Written by Convera’s Market Insights team
US labor market is losing steam
Boris Kovacevic – Global Macro Strategist
Global investors have taken the opportunity of the US holiday to reset. Overall, trading volumes have been thinning out as US liquidity reduced due to Thanksgiving. A lack of top tier macro data added to the rangebound movements this week, which is exemplified by equity volatility hitting another post-pandemic low and the cost of protecting against market selloffs tumbling to the lowest level since at least 2013. Investors have turned a blind eye to recent political and geopolitical developments as the fall in bond yields has been all that mattered.
The final session of the previous week induced a bit of volatility into the markets when the purchasing manager survey showed US companies shedding workers for the first time in almost 3 ½ years. The employment barometer for the manufacturing and services sector fell into negative territory for only the third time (2019, 2020, 2023) since the Global Financial Crisis. This dampened the initial optimism surrounding the composite PMI expanding (staying above the 50 mark) for the 10th consecutive month. A string of recent data disappointments has pushed the US economic surprise index to its lowest since July. Against this backdrop, investors have felt comfortable (1) pricing out any bets of the Federal Reserve raising interest rates this year and (2) selling the Greenback, which has lost around 3.7% of its value since October.
Most top tier macro releases for the US, UK and Eurozone were released at the end of October / beginning of November, explaining the lack of data points over the course of the past two weeks. However, this will change with the upcoming data patch. Sentiment data on Tuesday will be followed by inflation (Eurozone, US) and labor market reports (Germany) with focus shifting to final PMI numbers on Friday. Going into the week, we ask three specific questions. Will we see a confirmation of the European bottoming? Has inflation broadly continued to fall? And is the German labor market deterioration gaining pace? The consensus expects US inflation (headline PCE) to have eased from 3.4% in September to 3.1% in October, which would be the lowest growth rate since early 2021.
Signs of a European bottoming are emerging
Boris Kovacevic – Global Macro Strategist
While the soft (leading) indicators in the US are worsening and the hard (lagging) data points are holding up, it is the opposite case for Europe. Given the rate sensitive nature of the Eurozone, the current weakness in the hard data has been anticipated by the fall of leading indicators, which are now starting to turn up again. This has increased the probability of a bottoming of the European business cycle and has helped the euro stay above $1.09. German business expectations rose to the highest level in five months in November (85.2), according to the Ifo institute.
Consumer confidence in the Eurozone rose by 0.9pts to -16.9 as well in November, the highest in three months and above market expectations. This was echoed by German data as well over the past two weeks. The manufacturing PMI, Ifo Business Expectations Index, and the ZEW and Sentix Economic Expectations Indices all turned higher in November. While the bottoming is good news for Europe, current levels continue to point to negative growth rates for the last quarter of the year. And given the expected weakening of the European labor market and pull-back in fiscal spending, 2024 could fail to set itself apart from this year’s weak growth rate.
Most Eurozone members will reduce fiscal stimulus going into 2024, according to the European commission, with the aggregate budget deficit falling from 3.2% to 2.8% next year. Germany has gone the other way and is currently embroiled in a budget crisis following an emergency spending freeze. German Finance Minister Christian Lindner then came out last week and suspended the debt brake for this year, which could help increase borrowing significantly and intends to present a new budget next week. While this will most likely settle the debate over this year’s budget, a suspension of the budget for 2024 has been made less likely given the already made compromise from German Finance Minister Christian Lindner. The consensus for German GDP growth for 2024 has already been cut from 1% at the beginning of the year to now 0.4% and is now at risks of further downward revisions.
Stars align for pound
George Vessey – Lead FX Strategist
The pound is battling the Swiss franc to regain its status as the best performing G10 currency in 2023, amid improving global risk sentiment, resilient UK data and rising UK gilt yields supporting rate differentials. The pound logged its third weekly rise in four against the US dollar, ending above $1.26 to hit fresh 12-week peaks and continues to build on those gains this morning.
Investors now expect the Bank of England (BoE) to deliver its first rate cut by September next year. At the beginning of last week, they were betting it would come by June. Moreover, pricing of total BoE easing in 2024 has reduced from 80 basis points to 50 over the past couple of weeks. The 2-year UK government bond yield has risen by 30 basis points to 4.7% in that time, supporting the pound’s appreciation. Helping to spur this repricing was UK data revealing there was a surprise return to growth in the service economy in November and consumer confidence rose more than expected in a further sign of British economic resilience. However, we think most of sterling’s gains is a result of improving risk sentiment and rising stock markets as both the swap and expected rate differential between the US and UK have barely changed in recent weeks.
GBP/USD is consolidating above both its 100- and 200-day moving averages and is positioned almost exactly in the middle of its 2- and 3-year trading ranges. The UK data docket is light this week, so sterling will likely take cues from external developments and global risk sentiment.
US dollar on track for worst month of 2023
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 27-December 1
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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.
