October 08, 2024

“The dollar is holding on to its gains from Friday’s blockbuster non-farm payrolls report, and investors are no longer completely sure about even a 25bp rate cut in November, having preferred a second 50bp move only last week. Thursday’s CPI report will give the market its next nudge.”

Sam Cornford – Head of Trading

USD

Yesterday was a day of post-payrolls consolidation for the dollar as markets continued to trim their bets on further easing for the Federal Reserve. The OIS curve has fully switched to 25bp moves for at least the next four meetings, after which it is looking more like a once-per-quarter cadence. Interestingly some are betting on the Fed putting its cutting cycle on pause already, with the implied probability of no move at all next month creeping up to 20%. The net effect was a return of the US 10-year yield to 4% for the first time since early August, and a jump in the implied Fed’s long-term terminal rate to around 3.3%. The NFIB small business index is today’s main event where, as usual, it’s the hiring plans subindex that is watched for its predictive power for non-farm payrolls.

GBP

Sterling continues to grind lower after being struck by the double whammy of Bailey’s dovish comments and the blowout US payrolls report last week. There is little opportunity for the pound to reverse this momentum in the near term, unless there is a strong growth surprise in Friday’s GDP report. The heavy-hitting data starts to roll in next week with the final wage growth and CPI reports ahead of a widely anticipated rate decision in a month’s time.

EUR

As the market looks ahead to a likely rate cut next week, the data flow has been modestly better than expected so far. Monthly growth in retail sales in August printed at 0.2% as expected, Sentix investor confidence became slightly less pessimistic at -13.8, and German industrial production this morning bounced back with a 2.9% expansion. ECB speakers continue to hit the wires, with well-known hawk Holzmann keen to warn that, while headline inflation is below target, ‘things don’t look so good’ for core inflation. The overarching theme from policymakers continue to skew heavily towards a rate cut next week, which Centeno is likely to concur with when he speaks later this morning.

In Sweden, CPIF inflation fell from 1.2% to 1.1% as expected and cemented a likely 50bp rate cut before the end of the year. Riksbank policy has evidently been overly restrictive, and the market is looking for it to return to a neutral level relatively quickly now.

Markets

The pricing out of a frontloaded Fed easing cycle took the S&P 500 and the Nasdaq 1% lower yesterday, while the major European indexes managed to eke out some marginal gains. The big moves overnight were in China after the conclusion of the Golden Week holiday, with the CSI 300 surging 11% at the open before paring back its gains to only 2% as the Chinese authorities failed to deliver any further concrete stimulus measures at a press conference.

Main Economic Events (All Times CET)

8:00am: German Industrial Production m/m
8:00am: Swedish CPIF Inflation
9:00am: Fed’s Kugler speaks
12:00pm: US NFIB Small Business Index
6:45pm: Fed’s Bostic speaks

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