- The US equity benchmark has now managed to rise in ten out of the last eleven weekly sessions. Since October 2023, the S&P 500 has only recorded 14 negative weeks, showing how strong the capital flows into equities have been.
- A strong retail sales report and lower than anticipated initial jobless claims have upheld the US soft landing narrative. Economic momentum is gaining pace, and the consumer seems to have additional room to spend.
- The rise of Donald Trump in the betting markets has been an additional tailwind for US equities and the dollar. Trump now leads in all seven swing states according to polymarket, while polls remain narrow, indicating a race too close to call.
- The European Central Bank lowered its policy rate for a third time this year by 25 basis points and has opened the door for another easing in December. This would push the deposit rate to 3%, down exactly 100 basis point from its peak.
- UK headline inflation has fallen below the Bank of England’s (BoE) 2% target for the first time in three years. The 1.7% print for September was lower than the 1.9% forecast and 2.2% prior. Traders are pricing in just shy of two rate cuts for 2024.
- Investors continue to parse through timely macro data to gauge the impact of Hurricanes Helen and Milton on economic activity. One indicator to watch out for next week will be the Fed’s regional outlook (Beige Book).
Global Macro
Markets preparing for Trump 2.0
US keeps on going. US exceptionalism has been a dominant narrative for most of 2024, boosting the US dollar, yields and equities. Yesterday, the dollar marched to fresh 11-week highs, stocks rose and bonds fell after a solid US retail sales report. Jobless claims also fell 19k to 241k after a big jump due to storms the week prior. Bottom line, the US economy is looking strong, so the Federal Reserve (Fed) is likely to cautiously cut rates.
Cherish euro bears. The euro continued its three-week descent following hotter than expected US data and a slightly dovish ECB meeting. Both events can be seen as prime examples of two narratives that have recently shifted in the euros disadvantage. The initial rise of EUR/USD from $1.07 to $1.12 between May and September was all about the US economy losing steam and the expectation that the European Central Bank would not cut interest rates as aggressively as the Federal Reserve. Both theses have lost their supporters in recent weeks.
The Trump trade is back. Trump has taken over the lead in an average of the polls in the seven swing states for the first time since Harris got in the race. Everything is still within the margin of error and incredibly close — just 0.34 percentage points separate Trump and Harris. But the consistency of the change and the fact that it’s all in Trump’s direction, has Democrats concerned. Financial markets are also reacting. A Trump victory is seen as inflationary, hitting global trade, potentially reducing Fed rate cuts. This means higher yields, a stronger dollar (in the short term), higher equities and cryptocurrencies.
Regional outlook: Europe & US
Euro hit by dovish ECB, strong US consumer
ECB not going big. Yesterday’s 25 basis point cut by the ECB was highly anticipated and well telegraphed. The central bank under Christine Lagarde continues to be data dependent and sets policy by a meeting-by-meeting approach. However, the downside risks to inflation are mounting and have opened the door to more policy easing ahead. Markets now imply a 20% chance of a half-point cut in December. While a possibility, we don’t think that the upcoming developments will justify going big. The first argument rests on the case that the easing cycle is already well underway. Cutting by more than the usual 25 basis points now would imply that policy makers have made an error before. Secondly, while not great, economic data as of late has experienced somewhat of an uptick. German sentiment and Eurozone industrial production surprised to the downside this week. Furthermore, the lack of systemic volatility across asset classes means that the ECB can focus on the economy instead of financial markets.
Data at a turning point? German sentiment halted a three-month descent in October on the back of hopes of lower interest rates ahead. Lending conditions continued to improve in Q3 according to the latest survey published by the ECB and Eurozone industrial production surprised to the upside, rising by the most since February 2023 (1.8%) in August. This is a reminder that economic activity on the continent is not on a straight path down, even though broader positive catalysts are missing. The expected policy easing from the ECB remains front and center to help the economy recover.
Strong consumer. Retail sales in the US increased 0.4% m/m in September, well above a 0.1% gain in August and beating market expectations of a 0.3% rise. The figure caps another likely quarter of solid economic growth and consumer demand fuelled by solid income growth, access to credit and a sturdy labour market. While the retail sales report won’t deter the Fed from cutting interest rates by 25 basis points next month, it is yet more evidence that consumer spending remains robust, boosting the no landing thesis.
Regional outlook: UK
BoE to turn dovish after data dump
Disinflation trend intact. UK headline inflation has fallen below the Bank of England’s (BoE) 2% target for the first time in three years. The 1.7% print for September was lower than the 1.9% forecast and 2.2% prior. Core inflation also eased to 3.2%, versus a 3.4% forecast. The BoE has been more concerned about services inflation – giving it more prominence in the monetary policy decision-making process. Plus, Governor Bailey’s comments a few weeks back signalled the BoE could be more aggressive in its approach to cutting rates if inflation continued to fall. Therefore, the big surprise and likely nail in the coffin for more aggressive rate cuts is because services inflation was at 4.9% versus an estimated 5.2% and 5.6% prior – its biggest drop from one reading to another since 2020.
