Written by Convera’s Market Insights team
Two risks less to worry about
Boris Kovacevic – Global Macro Strategist
The Federal Reserve (Fed) left interest rates unchanged at 5.25% – 5.50% again in yesterday’s meeting, fueling bets that the central bank is done tightening monetary policy. While the recent string of better-than-expected economic data provided chair Jerome Powell with an opportunity to deliver a hawkish message to markets in his press conference, he mostly refrained from doing that. Investors sensed the dovish undertone surrounding the decision, giving them an excuse to buy equities again. The Nasdaq jumped by the most since the beginning of October (1.77%) with the US 10-year yield recording the largest daily drop (0.2%) since the collapse of SVB back in March.
However, as we pointed out on the days leading up to yesterday’s Fed decision, the most important announcement actually came from the US Treasury in the form of the quarterly refunding update. The Treasury increased its planned sales of long-term government bonds by slightly less than markets had expected, helping spur a rally in fixed income securities. Investors had feared that more issuance of bonds would be necessary to fund the governments increasing deficit as traditional buyers like the Fed and foreign entities like central banks have stepped back in recent months. And while this topic will continue to be an important point of discussion, for now, it seems that markets are all right with absorbing the new issuance of debt coming their way. The near-term trajectory of bond yields will also depend on the likelihood of a recession in the US. Yesterday’s bond rally (fall in yields) started by the Treasury refunding update. However, it gained pace after both the ADP private jobs growth (113k vs. 150k expected) and ISM purchasing manager index (46.7 vs. 49 expected) surprised expectations to the downside. This pushed down the Atlanta Fed’s GDP Nowcast for Q4 from 2.25% to 1.25%.
Tomorrow’s non-farm payrolls should see a significant moderation from the previous months 336k jobs gain as the impact of the UAW strike becomes visible. We expected the number to come in slightly below consensus (180k) in October, setting the stage for both long dated bond yields and the US dollar to record a negative weekly close. The Greenback has been pretty resilient against this week’s fall of the US 10-year yield from 4.9% to 4.72% and rising stock prices. If we enter a period where US data starts disappointing expectations, this might set the scene for a slight pull back in the dollar as investors will have two risks less (Fed, Treasury) to worry about in the next 1-2 months.
BOE holds again amid stagflation fears
George Vessey – Lead FX Strategist; Ruta Prieskienyte – FX Strategist
The Bank of England (BoE) held rates unchanged at 5.25% today for a second consecutive month – still at 15-year highs. While cable rose by 0.2% immediately after the announcement, GBP/USD has fallen, on average, 0.8% from Wednesday’s close to Friday’s close around each BoE meeting over the past two years.
The BoE meeting today came down to a 6-3 split, one more vote to hold versus the last meeting in September. Given the continued softness in UK activity and signs of a cooling labour market since, the Bank has notably lowered its growth forecasts. While not predicting a recession, BoE forecasts economic stagflation from now until 2025 – a grim backdrop for the general election due in that period. Just over half of the impact of quantitative tightening since late 2021 is yet to filter through into the real economy, with full effect to land by 2025 as mortgage holders roll off low fixed rate mortgages. Inflation will remain higher than previously forecasted. BoE now expects CPI to come down to 4.5% by end of 2023 and reach the goal of 2% by Q4 2025. However, risks continue to be skewed to the upside.
The Monetary Policy Committee has gone out of its way to signal that it does not expect to reduce its Bank Rate next year. The Committee has added to its key guidance paragraph that its “latest projections indicate that monetary policy is likely to need to be restrictive for an extended Bank of England period of time”. However, souring economic projections has markets unconvinced, with a 61.8% probability of a rate cut in August priced in, up from 55% before the BoE announcement.
Downbeat China data could dampen EUR
Ruta Prieskienyte – FX Strategist
While most of Europe was on holiday, the rest of the world was open for business as usual. The Fed’s inability to convince the markets of further rate hikes benefited the euro, with EUR/USD opening 0.3% higher this morning as markets continue to digest the announcement. Having said that, soft data releases from China earlier this week could put a dampener on the euro’s long-term performance.
China’s Composite PMI data for October surprised the markets to the downside, coming in at 50.7, down from 52 in the previous month, which is consistent only with very slow economic growth. The manufacturing PMI component dropped back into contractionary territory indicating that the momentum in world’s second largest economy is waning. Adding to the downbeat PMIs, a private survey on Wednesday suggested the manufacturing sector is still not on as solid a footing as previously thought, despite China’s GDP growth exceeding expectations in Q3. A slowdown in Chinese manufacturing will also soften its import demand. As the bloc’s largest export partner, accounting for over 20% total exports, manufacturers in the Eurozone are heavily dependent on demand from the economic giant for items such as industrial machinery. Thus, weaker momentum could weigh negatively on the Eurozone’s economic growth, which is already under duress having posted a contractionary GDP reading on Monday.
A light economic calendar for the remainder of the week will do little to give the common currency a convincing trajectory to follow. EUR/USD remains driven by US-centric developments and has been oscillating in $1.05-$1.06 band for over 70% of the past 30-days. The only potential market moving event will come in the form of the German employment report, that could show an increase in the unemployment rate by 10 basis points to 5.8%.
CAD down over 3% against MXN 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.
