January 03, 2024

“The late 2023 rally in sterling and the euro stumbled yesterday as rate cut expectations slipped while the dollar surged the most in a day since October. A series of headline US data is set to spark further volatility this afternoon with some key indicators of growth, labour demand, and policymaker attitudes.”

Sam Cornford – Head of Trading

Main Headlines

The US federal government’s total public debt has surpassed $34 trillion for the first time, according to the US Treasury Department’s Daily Treasury Statement. The report on Friday revealed that the total public debt outstanding increased to $34.001 trillion from $33.911 trillion on Thursday. The portion of debt subject to the federal debt ceiling rose to $33.89 trillion on Friday from $33.794 trillion on Thursday. This milestone comes as the federal debt exceeded $33 trillion in September, driven by increasing federal deficits due to declining tax revenues and rising expenditures.

British business leaders have become more pessimistic about the country’s economic outlook, leading to hesitancy in investment decisions, as per a survey published by the Institute of Directors (IoD) on Wednesday. The IoD’s confidence index, measuring the gap between business leaders with an optimistic view of the economy and those with a pessimistic outlook, declined to -28 in December from -21 in November, coming after a gradual rise since June. Roger Barker, policy director at the IoD, noted that sentiment among directors had been largely stagnant in the latter half of 2023 due to the impact of higher interest rates on the economy.

GBP

Sterling nursed significant losses yesterday, sliding almost 1% in the absence of market-moving economic events, as returning traders unwound gains achieved in thin trading over the holiday period. Rising global yields and ebbing rate cut expectations weighed on pro-cyclical and rate-sensitive currencies, pushing the pound to a two-week low. These moves overshadowed the only data point yesterday with the manufacturing PMI, which edged lower in its final revision from 46.4 to 46.2, remaining well into contractionary territory. No significant domestic drivers are due today but as yesterday proved, significant volatility can still be expected in the new year, particularly with a dense US calendar today.

EUR

A parallel corrective move in EUR/USD saw the pair slump slightly less aggressively than GBP/USD. Diminishing risk sentiment throughout yesterday’s trading session pulled the growth-sensitive euro away from its five-month high of last week. The eurozone final manufacturing PMI was revised up slightly to 44.4, but this hardly represents promising news for a stabilisation in the euro area economy for investors. This was worsened by an unexpected deceleration in the growth of private loans to 0.5% year-on-year in November. Today’s economic calendar is particularly US-heavy, with eurozone events limited to German and Spanish unemployment change – markets are looking to the German and French preliminary December CPI prints tomorrow morning to give the euro a jolt. Consensus points to an expected spike in both figures from a very low number in November, driven by energy price base effects from 2022.

USD

The dollar enjoyed its best trading day since October in yesterday’s session, correcting higher to a two-week peak as a knock to risk sentiment directed flows back towards the dollar. Front-end US Treasury yields surged almost 10bps as traders tentatively eased rate cut expectations this year from around 160bps to 150bps, pulling back from stretched forecasts for the pace of the global easing cycle. The macroeconomic diary bursts into life today with a large release at 1600 CET that includes the ISM manufacturing PMI and the JOLTS Job Openings survey. Private sector manufacturing activity is likely to pick up slightly, whilst the job openings figure – a main indicator of labour demand – should give a stable read on the softening figure that catalysed a dollar slide last month, when it signalled easing inflationary pressures in the labour market. Later this evening, investors will digest the FOMC meeting minutes from December’s dovish pivot at the Fed’s most recent policy decision. The underlying discussions behind the extra rate cuts pencilled in for this year will be key for investors as they revise pricings for the direction of  interest rates.

Markets

Asian equities experienced declines in early morning trade and European stocks appear poised for another day of losses, extending the trend of negative sentiment, as souring risk conditions and rising yields weigh on stretched equity valuations following rapid gains in late 2023. Geopolitical concerns have also chipped away global equities amid concerns about ship attacks in the Red Sea.

Main Economic Events (All Times CET)

9:00am.: Spanish Unemployment Change
9:30am.: Swiss Manufacturing PMI
9:55am.: German Unemployment Change
2:30pm.: Fed’s Barkin speaks
4:00pm.: US ISM Manufacturing PMI, JOLTS Job Openings Survey, & ISM Manufacturing Prices
8:00pm.: FOMC Meeting Minutes

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