Written by Convera’s Market Insights team
The (rates) end is near
Boris Kovacevic – Global Macro Strategist
Two weeks full of interest rate decisions and a plethora of top tier macro data out of the US, UK and Eurozone are coming to an end and are culminating in the release of the US labour market report later today. The conclusion of the fourth quarter so far has been that investors have stopped betting on any rate increases from the Federal Reserve. And while the Fed is not even thinking about thinking to ease monetary policy in the near future, not having to worry about further potential tightening has been enough for markets to switch into risk on mode this week.
US equities and long dated government bonds are both on track to record their best week since March 2023 with the S&P 500 up more than 4.8% on the week. The US Dollar Index has naturally continued to ease against the backdrop of lower yields and the capital rotation into riskier assets. However, the depreciation has been limited, given the weak macro data and strong repricing of rate expectations in Europe. The US 10-year Treasury yield is now trading around 50 basis points below its peaks (5.00%) reached two weeks ago at around 4.65%.
The fall in yields began on Wednesday with the Treasury surprisingly announcing that it needs to borrow slightly less than was expected. What followed was a drop that accelerated after the weaker ADP private jobs report and ISM manufacturing PMI. Yesterday’s rates pause from the Bank of England (BoE), cementing the global peak rate narrative, and a significant downbeat surprise on US unit labor costs (-0.8% vs. 0.7% expected) dragged the yield fall into Thursday. Now, attention turns to the US labour market report. Jobs growth is expected to come in at around 180k for October, after a blockbuster growth of 336k for September. We expect a slight miss of the consensus number.
BoE holds rates at 15-year high
George Vessey – Lead FX Strategist
As expected, the BoE kept Bank Rate at 5.25%, but it also stressed it did not intend to cut rates any time soon, pushing back against financial markets which have started to price in rate cuts next summer. Two-year gilt yields fell to a 5-month low and the pound lost ground against G10 peers bar the US dollar, as GBP/USD continues to grapple with the $1.22 handle on broad-based dollar weakness.
Six out of the nine Monetary Policy Committee members voted to hold interest rates at a 15-year high, whilst three dissenters voted for another hike. The second consecutive monthly hold comes as officials acknowledge much of the impact of past tightening is still to hit the economy. The updated projections in the Monetary Policy Report point to a weaker near-term outlook including a 0.5% downgrade in 2024 GDP growth to zero. Headline inflation has fallen from a peak of 11.1% to 6.7% in twelve months, and the BoE expects it to fall to less than 5% before year-end. However, slight upward revisions for 2024 inflation forecasts were made and the 2% target isn’t expected to be reached until the end of 2025. Clearly, policymakers continue to balance the slowdown in the economy against expected elevated inflation. Although we are more than likely at the peak of the tightening cycle, the BoE is obviously uncomfortable with rate cuts being priced in by markets as evidenced by the statement “rates need to be restrictive for an extended period of time” in the meeting minutes.
UK yields had already been trading lower in line with US yields, but the 10-year’s decline gathered pace and at one point was on track for its biggest one day drop since August, restricting the pound’s gains against the dollar. Elsewhere, GBP/EUR suffered its biggest daily decline in two weeks and could continue to see headwinds if markets continue pricing in more BoE easing.
EUR/USD on track to close the week above $1.06
Ruta Prieskienyte – FX Strategist
After a less than a stellar start to the week, the euro has enjoyed some respite amid easing global pressures. Yesterday’s BoE pause cemented the idea that the G3 central banks are done hiking. As a result, falling US yields lifted EUR/USD up to $1.0620 and the pair is now on track to close the week above $1.06, which would be the first such feat in six weeks.
However, as of late, Eurozone data has been nothing but euro negative. Disappointing economic growth figures and weaker inflation have heightened bets of ECB easing going into H1 2024, with markets pricing in a 37% probability of a rate cut as early as March. Eurozone manufacturing PMIs released yesterday did little to ease such gambles. The PMI data edged down to 43.1 in October, from 43.4 in September, which was the lowest reading since July. While supply chain issues related to the pandemic and last year’s energy shock have long dissipated, output continued to crash. With demand prospects bleak, firms expect to shed workers for the fifth straight month. Germany’s unemployment rate rose to the highest level since June 2021 at 5.8%, consistent with falling GDP in Q3, and weakening surveys. As the increase in claims is accelerating, we expect unemployment to rise further in Q4.
With the calendar light today, the Eurozone unemployment rate, which is expected to remain unchanged at 6.4%, is unlikely to elevate volatility. The US jobs report could present a possible trigger for a downward euro move if the data surprises to the upside, extinguishing the common currency’s hopes to end the week on a high note.
USD/MXN down by over 3% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 30 – November 03
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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.
