November 13, 2023
“A volatile week is to be expected as a series of top-tier data releases refine the market’s view on the macroeconomic backdrop, with CPI inflation in the US and UK likely to impact heavily on the main driver of the FX markets recently: the monetary policy path of the respective central banks.”
Tim Hallinan – Trading Director
On Friday, Moody’s revised its outlook on the US credit rating to ‘negative’ from ‘stable,’ citing significant fiscal deficits and a decrease in debt affordability. This move follows a similar downgrade by Fitch earlier in the year, prompted by prolonged political uncertainty surrounding the US debt ceiling. Rising federal spending and political polarisation have heightened investor concerns, contributing to a bond market sell-off that has driven US government bond prices to their lowest levels in 16 years. The decision drew immediate criticism from the Biden administration.
Rightmove reported that asking prices for homes in Britain have experienced the fastest decline in five years for this time of the year, indicating a slowdown in the housing market due to rising borrowing costs. The average asking prices fell by 1.7% between October 8 and November 4, a more significant decline than usual for the pre-Christmas period. Higher mortgage rates have reduced affordability for many buyers, according to Tim Bannister, Director at Rightmove.
Sterling continues its recovery this morning from a one-week low reached on Friday afternoon, shrugging off Rightmove data that signalled a slowdown in the housing market. A better-than-expected 0.0% growth figure in third quarter GDP failed to convince investors to bid up the pound, given the stark contrast to the US’ 4.9% growth, but it did prevent first step to a technical recession. Resident BoE hawk Catherine Mann speaks this afternoon, before market attention turns to the data highlights of this week with claimant count change and wage growth early tomorrow morning, followed by UK CPI on Wednesday. Economists foresee a cooling in wage growth, seemingly the most stubborn measure of inflationary pressure, from 8.1% to 7.5%, which would likely bolster the view that the central bank is done with rate hikes.
The euro is on a bullish trajectory following a week of losses, and much of the damage done by last Thursday’s Powell speech has been steadily recovered. ECB President Lagarde said on Friday that rates must stay restrictive for at least several quarters in order to bring inflation down to target levels. A sparse macroeconomic calendar leaves EUR/USD mainly at the mercy of US data this week, which has generally been to the benefit of the euro recently. Amongst the notable data, however, are flash GDP and ZEW economic sentiment tomorrow, as well as the EU economic forecasts. A raft of ECB speakers is also likely to provide some hawkish pushback, but the credibility of this rhetoric will simply be limited, with markets looking through current conditions towards rate cuts in 2024.
A buoyed US dollar has eased slightly this morning amid a pullback in Powell-induced gains and mounting concerns about the fiscal outlook. Fed Chair Powell’s familiar attempt to underscore the possibility of further hikes on Thursday night gave an initial lift to the greenback, but ultimately failed to persuade markets to hawkishly reprice the rates outlook. Moody’s downgrade to the US government’s credit outlook, meanwhile, was largely shrugged off, given that concerns about political polarisation and debt servicing costs are already firmly priced into US yields. The focus for the US this week is on tomorrow’s CPI data amid a wide range of macroeconomic releases that included PPI and retail sales on Wednesday, followed by unemployment claims and industrial production on Thursday.
European stocks started the week on a positive note, with the Stoxx 600 index rising by 0.5%. The market was influenced by gains on Wall Street on the previous Friday. Health stocks, particularly Novo Nordisk A/S, were among the top performers following positive results from a study supporting the use of its weight-loss drug, Wegovy, to reduce heart attacks and deaths in patients with a history of heart disease.
Main Economic Data/Central Banks/Government (All Times CET)
8:00 a.m.: Turkey Sept. Current Account
9:15 a.m.: ECB’s Guindos speaks
11:30 a.m.: Germany calls for bids on bills
12:00 p.m.: Portugal Oct. CPI
12:00 p.m.: Israel Oct. Trade
12:55 p.m.: BOE’s Breeden speaks
2:50 p.m.: France sells bills
5:05 p.m.: BOE’s Mann speaks
8:00 p.m.: US Oct. Monthly Budget Statement
UK’s Sunak gives annual foreign policy speech
20th Vienna Economic Forum
Markets are closed in Singapore and Malaysia
Earnings include Sun Life, British Land.