December 05, 2024

“Some weaker services activity data have weighed on the dollar over the past day, while the euro is edging higher despite the collapse of the French government. US jobless claims and eurozone retail sales data are in the diary today, although tomorrow’s non-farm payrolls is where markets are focused.”

Sam Cornford – Head of Trading

USD

A big disappointment on yesterday’s ISM services PMI boosted expectations for Fed rate cuts and has the dollar trading a touch softer this morning. The ISM index dropped from 56.0 to 52.1, as activity, employment, new orders slowed amid election and tariff concerns. US yields dropped off and the market is now nearly 75% certain that we will get a rate cut in two weeks’ time. Markets appear to be looking past warnings from the Fed speakers who say that the time may be approaching to start slowing the easing cycle – something Musalem was emphasising yesterday. He also mentioned that his team at the St Louis Fed had begun assessing different tariff scenarios as they prepare for next year. Meanwhile, Chair Powell did not add any fuel to bets on cuts, but he did boost risk appetite with some wholly optimistic commentary that argued the US economy is doing ‘remarkably’ well and that he is happy about where policy is. Looking at today’s calendar, unemployment claims are the likely to be the most important data point ahead of a speech by the Fed’s Barkin later on.

GBP

A brief sell-off in sterling followed a somewhat misleading headline from the Financial Times yesterday (here), where it was suggested that Governor Bailey was expecting 100bps of rate cuts over the next year, versus the market’s 80bps. In actuality, he had merely confirmed that the projection models had used that assumption, and so the move was unwound relatively rapidly. The pound is sitting pretty right now and has gained against both the dollar and the euro this week – in the absence of catalysts in the UK, it has simply ridden the wave of political turmoil in the eurozone and higher cut expectations in the US. That theme may continue today, with only a speech from the BoE’s hawkish-leaning Greene to come.

EUR

It is perhaps surprising that, on the day the French government fell to a no confidence vote, the euro, France’s CAC 40, and Europe’s Stoxx 50 all finished the day higher. The fact is that the market had seen this coming, and France’s political misery had been priced into the euro already. Six cuts are priced in for the ECB over the next year as it responds to the weakening eurozone economy – for the Fed and the Bank of England, it is only three. The vote means that France will almost certainly not form a new government and vote in a new budget for 2025, and instead the expectation is that the National Assembly involves the ‘Special Law’ which allows the 2024 budget to be rolled over. Using the same nominal budgets means real terms cuts to public services and some net fiscal tightening, but given the uncertainty it creates, few are too optimistic about the French economy next year. Retail sales is the most interesting event in the eurozone today, where the consensus is looking for a -0.3% drop in October after rising 0.5% the month before.

Markets

Rising Fed cut bets and Powell’s economic optimism took the S&P 500 to its 55^th record high this year and the Nasdaq surged another 1.2% as the post-election momentum takes US stocks to a 27.6% gain year-to-date. French and German equities also gained, with a sharp 1.1% rise in the DAX and a 0.7% gain on the CAC 40 seemingly coming in contrast to the political malaise in the eurozone’s biggest economies.

Main Economic Events (All Times CET)

8:00am: Swedish CPIF Inflation
2:30pm: US Unemployment Claims

To learn more about Ballinger Group, please visit our website or our LinkedIn page.