December 04, 2023

“The currency markets are set for heightened volatility this week with a series of top-tier US labour market data that includes the JOLTS survey, wage growth, and unemployment claims. Non-farm payrolls is the headline release, which last month catalysed a dollar slide when it printed below expectations.”

Sam Cornford – Head of Trading

Main Headlines

A strong late-year surge has propelled the S&P 500 to a new closing high for 2023, as investors anticipate the Federal Reserve’s cessation of interest rate hikes and the resilience of the US economy in the face of tighter monetary policy. Closing at 4,594.63, the benchmark index surpassed its previous 2023 closing high by nearly 6 points, set in late July. With a 0.6% gain on Friday, spurred by increased confidence in the peaking of the rate cycle, the index has surged 19% this year and is only 4% away from its all-time peak.

On Friday, the UK government intervened to prevent an Abu Dhabi-backed consortium from acquiring the media group that owns the Telegraph newspaper. This move comes as regulators scrutinize the takeover bid, citing concerns about freedom of expression. The government, taking action on Thursday, requested regulators to investigate the deal. Subsequently, Culture and Media Minister Lucy Frazer issued an enforcement order on Friday, barring any transfer of ownership of the Telegraph Media Group without her approval and also prohibiting changes to its structure or senior editorial staff.

GBP

Sterling has pared back some gains this morning after it edged higher on dovish language from US and European policymakers on Friday. The pound was buoyed first by a strong upwards revision to the manufacturing PMI, which decelerated its rate of contraction with tick up to 47.2 in November, as the UK extended its advantage versus the eurozone’s 44.2 figure. The big jump on the day then arose from disappointing US services data and dovish ECB rhetoric that have now seen much deeper easing cycles priced into the US and eurozone than in the UK, where the first rate cut is expected several months later. BoE official Dhingra speaks this morning ahead of a relatively quiet week for the UK macro calendar, so most sterling movement is likely to come from the heavy hitting US data.

EUR

The euro has eased following a late week slide on Thursday and Friday. Reflecting a sharp deceleration in consumer price growth earlier in the week, Bank of France Governor Francois Villeroy de Galhau fuelled rate cut bets on Friday when he said that he expected the ECB tightening cycle to be over, barring any inflationary shocks. No top tier releases are due out for the euro this week, but instead a barrage of second-tier data points should shape the eurozone outlook, starting with the Sentix Investor Confidence Survey and another speech by ECB President Lagarde today. She is likely to provide some mandatory pushback against rate cut bets, although the effectiveness of this is questionable given the recent sharp falls in inflation.  Elsewhere in Europe, the Swiss franc plunged 0.5% this morning after Swiss CPI unexpectedly turned to month-on-month deflation this morning, with prices falling 0.2% in November.

USD

The dollar has rebounded this morning as the currency markets retrace some of the losses suffered on Friday. Private sector manufacturing activity fell further into contractionary territory, according to the ISM PMI, in further evidence of tight monetary conditions weighing on the US economy. Fed Chair Powell then gave market the green light to double down on rate cut bets following Waller’s indication that a near-term pivot is possible, when he admitted that rates were ‘well into restrictive territory’ and gave little explicit pushback on the current direction of the bond markets, despite also claiming that it is premature to discuss rate cuts. Markets turned to some extreme pricing as a result – the probability of a March rate cut jumped from 20% to 60% in a week and 2-year Treasury yields plunged 41bps in the same period. Such a position may leave dollar bears vulnerable to a larger rebound if, for example, a strong non-farm payrolls report on Friday puts a dent in the rate cut narrative. Factory orders this morning precede a string of top-tier data releases focused on the labour market this week, including the JOLTS survey, ADP non-farms, the ISM services PMI, jobless claims, non-farm payrolls, and wage growth.

Markets

Treasury yields rose this morning, and gold retreated from session highs as markets retraced some of Friday’s gains that defied Federal Reserve Chair Jerome Powell’s reassurance that interest rate cuts are not imminent. The benchmark 10-year Treasury yield traded around 4.23%. EUROSTOXX 50 and FTSE futures remained stable. S&P 500 futures dipped 0.2% from Friday’s 20-month high, while Nasdaq futures declined by 0.3%.

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

8:00 a.m.: Germany Oct. Exports
8:30 a.m.: Switzerland Nov. CPI
9:00 a.m.: Spain Nov. Unemployment
9:30 a.m.: Riksbank minutes
9:45 a.m.: ECB’s Guindos speaks
11:00 a.m.: Riksbank’s Breman speaks
12:00 p.m.: Portugal Oct. Industrial Production
3:00 p.m.: ECB’s Lagarde speaks
4:00 p.m.: US Oct. Factory Orders, Durable Goods

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