October 10, 2023

“Some dovish remarks from US Federal Reserve officials yesterday have boosted expectations that a rate pause will come in the November meeting. The CPI inflation figure on Thursday will be crucial, but markets will now look to observe the large selection of central bank speakers this week more closely.”

Tim Hallinan – Trading Director

Main Headlines

Recent data from the Federal Reserve indicates that the richest Americans have seen their share of wealth and income increase during and after the pandemic, despite expectations that the tight job market and significant wage gains during the pandemic might narrow the wealth gap. According to the data, the top 1% of households by income held approximately 26.5% of household net worth at the end of June. This marks an increase of about 1.5 percentage points since 2019, which was the year before the pandemic led to economic fluctuations, massive government stimulus programs, and high inflation.

In Liverpool, Rachel Reeves, Labour’s Shadow Chancellor, pledged on Monday to “rebuild Britain” if the party comes to power. She emphasised a commitment to implement “iron-clad” fiscal rules, address fraud, and collaborate with businesses. Reeves accused Prime Minister Rishi Sunak’s party of lacking new ideas. She argued that Labour’s approach, which involves strict spending control, improved tax collection by closing loopholes, and a crackdown on fraud, would provide the stability that voters have been missing during the ongoing cost-of-living crisis.

GBP

Sterling has exhibited some weakness this morning after it gained following dovish Fed remarks last night. British Retail Consortium (BRC) retail sales grew a less-than-expected 2.8% compared to this time last year, in its second weakest month so far this year, as financially squeezed consumers cut back on large purchases and delayed winter clothing purchases amid unseasonably warm weather. This week is very much centred around GDP on Thursday – the only notable release on the UK macro calendar today is the BoE’s Financial Policy Committee’s statement on the stability of the financial system, whose commentary about the economic outlook can impact future rate decisions.

EUR

The euro enjoyed some reprieve yesterday on the back of a dollar easing, despite further concerns of a euro area recession triggered by a disappointing German industrial production read yesterday. Italian industrial output follows this morning and is expected to demonstrate a similar contraction, and then ECB President Lagarde is expected to participate in a panel discussion at the IMF meeting in Morocco today. After a dovish tilt by some Fed speakers yesterday, markets will be keen to observe how she reacts and whether she is in agreement at all with comments from across the Atlantic.

USD

The dollar has steadied this morning after dovish remarks from several Fed speakers yesterday dialled down rate expectations and settled investors’ nerves. Officials generally seemed to agree that the tightening of financial conditions through the current rally in longer tenor Treasury yields is diminishing the need to raise the Federal funds rate. A widely observed rise in the term premium – the extra return bondholders require to compensate for holding longer-term bonds – means that the effect of each setting of the US interest rate is essentially amplified, according to Dallas Fed President Logan. In response, 10-year yields fell as much as 18bps in a sharp selloff this morning. Markets price in only a 12% chance that the Fed hikes in November, but the CPI print on Thursday will be the crucial determinant here. The NFIB Small Business Index is due to report on economic conditions this morning, before further Fed speakers talk later this afternoon.

Markets

European shares saw a rally following dovish comments from Federal Reserve officials, which helped boost risk appetite in global markets, as investors continue to monitor the potential impact of the Israel-Hamas conflict. Meanwhile, Treasuries experienced a jump, making up for Monday’s government bond rally when US cash trading was closed. The yield on the two-year Treasury recorded its most significant drop since the end of August, while the benchmark 10-year Treasury had its best day since March. US equity futures also edged higher in response to these developments.

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

8:00 a.m.: Norway Sept. CPI
8:30 a.m.: Hungary Sept. CPI
9:00 a.m.: Czech Sept. CPI
9:00 a.m.: Turkey Aug. Industrial Production
10:00 a.m.: Italy Aug. Industrial Production
11:00 a.m.: UK sells linkers
11:00 a.m.: Switzerland sells bills
11:00 a.m.: Greece Sept. CPI, Aug. Industrial Production
11:30 a.m.: BOE releases meeting minutes
11:30 a.m.: Germany sells linkers
12:00 p.m.: US Sept. NFIB Small Business Optimism
3:30 p.m.: Fed’s Bostic speaks
4:00 p.m.: US Aug. Wholesale Inventories
5:15 p.m.: ECB’s Villeroy speaks
7:00 p.m.: Fed’s Waller speaks
IMF issues World Economic Outlook

Corporate Events

Earnings include PepsiCo, YouGov
LVMH sales

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