Market Commentary

A turnaround in equity markets during the course of yesterday’s session, as they erased most of their initial losses, also saw the dollar retreat from its best levels of the day. Comments from Fed Chair Jerome Powell, which left the door open to another cut in US interest rates at the end of this month, also weighed a little on the currency. EURUSD is trading back above the $1.16 level this morning, at around $1.1640, off lows yesterday of just under $1.1550, while GBPUSD has rebounded by more than a cent from its lows to trade at about $1.3350. EURGBP is little changed as it continues to hover around the £0.87 mark.

Yesterday’s Events

In government bond markets, UK yields fell by 5-7bps across the curve following softer than expected labour market data, while French 10-year yields ended about 8bps lower on the back of some grounds for optimism regarding the survival of the newly installed government. Elsewhere, both US and German yields were marginally lower on the day.  In equity markets, European stocks closed down 0.3%, having been off almost 1.5% during the day’s session, while the S&P 500 in the US closed just slightly lower as well having been down more than 1% at one stage.

In his latest comments, Fed Chair Powell said “based on the data that we do have, it is fair to say that the outlook for employment and inflation does not appear to have changed much since our September meeting four weeks ago.”. He noted that recent “goods price increases primarily reflect tariffs rather than broader inflationary pressures,” while “downside risks to employment appear to have risen”. Concern about increased risks to employment means it’s likely the Fed will cut rates again at its meeting later this month (28th-29th).

The IMF expects the Fed to cut rates by another 50bps to 3.5-3.75% by the end of this year according to its updated forecasts, and to 2.75-3.0% by around the end of 2028, even as it revised up slightly its projections for GDP growth this year and next year, to 2.0% and 2.1% respectively. For the Euro area, the IMF expects growth of 1.2% this year (up from 0.9% in 2024) and 1% in 2026, with the ECB expected to keep the deposit rate “steady at 2%.”

The Day Ahead

It is another quiet day ahead on the economic data front. Industrial production is due in the Euro area, while in the US the Fed publishes its latest Beige Book, which as Powell said yesterday provides “valuable insights” into how the US economy is doing. There are a number of Fed/ECB/BoE members scheduled to speak over the course of the day.

Market Commentary

US equity markets retraced a good portion of Friday’s slide yesterday, helped by a more conciliatory tone from Donald Trump towards China. The dollar has also rebounded from its (modest) fall at the end of last week, trading at around $1.1560 versus the euro this morning. Sterling is under pressure following the release of softer than expected UK labour data a short while ago. The pound has fallen back below the $1.33 level against the dollar, trading at around last week’s lows of $1.3260, and has weakened to about £0.8720 against the euro (from yesterday’s best levels of circa £0.8665).  The focus today will be on Fed Chair Powell’s speech to the National Association of Business Economists, where he will talk on the outlook for the US economy and monetary policy ahead of the central bank’s next meeting in a fortnight’s time.

Yesterday’s Events

The US bond market was closed yesterday for Columbus Day, although not the US equity market. In Europe, German and UK bond yields nudged lower on the day and have dipped further this morning amid the weaker than forecast UK economic data and a soft opening for European equity markets. The latter are off around 0.9%, have gained about 0.7% yesterday. The main US indices rebounded by 1.2% to 2.2% yesterday, led by the Nasdaq (which also led Friday’s slide), but are set to open lower later today according to the futures market.

The unemployment rate in the UK nudged up to 4.8% in June-August according to this morning’s release, its highest level in about four years. Most notably though, the annual rate of growth in average weekly earnings in the private sector – which the Bank of England (BoE) is monitoring very closely – decelerated to 4.4% from 4.9% over the same period, the slowest pace of growth recorded since early 2021. The BoE expects earnings growth to slow to under 4% by the end of this year – today’s data suggest its forecast is on track – which it expects in turn to contribute to a deceleration in services inflation from its still elevated rate of around 5%. The market has brought forward the expected timing of the next 25bps cut in interest rates following this latest data, albeit it is still not seen until March next year.

The Day Ahead

It is very quiet in terms of economic data for the rest of the day, with the ZEW investor sentiment index in Germany/Euro area and the small business optimism index in the US the only releases scheduled. As mentioned, Fed Chair Powell speaks later today, while a number of other central bank members are due on the wires too, including BoE Governor Andrew Bailey.

Market Commentary

Donald Trump caused a stir in markets on Friday afternoon. His threat to slap a ‘massive’ additional 100% tariff on China from 1st November- in response to the latter’s imposition of export controls on rare earths – led to a sharp sell-off in equity markets and a fall in bond yields, while the dollar lost ground although its losses were modest enough. The 1st November deadline leaves plenty of opportunity for ‘negotiations’ to take place, and so the threatened tariff hike not come to pass at all, but markets may be subject to some volatility in the meantime. Markets will also be watching developments in France, where the reappointed Prime Minister is trying to get a budget for next year passed through parliament. In FX, the euro and sterling kick off the day trading at around $1.1615 and $1.3340 against the dollar respectively, off last week’s lows of about $1.1540 and $1.3260 respectively, while EURGBP remains in an around the £0.87 level.

