Written by Convera’s Market Insights team
Stellar GDP print but yields retreat
Boris Kovacevic – Global Macro Strategist
Long-term US government bond yields retreated on Thursday, giving global investors across Asia and Europe some breathing space, with stock markets in both regions expected to open the last trading day of the week higher. US equities ignored the fall in Treasury rates as weak tech earnings pushed the S&P500 and Nasdaq down by 1.9% and 1.4% to the lowest levels since May. The US dollar is on its way to record a positive week, supported by the stellar macro data that has come out of the US this week.
The US economy outpaced the expectations of a 4.3% rise during the third quarter, record the strongest growth rate in more than two years at 4.9%. The consumer did most of the heavy lifting, with personal expenditure rising by 4%, the most since Q4 2021. Earlier this month, retail sales surprised the consensus to the upside as well, rising by 0.7% and recording the seventh consecutive monthly rise. For the first time after nine quarters, residential investment has not been a drag to GDP, showing how the rebound in the housing market is supporting the economy. The main focus today will lie on the PCE inflation report, where economists are expecting price growth to have fallen from 3.5% to 3.4%. Core inflation should come in slightly lower as well, falling by 20 basis points from 3.9% to 3.7%.
The last two weeks have confirmed the thesis of a strong US economy. However, as most market moving data this week has been backwards looking, with the GDP print being the best example, we should not place too much importance on the data points from a forecasting perspective. Leading indicators are still weakening at a steady pace, suggesting that the US central bank is done raising interest rates.
ECB pauses – terminal rate reached?
Ruta Prieskienyte – FX Strategist
After ten consecutive interest rate hikes, the European Central Bank announced a first pause in the hiking cycle, holding the deposit rate at 4%. Financial markets remain in a data-dependent mode, with yesterday’s message interpreted as slightly dovish, as the narrative now shifts to “higher for longer”.
The underlying message remained largely the same as in the September meeting: (1) The central bank’s restrictive policy is being forcefully transmitted into the real economy; (2) ECB is happy with the progress of bringing down inflation to its 2% target; (3) No changes were made to bond purchase programmes, refinancing operations, or reserve requirements. However, the economic situation in the eurozone is deteriorating stronger and faster than the ECB had anticipated. Lagarde sounded more cautious when referring to the latest disappointing macro data and tentative signs of a weakening of the labour market. Given the full impact of the policy tightening is yet to feed through into the real economy, significant downward revisions to the ECB’s staff projections at the December meeting are now very likely. The ECB is undoubtedly going to wait until then before making firmer conclusions on how the outlook is evolving and providing forward guidance on further policy trajectory.
Rate expectations fell on the back of the ECB’s message and EUR/USD briefly touched 1.0529 mark – a 10-day low – before recovering. The market still prices in around 3bp higher rates by the December meeting, a slight tightening bias, while a full 25bp rate cut is in prices by around the June 2024 meeting. As US influences continue to have a tighter hold on EUR/USD trends in the immediate term, a stronger euro from here is conditioned on economic activity picking up, as it would ease the need for the ECB to cut rates in the first half of 2024.
Pound bounces from 3-week low
George Vessey – Lead FX Strategist
After falling almost 2% from a 2-week high of $1.2290 to a 3-week low of $1.2070, GBP/USD managed to squeeze out a daily rise yesterday, despite stellar US GDP growth data. Investors are still expecting the Fed to keep policy on hold until it begins cutting rates next year, relieving some of the pressure from dovish Bank of England (BoE) expectations, which have weighed heavy on sterling of late.
Before the US data dump, sterling slid to fresh weekly lows after the Confederation of British Industry’s monthly retail sales balance plunged to -36.0 in October, worse than forecast and the poorest October reading since 2017. Sales volumes have been falling year-on-year for six months in a row and internet sales volumes fell at the fastest pace on record last month. Cost-of-living concerns and higher interest rates are clearly weighing on consumer spending, adding to the dovish BoE rate expectations – a major headwind for the pound. Moreover, conflict in the Middle East risks damaging already fragile consumer and business confidence – the GfK measure of consumer sentiment in October registered the biggest month-on-month drop in more than three years.
So, with economic momentum waning and signs of a weakening jobs market rising, the BoE is expected to keep interest rates at 5.25% next week, but will likely want to ensure that its previous ‘high-for-longer’ message is the key takeaway from November’s policy statement. A successful hawkish hold of this sort could limit any GBP weakness after the event, although the pound has had a tendency to fall after BoE meetings this cycle, no matter the decision or tone.
Tough week for safe haven swissy
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 23-27
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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.
