October 16, 2024

“UK inflation fell to below the 2% target in September, driving up expectations for Bank of England rate cuts. Faster-than-expected falls in inflation have become a theme across the UK, Europe, and Canada now, suggesting that most of the major central banks may soon be picking up the pace.”

Sam Cornford – Head of Trading

USD

The dollar continues to find support from more hawkish Fed expectations and a growing bias for a Trump win in the polls and betting markets. The implied probability of a November rate pause has more than halved over the past few days to 8%, but traders are now pricing in a one-in-four chance that rates are kept on hold in December. The notion of ‘one or two’ before the end of the year is something that the Fed’s Daly called ‘reasonable’ yesterday, while Bostic continues to float the idea of only cutting once more. After improved performances for Trump in the swing state polls this month, betting site Polymarket puts the probability of a win at nearly 59% now, although investors do not appear to be piling into the dollar just yet. Trump’s policies – tariffs, immigration controls, and tax cuts – are broadly expected to be inflationary, meaning higher US rates and a stronger dollar. Mortgage data is the only notable event in the US today, and the market will be eyeing tomorrow’s retail sales report for its next clues on the Fed’s rate path.

In Canada, inflation slumped to 1.6% yesterday and traders have upped the implied probability of a 50bp rate cut next week to 75%. The headline drop was driven primarily by falling fuel costs, which is something out of the Bank of Canada’s control, but the core inflation measures did mostly print below expectations.

GBP

A sharp fall in inflation has pushed sterling below the 1.30 mark for the first time since August, as the market doubles down on bets for further Bank of England rate cuts. The 1.7% headline figure is startling and the first time in the cycle that inflation has fallen below the 2% target, and more importantly services inflation – the BoE’s main concern nowadays – cooled much more quickly than expected from 5.6% to 4.9%. In the market’s eyes, that is enough to make a November rate cut an inevitability, and a December rate cut a high probability. It is not quite time for any ‘aggressive’ easing as per Bailey, given that 4.9% services inflation is still well above the pace compatible with a long-term achievement of a 2% headline, but there is a good chance that they can pick up the pace. That is the main event today, and the focus turns now to Friday’s retail sales print.

EUR

The eurozone data was surprisingly positive yesterday – but not enough to stem the euro’s decline. The German ZEW survey rose more than expected to 13.1, hinting at a possible bottoming out in weak investor confidence. Industrial production rose 1.8% in August, and the ECB’s bank lending survey hinted at a tentative recovery in lending. ECB pricing was unaffected, however, and markets are now wholly convinced of a 25bps rate cut in both tomorrow’s meeting and in December.

Markets

Tech and luxury stocks dragged down the major indexes yesterday. ASML, the Dutch producer chipmaking machines, beat revenue estimates in Q3 but showed weak bookings and sales forecasts for the next year, dampening sentiment around the chip industry. The tech-heavy Nasdaq fell 1.4%, while Europe’s Stoxx 50 fared worse, slipping by nearly 2% as luxury giant LVMH posted disappointing demand from China.

Main Economic Events (All Times CET)

8:00am: UK CPI Inflation
1:00pm: US Mortgage Applications

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