Yesterday’s Events

US government bond yields fell sharply following Trump’s latest tariff threat with 2- and 10-year yields ending down around 10bps on Friday, leaving them back close to their lows for the year. Equivalent German and UK yields also finished lower on the day, falling by around 4-6bps. In equity markets, the Nasdaq led the sell-off in US stocks, shedding 3.5% on Friday, with the S&P losing 2.7%, while European stocks were off around 1.5%.

Fed Governor Waller says he favours cutting interest rates further but cautions against doing so “aggressively”. He notes that while the labour market has softened recently, economic growth still appears reasonably solid, arguing that “something’s got to give, either the labour market rebounds to match GDP growth, or  GDP growth is going to pull back…but whichever way that goes, it’s got to affect what you do with interest rates.”

The Day Ahead

Looking to the week ahead, the ongoing government shutdown in the US means a continuing delay to most economic data releases there, though the Fed releases its latest Beige Book ahead of its next monetary policy meeting at the end of this month. Elsewhere, data of note include labour market and GDP reports in the UK on Tuesday and Thursday respectively, while Euro area industrial production is scheduled for tomorrow. There are quite a number of Fed, ECB and BoE members due on the wires over the course of the week, including Fed Chair Powell who gives a speech on the outlook for the US economy and monetary policy tomorrow.

Market Commentary

The euro lost more ground against the dollar yesterday, falling to lows of just under $1.1550. It is only a touch firmer this morning at about $1.1570, which leaves it down around 2 cents from last Friday’s close. The currency’s slide, which was triggered by the surprise resignation of the French PM on Monday, has continued even as French bonds have recovered over the past few days, with 10-year yields now lower than at the end of last week. While the path of least resistance in the near-term may still be down, EURUSD should find some support in and around the $1.15 level. Sterling, meanwhile, has fared no better against the dollar this week. It fell to a low for the week of about $1.3280 yesterday and is hovering around $1.33 this morning, down almost 2 cents from last Friday’s close. This leaves EURGBP trading just north of £0.87, little changed on the week.

Yesterday’s Events

US and German government bond yields have largely traded sideways this week, with the former marginally higher and the latter a touch lower, while UK bonds have underperformed slightly, with yields increasing by 4-5bps. In equity markets, US and European stocks lost ground yesterday, both shedding a little less than half a percent. European indices have opened in positive territory this morning, with the Israel-Gaza ceasefire possibly helping sentiment. The latter is also contributing to a modest fall in oil prices with Brent dipping below $65 a barrel.

The minutes of the ECB’s September monetary policy meeting, at which interest rates were again left unchanged, note that, “while a further rate cut in the coming months would better protect the inflation target both under the baseline and across a range of adverse scenarios, the materialisation of upside risks would instead warrant maintaining the current level of the policy rate.”  In the meantime, the ECB will “continue monitoring the evolving risks to the inflation outlook and the economy.” The market continues to see the central bank on hold through year-end and into 2026.

Fed Governor Barr says there “remains considerable uncertainty about the future course of the economy,” noting that “it is possible that recent low payroll growth is a harbinger of worse to come, or that payroll growth eventually strengthens,” consistent with still solid economic growth. He also says it is “possible tariffs will have only a modest impact on the course of prices” and that inflation will return toward the 2% target  next year, but “it is also possible that both inflation and inflation expectations escalate.” Given this uncertainty, he believes “common sense “would indicate that the Fed should move “cautiously” on interest rates.

The Day Ahead

It is a quiet end to the week in terms of economic data with the University of Michigan’s consumer confidence / inflation expectations survey for October the only release of note. There is a smattering of Fed/ECB members due to speak during the course of the day.

Market Commentary

There was a cautious enough mood in markets yesterday – as the government shutdown drags on in the US and political chaos continues in France – with equity markets retreating, bond yields edging lower, and the dollar gaining ground. The latter has advanced further overnight, strengthening against a broad range of currencies. EURUSD has fallen to a more than 1-month low of about $1.1625, while GBPUSD has weakened to around $1.3415. The euro continues to nudge lower against the pound, trading at around £0.8665 this morning.

Yesterday’s Events

Government bond yields are edging down again this morning after closing lower yesterday. US 10-year bond yields ended down around 4bps yesterday, while equivalent German and UK yields fell by 2-3bps. In equity markets, the S&P 500 in the US retreated from Monday’s record high, shedding around 0.4%, while the Euro Stoxx 50 was off about 0.3%.

ECB’s Nagel says the central bank is “in a good situation (with) inflation in the euro area close to our medium-term target of 2% and expected to remain there over the next years.” Given this, the ECB’s current monetary policy stance “is the right way forward.”

Industrial production in Germany fell sharply in August according to data published a short while ago, declining by almost 4.5% from July to leave it some 4% lower than in the same month in 2024.

Short-term inflation expectations in the US picked up in September according to the New York Fed’s latest consumer survey, with 1-year ahead expectations rising to 3.4% from 3.2% in August, though 3-year ahead inflation expectations remained steady at the 3.0%. At the same time, the “perceived probability of losing one’s job in the next twelve months” rose to 14.9 percent, above the trailing twelve-month average of 14.1.

The Day Ahead

For the day ahead, it’s very quiet on the economic data front with little or nothing of note due for release. The Fed publishes the minutes of last month’s monetary policy meeting, while a number of Fed members are also scheduled to speak over the course of the day.