December 12, 2023

“Despite a sharp decline in wage growth in October, the UK labour market continues to display strong inflationary pressures ahead of the Bank of England’s policy decision on Thursday. Today’s headline market event – US CPI inflation – sent the dollar sliding 1.5% last time around, and any surprise in the data will set the tone for the Federal Reserve decision tomorrow.”

Sam Cornford – Head of Trading

Main Headlines

On Monday, Poland’s parliament supported Donald Tusk to become the prime minister, marking the conclusion of eight years of nationalist rule and signalling a potential improvement in relations with the European Union. Poland has faced the freezing of tens of billions of euros in European Union funds amid a dispute with Brussels over democratic standards. However, Tusk, a former European Council president, has committed to repairing relations and unlocking the frozen funds.

The governing body of London’s financial district, the City of London Corporation, is expanding its presence by opening offices in New York and Washington, D.C. This move is part of a broader effort by British policymakers to strengthen international financial ties following Brexit. The New York outpost opened on Monday, and the Washington office is scheduled to open on Tuesday. The City of London Corporation aims to facilitate closer financial regulatory cooperation between Britain and the US, enhance market access for British firms, and attract increased investment from the US into Britain.

GBP

Cooling wage growth has dented sterling this morning ahead of the GDP print tomorrow and the Bank of England decision on Thursday. Wage growth in the three months to October slowed more than estimated, falling from a revised-up September figure of 8.0% to 7.2% in a welcome sign of easing inflationary pressure in the labour market. In response, UK 2-year bond yields – a reflection of expected future interest rates – fell to a near 6-month low this morning. However, the still rapid pace of pay growth is unlikely to push the BoE to begin discussions on rate cuts any time soon, with traders still broadly expecting the central bank to cut its benchmark interest rate much less aggressively than the Federal Reserve and ECB next year. The unemployment rate meanwhile stood steady at 4.2%. The GDP growth figure for October is due for release tomorrow morning, where a 0.1% month-on-month contraction is forecast, despite recent positive signs coming from the purchasing manager surveys.

EUR

The euro has edged marginally higher against its major peers overnight. The euro data diary is set to pick up today after a few quiet sessions, beginning with the ZEW economic sentiment survey results this morning. German investors are likely to have become slightly less optimistic about the eurozone economic outlook than in November, after the index ticked above the 0.0 threshold denoting optimism in October for the first time since April. The ECB’s monetary policy statement and economic projections on Thursday will then be the next focus for markets, ahead of the flash PMIs on Friday.

USD

The dollar is drifting lower this morning as investors brace for a looming November CPI inflation print. The lower-than-expected October figure at 3.2% catalysed a 1.5% dive in the dollar last month, sparking downward moves to US yields throughout November geared towards aggressive rate cuts in 2024. Economists are looking for a slightly cooler 3.1% year-on-year price growth and a month-on-month stagnation. A downside surprise is likely to greenlight investors leaning in to the ‘rate cut mania’ currently priced into markets, whereas with a hot print there is a lot of room to revise down these overextended bets. The Federal Reserve’s December meeting begins today ahead of the final decision and press conference tomorrow evening, alongside the highly anticipated dot-plots of policymaker expectations.

Markets

Prior to US economic data releases and meetings from major central banks that will provide insights into the potential for interest-rate cuts next year, both Treasury yields and the dollar experienced declines. European stock futures showed a slight increase. In Asia, shares were generally higher, with Hong Kong’s equity gauges leading the gains. Traders are awaiting decisions from a meeting of Chinese economic policymakers, which may offer indications about the extent of stimulus to expect in the coming year. US equity futures remained steady in the midst of these developments.

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

8:00am.: UK Claimant Count Change and Average Earnings Index
11:00am.: German and EU ZEW Economic Sentiment
12:00pm.: US NFIB Small Business Index
2:30pm.: US CPI Inflation
8:00pm.: US Federal Budget Balance

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