December 05, 2023

“The dollar selloff has stabilised this week as markets take a step back and reassess the aggressive rate cut profile for 2024. The 125bps of cuts priced in for next year will face a difficult challenge with this afternoon’s JOLTS and ISM services PMI data, which are set to spark some volatile moves.”

Tim Hallinan – Trading Director

Main Headlines

Banque Pictet, a Swiss private bank, has acknowledged aiding US taxpayers in concealing over $5.6 billion from the Internal Revenue Service (IRS). The bank has entered into a deferred prosecution agreement with the Justice Department, with federal prosecutors revealing on Monday that American taxpayers, using Pictet accounts in Switzerland and other locations, evaded approximately $50.6 million in taxes from 2008 to 2014. As part of the settlement, Banque Pictet has agreed to pay $122.9 million to the U.S. Treasury.

Labour Party leader Keir Starmer stated on Monday that a Labour government would not hastily turn on the spending taps but would prioritise fostering economic growth. Starmer attributed the need for such an approach to the alleged damage inflicted on public finances by the Conservative government led by British Prime Minister Rishi Sunak. With Labour enjoying a significant lead of around 20 points in opinion polls ahead of an anticipated election next year, Starmer aims to assure businesses and voters grappling with a cost-of-living crisis that his party is capable of responsibly managing the economy.

GBP

Sterling has eased against this morning ahead of the final services PMI. British Retail Consortium retail sales are up 2.6% on last November, in a stable but slightly better than expected print this morning. Few domestic macroeconomic triggers await sterling investors this week, putting movements in the pound largely at the mercy of developments in the euro area and the US. That said, this morning’s final revision to the November services PMI, although not traditionally headline news, may throw up a surprise given some strong upwards revisions in recent months.

EUR

The euro continues its corrective 1.6% slide from its late-November peak against the dollar as markets temper the greenback selloff. There is little to fuel a further rally in EUR/USD in the near-term, unless the eurozone economic data bottoms out or rebounds materially – the drive up from dollar weakness has somewhat reached its limits in terms of the pricing in of a soft landing and aggressive rate cuts in the US. The ECB’s Schnabel confirmed in an interview that further rate hikes were unlikely given the sharp fall in CPI inflation observed recently. The euro area’s economic woes were confirmed again this morning with a 0.3% decline in French industrial production in October. At the time of writing, the final services PMIs have been a mixed bag, with Spain revised downwards and Italy changed upwards significantly. The consolidated eurozone figure is due to be released this morning, ahead of a PPI inflation print.

USD

The dollar’s monumental November plunge has stabilised this week as rate cut bets peak and traders position themselves more cautiously ahead of some key US data this afternoon. Doubts have crept in surrounding the apparent overextension in the market’s dollar selloff in response to softening macroeconomic data, with near-term interest rates correcting around 10bps higher yesterday. The pricing in futures markets signals larger rate cuts for the Fed than for any other major central bank next year, which seems unlikely given, for example, that eurozone inflation is significantly lower whilst the economy is teetering on the edge of a technical recession. The crucial JOLTS Job Openings survey and the ISM services PMI this afternoon will have a tough job validating these views, although a slowdown in last month’s data catalysed a move down in the dollar in November. The Federal Reserve will hope for a further loosening in the labour market alongside a cooling services sector ahead of its rate decision next week, whilst a rebound will appease dollar bulls looking to capitalise on recent weakness.

Markets

Asian equities declined, and European stock futures showed minimal movement as traders reevaluated expectations of aggressive Federal Reserve rate cuts next year. An Asian stock index was heading for its third consecutive daily decline, with notable drops in benchmarks in Hong Kong and China. Euro Stoxx 50 futures remained stable, while US stock futures extended losses after Monday’s decline, where the S&P 500 retreated from its highest point since March 2022.

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

7:30 a.m.: Riksbank’s Thedeen speaks
8:45 a.m.: France Oct. Industrial Production
9:00 a.m.: Spain Oct. Industrial Production
9:15 a.m.: Spain Nov. HCOB Services & Composite PMI
9:45 a.m.: Italy Nov. HCOB PMIs
9:50 a.m.: France Nov. HBOC PMIs
9:55 a.m.: Germany Nov. HCOB PMIs
10:00 a.m.: Euro-area Nov. HCOB PMIs
10:00 a.m.: ECB Oct. 1- and 3-year CPI Expectations
10:30 a.m.: UK Nov. S&P Global/CIPS PMIs
10:30 a.m.: South Africa 3Q GDP
11:00 a.m.: Euro-area Oct. PPI
3:45 p.m.: US Nov. S&P Global PMIs
4:00 p.m.: US Nov. ISM Services; Oct. JOLTS
Markets closed in Thailand

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