October 19, 2023

“Rising US bond yields, downbeat earnings, and Middle East tensions are providing a strong level of support for the US dollar and safe haven assets like gold this morning. Sterling and the euro are holding up relatively well, however, as we look to a key speech from Federal Reserve Chair Powell this afternoon.”

Sam Cornford – Head of Trading

Main Headlines

An Alaska state agency has filed a lawsuit against the Biden administration over its decision to cancel oil and gas leases in the state’s North Slope. The lawsuit, filed in federal court in Washington, D.C., challenges the US Interior Department’s September 6 decision to revoke seven oil and gas leases in Alaska’s Arctic National Wildlife Refuge. This area is known for its pristine federal land, wildlife, and vulnerability to climate change, making it a subject of significant environmental debate.

The Resolution Foundation has suggested that a future British government should consider raising the Bank of England’s inflation target from 2% to 3%. This adjustment could provide the central bank with more flexibility during economic downturns and potentially ease the strain on public finances. By raising the inflation target, it would allow the Bank of England to have higher nominal interest rates, providing more room to cut rates in response to economic crises. This, in combination with a willingness to lower rates to negative levels, could offer greater monetary stimulus during a crisis, potentially reducing the need for government borrowing and central bank bond-buying.

GBP

Sterling exited the session lower against the dollar yesterday despite an initial boost from consensus-beating inflation data. The data beat failed to substantially change the narrative for the Bank of England, and the move upwards was overshadowed in the afternoon by risk averse flows induced by rising US Treasury yields and concerns about an escalation in the Middle East. The macroeconomic calendar is particularly light for sterling today, but the raft of US-led events is likely to maintain significant volatility in the GBP/USD pair. Early tomorrow morning, however, we can expect a broadly stable GfK Consumer Confidence survey, contracting British retail sales, and expanding public sector borrowing.

EUR

A China-related spike defended the euro from significant losses to the dollar yesterday, as the common currency stands relatively firm despite further growth divergence to the US. Final revisions left eurozone CPI unchanged at 4.3% in September, far lower than the 6.7% print in the UK, and set the stage for an ECB rate pause next Thursday. The eurozone data diary is particularly sparse today, with German PPI inflation tomorrow morning the only key data point before the end of the week, although the current account release this morning may hold some useful information.

USD

The dollar is holding firm this morning, buoyed by fresh Treasury yield highs and a general risk averse atmosphere that has taken hold in financial markets. A growing fiscal risk premium as a result of shutdown concerns and paralysis in congress, combined with a string of robust economic surprises recently in payrolls, CPI, and consumer spending releases, has pushed 10-year yields up to 4.95% for the first time since 2007, brushing off recent dovish commentary from Federal Reserve officials. It is interesting to note, however, that the dollar has not been able to achieve its highs from early October this time around. Nevertheless, an over 500bps 2-year yield advantage to the yen provides strong rationale as to why USD/JPY is nearing the 150 mark again, where many traders fear Japanese government intervention. Unemployment claims kick off the US diary this afternoon, before Chair Jerome Powell speaks later on for the last time ahead of the pre-meeting blackout. Markets are keen to gauge Powell’s stance on the rates and economic outlook, with analysts divided on whether he will mirror the more dovish tilt or if he will return the rhetoric to the higher-for-longer path – either way, near-term bond and FX market direction is likely to be steered heavily by his language.

Markets

Global financial markets were impacted by rising Treasury yields and weak earnings reports, driving a decline in equity valuations. The European Stoxx 600 Index dropped by 0.8%. Nokia’s stock fell after the company missed earnings estimates and announced plans to cut up to 14,000 jobs. Nestle SA shares also slumped after the company reported its slowest sales growth in almost three years. In the United States, equity futures stabilised after the S&P 500 experienced a 1.3% decline on Wednesday. Additionally, Asian stock markets saw a decline of more than 1%.

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

8:45 a.m.: France Oct. Manufacturing Confidence
10:00 a.m.: Poland PPI
10:00 a.m.: ECB’s Valimaki speaks
12:00 p.m.: ECB’s Visco speaks
1:00 p.m.: Riksbank’s Breman speaks
2:30 p.m.: US Initial Jobless Claims
3:00 p.m..: Fed’s Jefferson speaks
4:00 p.m.: US Sept. Existing Home Sales
6:00 p.m.: Fed’s Powell speaks
7:20 p.m.: Fed’s Goolsbee speaks
7:30 p.m.: Fed’s Barr speaks

Corporate Events

Earnings include Blackstone, AT&T, Union Pacific

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