December 21, 2023

“Sterling suffered its worst daily loss since October yesterday as slowing inflation dented the Bank of England’s hawkish outlook for next year. With liquidity thinning out ahead of the festive period, any surprises in the macroeconomic data have an elevated potential to cause volatile swings in price in major currency pairs, despite a sparser calendar.”

Tim Hallinan – Trading Director

Main Headlines

On Wednesday, European Union finance ministers reached an agreement on the latest reform of the bloc’s two-decade-old fiscal rules. These reforms provide more flexibility in reducing public debt and introduce incentives for public investment, even during budget consolidation efforts. The revision comes in response to the record-high national debt levels resulting from pandemic recovery programs. The updated rules establish minimum requirements for average deficit and debt reduction that governments must adhere to, albeit with more leniency compared to previous standards. This adjustment recognises the need for increased spending to support climate, industrial, and security objectives.

According to a survey, British businesses grew more pessimistic about the economic outlook in December, marking the most significant monthly decline in confidence in over a year. The Lloyds Bank Business Barometer, which involved 1,200 firms across various sectors, dropped by seven points to 35% from November’s 21-month high of 42%. This decline represents the most substantial monthly fall since August 2022, contributing to concerns about a slowdown in the country’s economy.

GBP

Lower-than-expected inflation in November chipped away at sterling for much of yesterday’s session, as it suffered its worst day against the dollar in two months. The pound hit its lowest level against the euro in over three weeks after a sharp 20bps decline in the 2-year UK government bond yields, which reflects expectations for the short-term evolution of interest rates. The mortgage-rates-induced dive in British house prices continued in October this year, falling 1.2% year-on-year according to the ONS’ House Price Index released yesterday morning. Today’s macro diary sees the CBI Realised Sales survey give an indication of consumer spending this month, although this is less significant to investors than November’s retail sales data tomorrow morning, which is expected to rebound from the previous month when it declined 0.3%, notching a 0.4% gain this time around. With thinning liquidity ahead of the holiday season, a surprise print has the potential to cause large swings in price.

EUR

The euro has recovered slightly this morning after being dragged down by inflation figures in the UK. Markets continued to ratchet up rate cut expectations from the ECB last year as another country joined the growing list of advanced economies where inflation has fallen sharply below central bank forecasts. In one of the final domestic data points ahead of the holidays, euro area consumer confidence remained pessimistic but nudged up to its highest level since July yesterday, mirroring a similar concurrent release in the US.

USD

The dollar selloff and risk asset rally have stalled in the past couple of days, allowing the greenback to regain its footing after 150bps of priced-in 2024 cuts and a sharp fall in yields knocked it down to a four-month low. The UK CPI spillover into the wider rates markets saw US front-end yields drift towards a seven-month low at 4.33% yesterday, down from peaks of 5.25% reached in October. The dollar was buoyed too by a large beat on expectations for consumer confidence, which rallied to its highest level in 5 months as loosening financial conditions and market optimism boost the economic outlook. Unemployment claims are the headline figure today ahead of the week’s main event tomorrow: core PCE inflation. The third and final estimate of the US’ 5.2% annualised growth rate in Q3 is also due this afternoon, although this is unlikely to throw up any major surprises that would rewrite rate expectations.

Markets

European stocks are poised to mirror losses seen in the US and Asia as traders temper their optimism regarding potential Federal Reserve interest-rate cuts and adjust positions ahead of the extended Christmas weekend. Futures on Europe’s stock benchmark fell by as much as 0.8% following a 1.5% drop in both the S&P 500 and Nasdaq 100 on Wednesday. The MSCI All Country World Index, representing shares globally, declined for a second consecutive day after nine consecutive sessions of gains.

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

8:00am.: UK Public Sector Net Borrowing
12:00pm.: UK CBI Realised Sales
2:30pm.: US Final Q3 GDP and Unemployment Claims
2:30pm.: Canadian Retail Sales
4:00pm.: US CB Leading Index

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