as AI concerns were to the fore, and the S&P lost just over 1%, with both ending lower on the week overall, while European stocks fell by around 0.5% albeit they were largely unchanged on the week.

Fed member Goolsbee, who dissented in favour of keeping interest rates on hold at last week’s meeting, said in a statement on Friday that he believed the central bank should have waited to get more economic data, especially about inflation, before lowering rates further. He said he was uneasy about “too heavily front-loading rate cuts” and just assuming that the recent uptick in inflation will be transitory, particularly as inflation has been running above target for some time.

The Day Ahead

As mentioned, the central bank meetings and US jobs reports will command most attention this week. Other economic data of note due include flash PMIs for December in the main economies tomorrow; retail sales (Tuesday) and CPI inflation (Thursday) in the US;  and labour market and CPI inflation reports in the UK tomorrow and Wednesday respectively. The latter are expected to show unemployment nudged up further to 5.1% in the three months to October and headline inflation edged down for a second month running in November to 3.4%,  outcomes that would copper-fasten expectations for a BoE rate cut on Thursday.

Market Commentary

The dollar lost further ground yesterday following the Fed’s rate cut on Wednesday, though it did manage to end off its lows of the day. The euro has been one of the main beneficiaries from the US currency’s post-Fed weakness, gaining around a cent to trade just shy of $1.1750. Weaker than expected UK GDP data released a short while ago are weighing a little on sterling, which is trading just below $1.34 against the dollar and at about £0.8770 versus the euro. The GDP data suggests the Bank of England will follow the Fed in cutting interest rates at next Thursday’s monetary policy meeting.

Yesterday’s Events

US government bond yields, which fell immediately following the Fed’s rate decision, headed further south for a time yesterday before reversing course to finish the New York session broadly flat overall, while German and UK yields had earlier closed marginally lower on the day. UK yields are nudging lower again this morning post the soft GDP data. In equity markets, European stocks had a very positive session, gaining almost 1%. US stocks reversed early losses to close in positive territory (and at a new all-time high) in the case of the S&P 500 and only marginally lower in the case of the Nasdaq (which had been off more than 1% at one stage following Oracle’s weaker the expected results).

The UK economy contracted for a second month running in October according to this morning’s data, with GDP down 0.1% after falling by 0.1% as well in September, as declines in output in the services and construction sectors more than offset an increase in industrial output. Over the three months to October GDP fell by 0.1%, a notable deterioration from growth of 0.2% in the three months to July and 0.7% in the February-April period. The weaker than expected data should copper-fasten a rate cut at next Thursday’s Bank of England meeting.

The Day Ahead

It is extremely quiet for the rest of the day in terms of economic data, with little or nothing of note scheduled for release. We will hear from a few Fed members over the course of the day, including the head of the Chicago Fed (Goolsbee) who dissented in favour of keeping interest rates on hold at Wednesday’s monetary policy meeting.

Market Commentary

The Fed cut its policy rate by 25bps to 3.5%-3.75%, as expected, noting that “downside risks to employment appear to have risen in recent months”. There were three dissents , with one member voting for a larger 50bps cut and two voting to keep rates unchanged. Fed Chair Powell said that, with rates having been cut by 75bps since September (and by 175bps in total since September 2024), monetary policy is now well-positioned to ‘wait and see’ how the economy evolves. This suggest a pause to rate cuts, though Powell kept the door open to further policy easing next year. The initial market reaction saw US stocks rise and US bond yields fall, while the dollar weakened. The euro has gained around half a cent against the US currency, trading at $1.17, while sterling has edged up to about $1.3375. EURGBP is marginally firmer this morning,  hovering around £0.8750.

Yesterday’s Events

US government bond yields fell following the Fed meeting – partially reversing the rise in yields that had occurred over the previous few days – as the market priced back in some of the policy easing it had taken out lately, with 2- and 10-year yields ending the day around 8bps and 5bps lower respectively. In equity markets, the S&P 500 added to its gains post Fed, closing  around 0.7% higher at a new record high. However, disappointing results from Oracle after hours has contributed to weaker markets in Asia overnight, while European stocks are slightly lower at the open this morning (with US indices set to follow suit later according to the futures market).

In its updated economic projections, the Fed raised its forecast for GDP in 2025-2026, though growth is still expected to moderate to around 2% from 2.8% in 2024, while forecasts for inflation were revised down a little with headline and core inflation seen falling back to circa 2.5% by the  end of 2026 from around 3% in the final quarter of this year. The unemployment rate is seen nudging up a bit further from the current 4.4% before edging down during the course of next year. The Fed’s updated interest rate ‘dot plot’ guided one 25bps cut next year and another 25bps reduction in 2027.

ECB member Simkus says inflation in the Euro area is “more or less” in line with the 2% target, “which suggests no need for a change in interest rates — not only at the next meeting in December (18th) but also at further meetings”. Meanwhile, Christine Lagarde says the economy is proving more resilient than expected, with forecasts for GDP growth likely to be revised up at next week’s meeting.

The Day Ahead

Looking to the day ahead, markets will continue to react to the outcome of  the Fed meeting. It is quiet on the economic data front, with weekly jobless claims in the US the only release of note.

