November 16, 2023

“The dollar is clawing back some of the gains it handed over after the CPI report on Tuesday, as the inherent uncertainty in markets about the future policy direction of central banks continues to spark volatility. Investors will hope for further clarity from US jobless claims and industrial output today, as well as UK retail sales tomorrow.”

Sam Cornford – Head of Trading

Main Headlines

President Joe Biden and China’s Xi Jinping held a four-hour meeting on Wednesday, covering a range of topics from military conflicts to drug trafficking. The meeting took place at the Filoli estate, a country house and gardens near San Francisco, ahead of the Asia-Pacific Economic Cooperation (APEC) forum summit. Beijing announced that the leaders agreed to re-establish military contacts, which China had severed following a visit to Taiwan by then-House of Representatives Speaker Nancy Pelosi in August 2022. Additionally, they agreed to high-level presidential communications and discussed cooperation on artificial intelligence and Iran.

British Chancellor Jeremy Hunt is expected to shift focus towards boosting growth in preparation for an anticipated 2024 election, following a significant drop in inflation. The drop in annual inflation from 6.7% to 4.6% in October allows Hunt to claim victory on one of Prime Minister Rishi Sunak’s key policy goals. In his budget update on November 22, Hunt is likely to propose tax reductions for both voters and businesses, offering relief to Conservative lawmakers concerned about the Labour Party’s lead in opinion polls. The decrease in inflation puts Sunak on course to fulfil his commitment to halve inflation over 2023.

GBP

Sterling has handed back much of its stellar gains won against the dollar on Tuesday alongside a parallel weakening against the euro in response to a dovish repricing the Bank of England’s policy path. The British CPI report yesterday morning failed to garner an immediate market reaction, but the pound inched slowly lower throughout the day as derivatives markets brought forward the first full 25bps rate cut to June 2024. Local price action will be limited to a speech from MPC member Ramsden this afternoon, with sights therefore set on retail sales first thing tomorrow morning. Last month’s print saw a disappointing -0.9% contraction associated with low winter clothing sales amid mild weather, but a consumer rebound is expected with 0.5% growth in October.

EUR

The euro has been able to consolidate gains this week and move into higher trading ranges, as a gap in the stream of pessimistic data has left investors to bid up the currency unchallenged amid a faltering dollar and sterling. In yesterday’s only release of note, industrial output fell about as much as forecast in October at -1.1%. The macro calendar remains relatively sparse until next week’s PMIs, although we have a couple of speeches from Lagarde and de Guindos at the ECB this afternoon, who may give some clues towards the timing of rate cuts next year.

USD

The dollar continues to recoup some of its large CPI-induced losses from Tuesday afternoon. Investors have spent the sessions since the lower-than-expected inflation print digesting its uncertain implications for the end of rate hikes and the timing of cuts. A mixed bag of PPI and retail sales data yesterday failed to add much clarity but was generally USD-supportive, as a -0.5% monthly contraction in producer prices was overshadowed by stable consumer spending that faltered much less than expected in October. Corrective moves to bond yields mean that a March cut is now pencilled in at a 1-in-4 probability as opposed to 1-in-3 before the data, with 90bps of cuts baked into 2024. This afternoon, unemployment claims are forecast to remain stable, whilst industrial output is expected to have fallen by -0.4% versus a 0.3% expansion the month before. Investors will likely look for further confirmation of a downwards turn in the US economic data to continue a dollar selloff.

Markets

The stock market rally hit a pause as the initial excitement over the possibility of a more accommodative stance by central banks diminished. Investor focus shifted towards the latest corporate earnings and deals news. In Europe, the Stoxx 600 Index stabilised after three consecutive days of gains. Burberry Group Plc saw a 6.7% decline as it cautioned that reaching this year’s revenue target might be challenging. HelloFresh SE experienced an 18% drop after surprising investors with a profit warning.

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

10:30 a.m.: ECB’s Centeno speaks
10:30 a.m.: Spain sells bonds
10:50 a.m.: France sells bonds
12:00 p.m.: Israel 3Q GDP
12:30 p.m.: ECB’s Lagarde speaks
12:45 p.m.: ECB’s Knot speaks
1:10 p.m.: Fed’s Barr speaks
1:10 p.m.: ECB’s De Cos speaks
2:30 p.m.: US Oct. Import Prices; Jobless Claims
2:30 p.m.: Fed’s Mester speaks (and at 5:45 p.m.)
3:15 p.m.: US Oct. Industrial Production
3:15 p.m.: ECB’s Guindos speaks
3:25 p.m.: Fed’s Williams speaks
4:45 p.m.: BOE’s Ramsden speaks
6:00 p.m.: Fed’s Cook speaks

Corporate Events

Earnings include Walmart, Macy’s, Bath & Body Works

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