November 23, 2023

“The PMIs are set to maintain elevated currency market volatility today despite market holidays in the US and Japan. These indicators of economic activity have battered the euro at times this year and will pose a huge test to this month’s rally in sterling and the euro.”

Tim Hallinan – Trading Director

Main Headlines

Oil prices declined by more than 1% on Thursday, extending losses from the previous session. The drop followed a surprising move by OPEC+ (Organisation of the Petroleum Exporting Countries and allies, including Russia), which postponed a ministerial meeting to November 30. The delay sparked speculation that producers might implement smaller output cuts than initially anticipated. This uncertainty over OPEC+ supply decisions coincided with data indicating a significant increase in US crude stocks by 8.7 million barrels last week, well beyond the expected 1.16 million build forecasted by analysts.

British Chancellor Jeremy Hunt received applause from Conservatives in parliament on Wednesday when he announced plans to reduce national insurance contributions for employees by a larger-than-expected two percentage points, along with a smaller cut for self-employed workers. In addition to making permanent the earlier incentives for business investment, Hunt’s tax cuts package is estimated to be worth around £20 billion per year by the 2028/29 tax year. According to the Resolution Foundation think tank, this marks the largest giveaway package in Britain since 1988, excluding the substantial tax cut proposals last year by former Prime Minister Liz Truss, which faced challenges in the bond market and were swiftly abandoned.

GBP

Sterling has recovered much of the losses taken against the dollar yesterday afternoon. Yesterday’s Autumn Statement should be generally positive for sterling, with the prospects of tax cuts and stickier inflation likely to please markets, although the initial reaction was fairly muted given that much of its contents was leaked well ahead of the announcement. The pound is set for a jolt this morning with the flash manufacturing and services PMIs, both of which are expected to remain stable as the slowdown in economic growth bottoms out in a state of stagnation. Estimates for growth by JP Morgan and Goldman Sachs support this view, with both being revised up to 0.4% and 0.7% respectively for 2024 this week following Hunt’s tax cuts. The purchasing manager surveys are one of the most closely watched and timely economic indicators and tend to be very good leading predictors of GDP.

EUR

The euro faces the biggest challenge to its November rally yet this morning with a string of euro area PMIs. At the time of writing, the French PMI disappointed slightly on the composite index at 44.5 versus a 45.0 expectation (anything below 50.0 indicates a contraction in economic activity). An impressive beat on the German print – now at 47.1, compared to 45.9 in October – has lifted the common currency, however, in welcome news for euro investors that will ease worries about Germany’s drag on eurozone growth. The consolidated euro area figure is expected to show a modest rebound as economic pessimism bottoms out, potentially relieving concerns about a deep recession that will force rate cuts. This afternoon, the ECB publishes its Monetary Policy Meeting accounts, which will give further insight into the thought processes of central bankers during the previous decision to hold rates at 4.00%. Elsewhere in Europe, Sweden’s Riksbank held their policy rate at 4.0% despite an economist leaning towards a 25bps hike amid elevated inflation, triggering a rapid initial loss for SEK.

USD

The dollar was unable to hold on to gains made by a mixed bag of economic indicators yesterday afternoon. An initial climb was triggered by a still robust unemployment claims figure of 209k, which fell significantly from last week’s 233k. A further boost was provided by improving consumer sentiment, as illustrated by a University of Michigan survey. These contrasted, however, with a worse-than-expected 5.4% decline in manufactured goods orders in October in a stark signal of a slowing US economy. Further clarity on the state of US economic growth will come in its PMIs, but investors must wait until tomorrow afternoon due to a Thanksgiving delay that is likely to thin dollar trading today amid a lack of data.

Markets

Trading is thin today owing to holidays in the US and Japan. European equity futures were flat while shares in Hong Kong and China advanced. Chinese developers rallied on signs of more government support. In the US, market cheer about peak rates and a dialled down expectation for future interest rates has seen the S&P 500 climb 8% this month alone.

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

9:15am.: French flash PMIs
9:30am.: German flash PMIs
10:00am.: Eurozone flash PMIs
10:30am.: UK flash PMIs
12:30pm.: ECB Monetary Policy Meeting Accounts
10:45pm.: New Zealand retail sales

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