November 07, 2023

“The investor enthusiasm driving up riskier assets in recent days has seemingly run out of steam, and a resurgence in US sovereign yields has trimmed some of the huge gains made by the euro and sterling. There is a plethora of event risk today in the form of Federal Reserve speakers, who are expected to push back against market expectations of early rate cuts.”

Tim Hallinan – Trading Director

Main Headlines

As the US Congress approaches another potential partial government shutdown in less than two weeks, questions are arising about whether lawmakers, and particularly a small group of hardline Republicans, can find common ground. House of Representatives Republicans, holding a narrow 221-212 majority, are planning to focus on passing full-year spending bills in the coming week. However, these bills are unlikely to pass the Democratic-majority Senate, leading to increasing concerns about the November 17 shutdown deadline, even within their own ranks.

King Charles is set to deliver the British government’s legislative plans, encompassing areas such as crime, climate, housing, and more, in what could be Prime Minister Rishi Sunak’s final King’s Speech before the next year’s election. Sunak aims to garner votes and to advance policies designed to create a contrast between his Conservative Party and the leading Labour Party, which currently holds a significant lead in the polls. Sunak is expected to push on with weakening climate measures aimed at achieving the UK’s net-zero emissions target by 2050.

GBP

Sterling has weakened significantly from yesterday’s peak as investor enthusiasm wanes and the BoE’s Chief Economist Pill strikes a dovish tone. The risk-sensitive pound has retraced some of its rally sparked by a potential peak in US interest rates, after what many analysts saw as an overshoot in terms of sterling strength when it notched its best week in a year last week. This weakening was compounded by Pill’s comments, in which he said that the mid-2024 rate cuts priced into financial markets do not seem unreasonable, as he warned that UK CPI releases will soften sharply in coming months. In some positive news, the British Retail Consortium retail sales report showed this morning that consumer spending increased a better-than-expected 2.6% year-on-year, and a Halifax report showed that house prices rose for the first time since April. No market-moving events are expected today, with investors looking to Governor Bailey’s speech tomorrow.

EUR

The euro firmed against sterling but mirrored its declines against the dollar overnight, as the common currency trimmed gains on a small resurgence in the greenback. The euro area final services PMI printed unchanged on the preliminary estimate at 47.8, indicating an emerging growth differential to the UK, for which the figure was 49.5 last week. German industrial production also disappointed, with a -1.4% contraction just in September despite stagnation expected. In a relatively quiet session for the euro today, the macro highlights are the PPI inflation index this morning and a speech by the ECB’s Nagel this afternoon.

USD

The dollar has edged higher from an almost 8-week low following a Treasury yield rebound. The 10-year sovereign bond yield – a reflection of future expected interest rates – bounced off the 4.5% level and retraced some of the losses triggered by a dovish Fed and a soft jobs report last week, buoying the greenback into this morning’s session. Earlier this morning, the dollar also made solid gains on the Aussie Dollar, despite an 25bps hike in the Reserve Bank of Australia’s cash rate, as it tempered its stance on further hikes. Today’s calendar is all about Federal Reserve speakers, and attention will be particularly heightened given the impact of Chair Powell’s language last Wednesday. A raft of speakers this afternoon includes Kashkari, Goolsbee, Barr, Waller, and Logan, who may provide some hawkish pushback against the recent weakening of financial conditions and boost the greenback a bit further.

Markets

Europe’s Stoxx 600 equity index started the day nearly flat, while US equity futures contracts dipped approximately 0.2%. In Europe, financial shares saw an increase, with Switzerland’s UBS Group AG leading the way with over a 4% gain, thanks to better-than-expected client inflows offsetting losses associated with absorbing Credit Suisse.

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

8:00 a.m.: Germany Sept. Industrial Production
8:00 a.m.: Norway Sept. Industrial Production
11:00 a.m.: Euro-area Sept. PPI
1:30 p.m.: Fed’s Kashkari speaks
2:00 p.m.: Fed’s Goolsbee speaks
2:30 p.m.: US Sept. Trade Balance
3:10 p.m.: Riksbank’s Floden speaks
3:15 p.m.: Fed’s Barr speaks
3:50 p.m.: Fed’s Schmid speaks
4:00 p.m.: Fed’s Waller speaks
6:00 p.m.: Fed’s Williams speaks
7:25 p.m.: Fed’s Logan speaks
8:30 p.m.: ECB’s Nagel speaks
Charles III opens new session of parliament

Corporate Events

Earnings include Mitsubishi, Ryanair.

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