November 01, 2024

“Gilts and sterling were thrown into turmoil yesterday as Wednesday’s budget chipped away at expectations for the Bank of England’s ability to cut rates over the coming months. Today, non-farm payrolls is the main event, with a low figure a real possibility given recent disruptions to work in the US.”

Tim Hallinan – Trading Director

USD

The dollar is trading on the stronger side ahead of today’s payrolls, having taken a step back over the last few days as data elsewhere took over. Yesterday’s data points did not shake up Fed pricing too much – core PCE landed at 0.3% as expected on a rounded basis but came slightly lower than the forecast to two decimal places. The implied probability for another rate cut next week is hovering around the 80% mark, and investors are less sure about a follow-up in December given the strong macro data of late. Today’s non-farm payrolls has reduced scope for added clarity around the rate path, as various strikes and the recent hurricanes have the potential to warp the employment figures. The consensus is looking for 100k, but many are expecting much lower. Bloomberg Economics are the only ones on the survey to forecast a negative print, but it is within the realms of possibility. While that sounds scary for the dollar, the markets will likely look through downside surprises to some extent. Most are pointing to the unemployment rate as a more representative indicator in this report, as it should be less affected by recent events.

GBP

Having now done the calculations, it turns out that the gilt market isn’t too comfortable with Reeve’s tax-and-spend, big-state budget after all. Investors intensified their dumping of UK government bonds and began injecting a risk premium into the pound yesterday afternoon. The two- and ten-year yields are now 25-30bps higher than they were before the budget announcement (bond prices move inversely to yields), owing to: a) a mechanical movement based on higher gilt supply, b) what the market now appears to have decided are overextended borrowing plans, and c) the inflationary impulse to come from the short-term fiscal stimulus that has reduced the scope for rate cuts. A yield surge is normally good for sterling, and GBP/USD typically has a strong positive correlation with its front-end rate differential, but this was naturally a ‘bad’ rise in yields that sent the pound sharply in the opposite direction. The extra government spending means that market is no longer sure about a rate cut next week, having trimmed the implied probability to 78%, and very little chance is assumed for another in December.

EUR

An upside inflation beat and a surprise drop in the unemployment rate meant that the euro had a good day yesterday. The strong German inflation report from the day prior had hinted at a stronger bloc-wide print, which rose to 2.0%, and at the margin weakened the case for more accelerated easing. Meanwhile, the 6.3% unemployment figure was a new record low – despite the weakness in the eurozone economy and the solid pace disinflation, the labour market has so far remained unusually resilient. With employment rising and output rather stagnant, however, it doesn’t say good things about productivity.

In Switzerland, inflation once again printed below estimates, this time at 0.6%. Deflation risks continue to grow for the SNB, who have not been able to revise down their forecasts quickly enough this year, thanks to the franc’s continued strength. Deflation risks are growing, and this will no doubt fuel intervention speculation.

Markets

The S&P 500’s monthly gain was wiped out in a day with a 2% drop yesterday, snapping a five-month winning streak as markets took Meta and Microsoft’s warnings about spiralling AI costs seriously. The tech-heavy Nasdaq fell by 2.5%.

Main Economic Events (All Times CET)

8:30am: Swiss CPI Inflation
1:30pm: US Non-Farm Payrolls
3:00pm: US ISM Manufacturing PMI

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