Morning Report

October 04, 2023

“Another upside surprise in the US labour market data sent the dollar surging again yesterday, but a sharp USD/JPY selloff soon after has sparked speculation that Japanese officials may have intervened in the FX markets. The substantial volatility that we have observed recently has shown no sign of slowing, and we will be watching a raft of PMIs and labour data out of Europe and the US today.”

Tim Hallinan – Trading Director


Main Headlines

A group of Republicans in the US House of Representatives voted on Tuesday to remove Republican Speaker Kevin McCarthy from his position, creating further turmoil in Congress just days after narrowly avoiding a government shutdown. The vote, with a tally of 216 to 210, marked the first instance in history where the House removed its speaker. 8 Republicans joined 208 Democrats in voting to remove McCarthy. Until a new House speaker is chosen, it’s unlikely that further progress will be made on bills to fund the government. Lawmakers are facing a deadline of November 17 to provide additional funding or risk a partial government shutdown.

British Chancellor Jeremy Hunt stated on Tuesday that he would like to reduce taxes in the lead-up to an expected national election next year, but added that implementing a tax cut at the current moment would contribute to inflation. Hunt also mentioned that even if the government achieves its target of halving inflation this year, it would not be possible to implement tax reductions at a fiscal event scheduled for November. “Obviously, in the run-up to an election, I would love to do a tax cut that ordinary people felt,” Hunt told a gathering at the annual conference of the Conservative Party in Manchester.


Sterling is trading flat this morning as it steadies following significant losses on Monday. The UK final services PMI figure is released this morning, after the preliminary figure for September saw the private sector tip over into contractionary territory for the first time since February. Sterling investors will hope for an upwards revision to bolster optimism towards the UK avoiding recession amid high borrowing costs. A Rishi Sunak speech at the Conservative Party Conference today is a potential market mover, as analysts watch closely for indications of fiscal policy and for a decision on the HS2 northern leg, which is widely expected to be scrapped. A sign that the UK government is unwilling to invest in infrastructure may cause some sterling weakness, and there is an outward chance that another policy curveball could cause some swings as Sunak attempts to bring voters on his side ahead of a general election next year.


The euro has rebounded slightly this morning as a string of final services PMIs were revised upwards across the euro area to show a slight improvement on the contractionary consolidated figure. On today’s calendar, we can also expect PPI inflation and retail sales, followed by a speech by ECB President Lagarde late in the afternoon. Furthermore, important to note is the OPEC+ meetings of oil-rich nations throughout the day, as they are set to discuss energy market issues and the amount of oil they are set to produce. 90% of EU oil products are imported, and high prices are weakening euro area terms of trade – further indications of tight supply and rising costs could spark further euro weakness.


The dollar remains firm today and financial market headlines continue to be dominated by the US longer-tenor bond selloff. The 10-year Treasury yield hit fresh highs at 4.85% last night, and the 30-year yield has hit 5%, as markets continue to price in a multi-year period of elevated Federal Reserve rates. This was intensified yesterday by yet another positive surprise – this time job openings, an indicator of labour demand, rose 5% higher to 9.61m, according to the JOLTS survey. Confusion ensued, however, when a resulting boost for USD/JPY above 150 was met with a sharp selloff and, briefly, a 2% strengthening in the Japanese yen with all the hallmarks of FX market intervention. Japanese officials have remained coy about the movement, declining to confirm if they had stepped in. The potential for USD volatility remains high today, as we await ADP non-farm payrolls, the ISM services PMI, factory orders, and crude oil inventories.


An accelerating selloff in US government bonds is having a widespread impact on financial markets. This trend is causing borrowing costs to rise, putting pressure on currencies, and pushing stocks closer to a technical correction. In Asia, an equity benchmark has fallen for a third consecutive day, resulting in a decline of just over 10% since its high in July. Meanwhile, Treasuries have continued to experience losses in Asian trading, with yields on 10- and 30-year notes approaching the 5% mark. In Europe, equity contracts and US stock futures have both declined following the S&P 500’s drop to a four-month low on Tuesday.

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

8:00 a.m.: Russia Sept. S&P Global Composite, Services PMIs
8:30 a.m.: Sweden Sept. Swedbank/Silf Services PMI
9:15 a.m.: Spain Sept. HCOB Composite, Services PMIs
9:45 a.m.: Italy Sept. HCOB Composite, Services PMIs
9:50 a.m.: France Sept. HCOB Composite, Services PMIs
10:00 a.m.: Euro-area Sept. HCOB Composite, Services PMIs
10:00 a.m.: ECB’s Lagarde speaks
10:30 a.m.: UK Sept. S&P Global/CIPS Services, Composite PMIs
10:30 a.m.: Iceland Monetary Policy
11:00 a.m.: Euro-area Aug. Retail Sales
12:00 p.m.: ECB’s Centeno presents Bank of Portugal’s Economic Bulletin
1:40 p.m.: ECB’s Guindos speaks
2:15 p.m.: US ADP Employment Change
3:45 p.m.: US S&P Global US Composite, Services PMI
4:00 p.m.: US Factory Orders, Durable Goods Orders
4:00 p.m.: ECB’s Panetta to Chair Panel
6:00 p.m.: Russia 2Q GDP
Poland Base Rate Announcement


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