December 01, 2023

“A dovish tilt in the data and policymaker language handed the dollar its worst monthly performance in a year in November, despite some last-minute weakness for the euro from cooling inflation. The higher-for-longer message that saw the dollar thrive in September has been rapidly unwound as we head towards the end of 2023.”

Tim Hallinan – Trading Director

Main Headlines

Amidst global economic uncertainties and geopolitical tensions, European bankers are facing a dearth of optimism, according to a Reuters report. Finance executives, consultants, and headhunters are foreseeing sluggish deal flows, modest bonuses for many, and substantial job cuts in 2024. Dealogic data indicates that the $2.669 trillion of global deals completed this year is the lowest since 2005. In the Europe, Middle East, and Africa region, the $616 billion of deals executed is the lowest since 2004.

British house prices unexpectedly increased for the third consecutive month in November, suggesting that the downturn in the housing market has eased, according to mortgage lender Nationwide. House prices rose by 0.2% in November following a 0.9% increase in October, defying expectations of a 0.4% decline in the economist consensus. Compared to the previous year, house prices were 2% lower, marking the smallest year-on-year drop in nine months.

GBP

Sterling has rebounded this morning after it was dragged down by cooling inflation in the euro area. A sparse data calendar saw the pound drift with the European and US data throughout yesterday’s choppy session. The newest of the Bank of England’s Monetary Policy Committee members, Greene, said that interest rates may need to stay high for an extended duration, saying that she was more concerned about upside inflation risks than a potential economic downturn. The final revision to the manufacturing PMI is due out this morning, but investors are likely to be more preoccupied with the US data this afternoon.

EUR

The euro slipped 0.7% yesterday as consumer prices inflation fell sharply in November. Consolidated eurozone CPI fell from 2.9% in October to 2.4% and the core measure (excluding food and energy) dropped from 4.2% to 3.6%, signalling a more rapid pace of disinflation and a starker economic slowdown than previously expected by the European Central Bank. The news fuelled the market expectations for early and aggressive rate cuts next year that have developed in November, with a full rate cut in April now priced into futures markets. A string of final manufacturing PMIs may throw up some surprises this morning and ECB President Lagarde is likely to continue to push back against market moves towards rate cuts when she speaks this afternoon, although credibility is waning rapidly at this point.

USD

The US dollar concluded its worst month in a year, sliding 3% as a result of softening economic data and a dovish pivot in policymaker language that saw an aggressive dovish repricing of the future Federal Reserve rates profile. The PCE price index printed as expected at a 2-1/2 year low of 3.0% year-on-year in October and month-on-month growth in consumer spending fell markedly to just 0.2%, in a further affirmation of the dollar’s bearish Q4 momentum. Today, the ISM manufacturing PMI this afternoon is forecast to show a deceleration in the contraction of private sector activity before Fed Chair Powell speaks twice later in the day. A dollar selloff triggered by the Fed’s Waller earlier in the week has put heavy emphasis on Powell’s reaction, following his colleague’s speech in which rate cuts were signalled as soon as Q1. There is a strong chance here that pushback may undermine the rate cut bets that were pencilled in as a result.

Markets

European equity futures advanced, despite a slip in Asian stocks on Friday. The MSCI All Country World Index concluded November with its third-largest monthly gain in the past decade. European contracts rose ahead of eurozone manufacturing data and comments from Federal Reserve Chair Jerome Powell, which will be scrutinised for further insights into the trajectory of interest rates. US futures were slightly lower after the S&P 500 rose 0.4% on Thursday, achieving one of its best Novembers on record with nearly a 9% gain for the month. The all-country gauge recorded its best month since 2020.

Main Economic Data/Central Banks/Government (All Times CET)

9:00am.: Swiss GDP
10:00am.: Eurozone final manufacturing PMI
10:30am.: UK final manufacturing PMI
2:30pm.: Canada employment change
4:00pm.: ISM manufacturing PMI and construction spending
5:00pm.: Fed Chair Powell speaks
8:00pm.: Fed Chair Powell speaks

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