Written by Convera’s Market Insights team
Cracks in the US labor market
Boris Kovacevic – Global Macro Strategist
Signs that the US labor market is cooling are starting to multiple with the latest data supporting the narrative that the Federal Reserve would ease monetary policy next year. However, the Greenback pushed higher for a second consecutive day as the fall in European yields, induced by comments from ECB policy makers, outweighed weak labor market data in yesterday’s trading. The US 10-year Treasury yield broke below the 4.20% mark for the first time since the beginning of September as the economic surprise index fell to the lowest level since June.
US job openings started this labor market dominated week off with a big downside surprise. The number of open positions decreased by more than 600 thousand to 8.783 million in October, falling to its lowest level since March 2021. Job openings have now decreased in eight of the ten months this year in a sign that the tightness of the labor market is easing. This has reinforced the priced in Fed rate cuts for 2024 worth 125 basis points with investors continuing to rotate capital into government bonds as protection against a potential recession. As we mentioned, the dollar continued to recover lost ground, partially due to events outside the US and the ambiguity of the macro data. Because while the job openings number did surprise to the downside, the ISM Services PMI increased from 51.8 to 52.7 in November. The employment index improved by 0.5 points and came in at 50.7, remaining in expansionary territory.
Investors will continue to focus on labor market data after the first data miss this week. The next release in line is the ADP private payrolls report that will be followed by initial jobless claims on Thursday and the non-farm payrolls report on Friday.
Pound loses steam
Ruta Prieskienyte – FX Strategist
The pound surrendered further ground to the US dollar as dovish ECB’s Schnabel comments shielded the Greenback against a potential fallout from weak jobs data. UK stocks closed lower for a second consecutive day while the 10-year government bond yield hit a 28-week low, as expectations grew for an earlier onset of monetary policy easing by the G3 central banks.
Domestically, a final PMI survey confirmed that the UK services sector returned to a positive territory. The final composite figure was revised higher to 50.7 in November 2023, up from a preliminary estimate and 48.7 level in October. The latest reading indicated the first expansion of UK private sector output since July, attributed to increasing demand and the completion of unfinished projects. Growth was confined to the service economy as the manufacturing sector saw a marginal decline. Meanwhile, the BRC-KPMG report showed cautious British consumers delayed Christmas spending in November, not tempted by the Black Friday deals. Preliminary GDP reading released last month showed that the UK economy stalled in the Q3 of 2023. Weaker consumer spending going into the holiday period could further suppress aggregate consumption, which in turn would dampen economic growth and could be pound negative.
GBP/USD fell beneath the $1.26 handle and is already over 1% below its 3-month high reached last Thursday. Further sterling downside is on the cards as the pair continues to be positioned on the high end of short-term trading ranges and technical indicators such as the RSI hover close to overbought territory. Meanwhile, GBP/EUR continues to trade close to its 4-month high after dovish ECB signal spurred on renewed rate easing expectations. Governor Baileys speech and the Financial Stability Report from the Bank of England due later today will provide direction for the sterling.
Euro nears 3-week low on dovish ECB signal
Ruta Prieskienyte – FX Strategist
The euro extended its losses for the fifth consecutive day on the back of dovish remarks by ECB’s Schnabel that further rate increases are “rather unlikely” given recent inflation developments. EUR/USD breached past its key support levels and fell to a 1-month low at $1.0780 level. Meanwhile, Germany’s Dax index closed at all-time high as prospects of lower interest rates boosted demand for the country’s biggest stocks.
The HCOB Eurozone Composite PMI was revised higher to 47.1 in November 2023, up from a preliminary estimate of 47.1 and above October’s 35-month low. While it was the highest PMI reading since July, the index continues to point to a deterioration in current economic conditions. The reading is in line with technical recession calls for Q4, after a 0.1% decline in Q3. New business fell for a sixth consecutive month while export sales continued to decline for a twenty-first consecutive month. Meanwhile, German factory orders released this morning did not provide much to cheer about either. The index fell by 3.7% m/m, in a sign the industrial sector remains fragile. Elsewhere, the median consumer expectations for Euro Area inflation over the next 12 months remained unchanged at 4.0% in October 2023, matching the highest level since April and double the pre-pandemic level, according to data from the ECB Consumer Expectations Survey. Simultaneously, expectations for inflation three years ahead remained unchanged at 2.5. With expectations not budging, this could give ECB something to quietly worry about as such beliefs could be self-fulfilling and become embedded, elevating the inflation rate for longer.
Today’s forex dynamics will continue to be driven by the US story, as developments on the European front are unlikely to provide meaningful upward momentum for the euro. Eurozone retail sales are due shortly this morning and are expected to remain in contractionary territory for the thirteen consecutive month. Bundesbank President Nagel is also due to speak later today, in what will be the last speech by an ECB policymaker before the quiet period ahead of the policy rate decision next Thursday.
Euro down across board amid dovish ECB
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 04 December
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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.