Mixed labour market data. The unemployment rate fell to 4% as expected, marking the lowest level since the three months ending in January. Average weekly earnings including bonuses were up 3.8% y/y as expected but marked a fresh low since November 2020. Vacancies continued to decline for the 27th consecutive quarter, now at 841,000, thus the vacancies to unemployment ratio is back at pre-pandemic levels. The bottom line is that a cooling UK labour market is bringing down wage growth, which will please BoE policymakers.
Traders ramp up BoE rate-cutting bets. The data means the BoE may find the confidence to push through a faster pace of policy loosening. Hence overnight index swaps are now pricing 30bps of easing in November versus 22bps at the start of the week, and a total of 44bps by year-end versus 37bps prior. In other words, traders are still shy of pricing two rate cuts this year. If that pricing continues to shift, so will the pound come under pressure.
Week ahead
Fed’s assessment, BoC cut and Tokyo inflation
Waiting for the Hurricane impact. Investors continue to parse through timely macro data to gauge the impact of Hurricanes Helen and Milton on economic activity. One indicator to watch out for next week will be the Fed’s regional outlook (Beige Book), in which the 12 districts report on growth momentum and other related topics such as employment. The recent uptick in the US surprise index and strong retail sales report indicate continued room for spending on the consumer side. This assumption will be put to the test with the upcoming secondary data points such as the regional Fed PMI’s (Richmond, Chicago) and Leading Index.
BoC to go big? Inflation in Europe and Canada surprised to the downside in September. While it did not prompt the ECB to go big just yet, it might have done the trick for the Bank of Canada. The central bank could see the deflationary acceleration as a sign that it is falling behind the curve. Front-loading the easing cycle might be the choice for policy makers, looking to enact a 50-basis point cut next week.
Tokyo inflation to rise. USD/JPY is once again back at trading just shy of the 150¥ mark. This could raise concerns within the Bank of Japan as the weakness of the yen could result in an uptick in goods inflation. The upcoming Tokyo October CPI report could show such momentum building. Core inflation excluding fresh food and energy picked up slightly from 2.0% to 2.1%. Still, markets have recently pared back their bets on a policy tightening this year with January being the first live meeting.
*All times are BST
FX Views
Central bank hierarchy shifts
USD Too many tailwinds. Despite a short-term pullback earlier this week on de-escalating tensions in the Middle East and a 5% fall in oil prices, the US dollar index is back at a fresh 11-week high. The dollar is also arguably stronger of late because of the rising odds of a Donald Trump victory in the US election just three weeks away. Trump has taken over the lead in an average of the polls in the seven swing states for the first time since Harris got in the race. Financial markets are also reacting. A Trump victory is seen as inflationary, hitting global trade, potentially reducing Fed rate cuts. This means higher yields, a stronger dollar (in the short term), higher equities and cryptocurrencies. The Greenback has therefore been able to profit from stronger economic data, weakening Fed easing bets and political uncertainty rising. DXY is now back above a 2% gain on the year for the first time in almost two months as the index advanced in 13 out of the last 15 sessions.
EUR ECB now “most dovish”. The euro was down over the week as US election nerves boosted the greenback, pressuring the EUR/USD, while another interest rate cut from the European Central Bank also weighed on the single currency. The ECB cut their deposit rate by 25bps to 3.25% in a widely expected move. ECB president Christine Lagarde’s downbeat assessment of the European economy – saying growth has been weaker than expected – caused markets to speculate the ECB will need to cut rates further. Global money markets repositioned after the ECB decision with the Eurozone now expected to cut interest rates more sharply than the US or UK. Financial markets are now looking for more than 175bps of cuts from the ECB over the next 12 months. The euro was lower versus most other G10 markets, with the exception of the Scandinavian currencies. Technically, the EUR/USD’s move lower is now stretched, with the relative strength index now flashing oversold. Topside targets are to 1.0900, downside targets are to 1.0800. Looking forward, key PMI activity readings for both the manufacturing and services sectors are due Thursday while the German Ifo business confidence reading is due on Friday.
