Written by Convera’s Market Insights team
US exceptionalism is waning
Boris Kovacevic – Global Macro Strategist
Incoming economic data keeps adding fuel to investors’ speculations that the cooling of the US economy will stop the Federal Reserve from raising interest rates. Yesterday’s string of secondary data releases broadly disappointed forecasts, paving the way for global equities to rise and the US dollar, commodity prices and bond yields to fall. Markets have priced out the possibility of more tightening of monetary policy in the US or the Eurozone with global oil prices having fallen into bear market territory (-20% since October).
Investors had four data points to digest in the US. From industrial production to import prices and the Philly Fed Index to the weekly jobless claims and NAHB Housing Sentiment Index. In totality, economic data continues to weaken this week. US production fell by 0.6% in October, recording the fastest deterioration in four months. Most of the drop had been driven by manufacturing output, which has been weakening for some time now. The number is heavily skewed to the downside by the United Auto Workers union strike against the big three Detroit automakers and should see production rebounding in November. However, looking at the lack of new orders in the manufacturing sector as per the purchasing manager index and other indices, the short-term outlook remains weak. At the same time, import prices fell the most since March, easing by 0.8% on the month alone. Initial jobless claims reached a 3-month high at 231k but remain relatively suppressed. The last data point of the data showed sentiment in the housing market deteriorating at the fastest pace since December, after the NAHB Housing Index fell for four consecutive months.
None of the data has been market moving on its own. However, combined, they paint a picture of a weakening US economy. The S&P500 is on track to rise for the third consecutive week (+9.45%) in line with the drop of the US 10-year yield from 5% at the end of October to 4.6%. The US dollar has suffered this week, mostly following the weak US CPI report and the overall fading of the US exceptionalism story. USD/JPY is set to record its worst week since July and is trading slightly above the 150¥ mark.
Pound softens after retail sales miss
George Vessey – Lead FX Strategist
GBP/EUR hit a fresh 6-month low yesterday just shy of €1.14 and sterling continues to trade softer this morning after UK retail sales data volumes fell by 0.3% in October, falling short of the market consensus of a 0.3% growth. This was predominately affected by a fall in automotive
fuel sales volumes, which fell to the lowest level since March 2021. Looking broader, sales volumes fell by 1.1% in the three months to October when compared with the previous three months.
This week, we’ve had an influx of UK data, which revealed UK wage growth is slowing and vacancies continue to fall in a further sign that the labour market is easing. UK inflation fell sharply from 6.7% to 4.6% y/y in October, the steepest single month decline in the consumer prices index since 1992. It also means UK PM Rishi Sunak achieved his target of halving inflation by the end of the year. Mr Sunak also carried out a major reset of his government this week, appointing David Cameron as foreign secretary in a cabinet reshuffle. But the market reaction was benign, driven instead mainly by US-centric developments and interest rate differentials. Money markets are currently pricing the Fed to cut rates before the BoE and to cut by 25 basis points more in total in 2024. This should help limit GBP/USD downside risks and we still view a lacklustre recovery as our base case for next year, with eyes on $1.2510 (the 100-day moving average) as our next key upside target/resistance level.
Next week, all eyes will be on UK chancellor, Jeremy Hunt, when he delivers his autumn statement. Plans to slash inheritance tax are reportedly being drawn up by No10 and the Treasury in a bid to offer a boost to the electorate ahead of a general election next year. Flash industry PMIs and consumer confidence data will also be published.
EUR gains as oil plunges
Ruta Prieskienyte – FX Strategist
The euro ended the day on a positive note against most of the G10 currencies amid heightened volatility in the oil market, in part due to concerns about oversupply and diminishing demand. EUR/NOK saw the third largest daily gain of 2023 in the magnitude of 1.15%, with the common currency also advancing against other commodity sensitive currencies such as the Australian dollar, Canadian dollar and the Swedish krona.
WTI crude oil plummeted to a four-month low of $72.22 in the late trading hours of the New York session on Thursday as data from the EIA revealed a larger than expected build up in US crude inventories. That, coupled with soft US economic indicators, including rising unemployment claims and a dip in industrial production, fuelled concerns over weakening oil demand. The economic contraction in Q3 in Japan, one of the world’s largest energy importers, and an ongoing stream of negative data from the Eurozone are also adding to faltering demand concerns. Despite the recent downward trend, potential production cuts by Saudi Arabia and Russia and optimistic forecasts from Oxford Economics offer some support to oil prices. OE expects brent crude to recover above $90/pb over the next few quarters as the winter season in the northern hemisphere pushes on. Markets have recently been skittish after the soft US CPI print caused a 2-sigma overaction in the forex markets. The effects of yesterday’s plunge in oil prices are likely to decay over the coming weeks.
To finish off the week, the final Eurozone CPI print for October and September’s current account data are out later today but are not expected to be market movers. In the absence of top tier data releases, the euro will likely trade without a clear direction in the mid $1.0800s for the remainder of the day, but that alone would see EUR/USD record its fifth largest weekly close of 2023.
CAD down across board
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 13-17
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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.