Market Commentary

Markets generally treaded water yesterday ahead of the Fed’s interest rate announcement later today. In FX, the dollar was marginally firmer, gaining ground against most of the main currencies, though it has given back some of this overnight. EURUSD is hovering around $1.1650 this morning, while GBPUSD is trading at $1.3325 (having dipped below $1.33 for a time yesterday). EURGBP remains within its relatively narrow range of the past week or so, trading at about £0.8740. Regarding the Fed, it looks set to cut the policy rate by 25bps for a third time since September, to 3.5%-3.75%, bringing the cumulative reduction since September 2024 to 175bps. It may though strike a cautious note regarding the pace and extent of any further cuts, which could lend some support to the dollar.

Yesterday’s Events

US government bond yields nudged up a little ahead of the Fed’s rate decision, while Euro area yields ended a touch lower, partially reversing some of Monday’s spike in yields. UK bonds outperformed modestly, with yields about 3-4bps lower across the curve. In equity markets, European stocks closed marginally in the red, while the main US indices finished flat to slightly lower on the day.

Bank of England MPC members remain divided on interest rates ahead of the December 18th monetary policy meeting judging by their comments at a parliamentary hearing yesterday, where the ‘usual suspects’ on both sides argued for and against lowering rates. This suggests next week’s decision will be another close call, though the market more or less fully expects rates to be cut by 25bps (to 3.75%).

Yesterday’s labour market data in the US were a mixed bag. While the number of the job openings rebounded in September-October, the pace of job hiring slowed and job layoffs rose for a second month running in October (albeit still remaining relatively low). Overall, though, labour market conditions have softened recently, evident in a gradual rise in the unemployment rate, hence today’s likely Fed rate cut will be to address downside risks to employment.

The Day Ahead

The Fed meeting is the main focus for markets today. The Bank of Canada also announces its latest policy decision, with interest rates expected to be kept on hold. On the economic data front, the Employment Cost Index (ECI) for Q3 and the Federal budget balance for November are both published in the US, with little or nothing of note scheduled elsewhere.

Market Commentary

Notwithstanding a jump in Euro area government bond yields following relatively ‘hawkish’ comments on interest rates by an ECB member, the single currency is largely unchanged from yesterday morning’s levels against the dollar at $1.1650 (though it bounced around quite a bit during the course of the day’s session). Sterling is also more or less unchanged against the US currency at $1.3330, and is holding onto last week’s gains against the euro, trading at around £0.8735 this morning.

Yesterday’s Events

Euro area government bond yields rose by 6-8bps as the market priced in a (small) chance of an increase in ECB interest rates in the final quarter of next year following comments by ECB member Schnabel, who said she believes the next move in rates is likely to be up “albeit not anytime soon”. UK and US yields followed Euro area yields some of the way higher, increasing by 3-5bps and 2-3bps respectively. Equity markets had an uneventful start to the week, with European stocks closing marginally higher and the main US indices ending a touch lower.

The latest New York Fed survey of US households’ inflation expectations showed short (1-year ahead) and medium (3-5 years ahead) expectations for inflation both held steady in November at 3.2% and 3% respectively. The survey also showed that households’ perceptions about their current financial situation “deteriorated notably, with a larger share of respondents reporting they were worse off compared to a year ago”,  while “expectations about their year-ahead financial situations also deteriorated slightly”.

The Day Ahead

Looking to the rest of the day, the main currency pairs may not do an awful lot ahead of the Fed’s interest rate announcement tomorrow. There is some US labour market data to be negotiated with job openings for October scheduled for release later, while the small business optimism survey (for November) is due in the US as well.

Market Commentary

The dollar lost ground for a second week running, shedding around half a percent against a basket of other currencies. Friday’s as-expected inflation data in the US copper-fastened market expectations that the Fed will lower interest rates at this week’s meeting (announcement on Wednesday). A 25bps cut  – to 3.5%-3.75%  – would bring the cumulative reduction since September 2024 to 175bps and leave the policy rate just above the top of the Fed’s estimate of the range for the neutral interest rate. This, together with likely dissent in favour of keeping rates unchanged at this meeting, suggests Fed Chair Powell may strike a cautious tone regarding the scale and timing of any further cuts, which may lend some support to the dollar in the near-term. EURUSD and GBPUSD start the week at about $1.1650 and $1.3330 respectively, towards the top of last week’s trading ranges, while EURGBP is hovering just below £0.8750.

Yesterday’s Events

Government bond yields backed up last week, triggered by a sharp spike in Japanese yields on Monday. US and German 10-year yields increased by around 10-12bps, closing at their highs for the week on Friday, while UK bonds outperformed albeit yields still rose by around 5bps. Meanwhile, equity markets gained ground for a second week running as they continued their recovery from late November’s lows, with the S&P 500 in the US and Europe’s STOXX 600 both adding almost 0.5%

Friday’s inflation data in the US were in line with expectations. Headline PCE inflation nudged up to 2.8% in September from 2.7% in August, bringing the increase from its March low to 0.5% points. Core inflation – excluding energy and food prices – nudged down to 2.8% from 2.9%, with a further (tariff-related) increase in goods inflation (to 1.2%) more than offset by declines in housing inflation (to 3.7%) and services ex housing inflation (to 3.3%).

ECB’s Schnabel says inflation in the Euro area is in a good place, albeit services inflation is stickier than expected, which alongside solid domestic demand and fiscal expansion suggests interest rates are likely to remain steady for some time.

The Day Ahead

Looking to the week ahead, the main focus for markets will obviously be the Fed meeting which begins tomorrow and concludes on Wednesday. It is relatively quiet on the economic data front, with weekly jobless claims in the US on Thursday and GDP for October in the UK on Friday the main releases of note.