GBP $1.30 gives way. GBP/USD tumbled below $1.30 for the first time since August after data highlighted UK wage growth and inflation continue to cool, leading to a rise in BoE rate-cut wagers. UK-US swap differentials extended their decline, but some strong UK retail sales figures cushioned the fall. Meanwhile, one-month implied volatility in GBP/USD remains close to 2024 highs amidst the looming US election and central bank meetings. Looking at seasonal trends, volatility tends to stay elevated going into year-end, especially in these years when Americans head to the polls. The options market helps understand FX sentiment, and with 1-week and 1-month risk reversals for GBP/USD in negative territory once again, there is a bias towards protecting against further GBP declines, or USD strength. The 100-day moving average support level of $1.2954 is our next downside target beyond which the 200-week moving average at $1.2844 and the 200-day at $1.2794 come into focus.
CHF Bullish ahead of US election. With less than three weeks to go until the US election, heightened uncertainties may spur a revival in Swiss safe-haven flows. Moreover, Switzerland’s economic outperformance vs. Euro-area peers gives the franc an additional edge for now. Although the SNB began easing in March, delivering a cumulative 75 bps of cuts to 1%, EUR/CHF and USD/CHF are down over 3% and 4%, respectively, since the start of the cycle. In fact, EUR/CHF is down about 5.25% from May’s high above 0.99, but a further near-term slide toward 0.93-0.92 is feasible in the near term. Question marks remain over the SNB’s tolerance for a stronger franc though. FX intervention is always an option, but additional rate cuts may be favored first, with a 25bps reduction likely in December. This may weaken the yield-driven bullish franc case. However, because the SNB isn’t the only central bank in the easing camp and, if the relative yield differential doesn’t evolve too much, any bearish currency impact on the franc may be contained, especially as franc exposure is an appropriate path to hedge the looming geopolitical concerns.
CNY China’s offshore investment tax plans and deflationary pressures. China has begun imposing a long-overlooked tax on profits from offshore assets. Tax officials have reportedly contacted wealthy individuals in recent months to assess possible payments, including those that are past due. This comes as the government’s fiscal income is declining due to reduced land sales. Meanwhile, China’s September CPI came in lower than anticipated, at 0.4% y/y vs a consensus of 0.6%, reversing the 0.5% and 0.6 percent y/y increases in August and July. The core CPI increased just 0.1% compared to August’s 0.3% y/y rise. Initial support for the USD/CNH pair, following a breakthrough, is located around the 6.9527. A consistent break above the high of 7.1366 would shift focus to the resistance levels of 7.1804–7.2060.
JPY BoJ signals cautious approach to rate normalization. While the option for policy normalization exists, there is no immediate move to further normalize monetary policy at this time. Preparations for a very moderate/slow pace suggest no more than one hike per quarter, with no definite commitment to a neutral rate prediction. The BoJ remains concerned about the effects of policy rates, leading to caution about the pace of rate hikes despite usually low inflation and regular concerns about the US and European economies. USDJPY, at 2-month highs at the point of writing, hovers around the psychological 150 level as currency authorities monitor FX movements with heightened vigilance. The pair may be expected to peak at a convergence of significant levels in the 150–151 handle, where the bounce from major support around 140 extends.
CAD Braced for impact. The Canadian dollar fell over the last week after the September inflation reading, released Tuesday, showed inflation pressures were easing at a quicker pace than previously anticipated. Annual headline inflation was reported at 1.6% versus the 1.8% forecast. Canada is clearly showing signs of slack, easing price pressures and the consumer impact of higher rates. Financial markets now have 85bps of cuts priced in for the two remaining Bank of Canada decisions this year. The Canadian dollar weakened and the USD/CAD climbed to two-month highs before reversing at the key 1.3800 level. On the other hand, the CAD saw small gains over the week versus the euro and Japanese yen. From here, CAD buyers will be likely targeting levels towards 1.3800, with the USD/CAD nearing the two-year highs. To the downside, USD buyers will be looking to target levels just above 1.3650. Looking forward, Thursday’s BoC decision is clearly the highlight, with markets seeing a 50bps cut as most likely, while retail sales on Friday will also be important.
AUD Strong jobs data fuels labor market optimism. Australia had a 64.1K increase in employment in September, above the 25K forecast. The participation rate was slightly higher at 67.2% compared to the consensus of 67.1%, while the unemployment rate was 4.1%, below the 4.2% estimate. The majority of the employment gain was fueled by a 51.6K increase in full-time work, while a 12.5K increase in part-time employment. As job openings continue to stay above pre-pandemic levels, the Australian Bureau of Statistics said that “the record employment-to-population ratio and participation rate shows that there are still large numbers of people entering the labor force and finding work in a range of industries.” Technically speaking, the main focus is on whether the pair can hold above the nearest support area, which is located between 0.6716-0.6745. AUDUSD had recently bounced off from its 1-month lows. Alternatively, an upward break would aim for the high of 0.7159, the next resistance.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
