October 24, 2023

“Volatile bond markets translated into volatile currency markets yesterday in the absence of any market-moving macroeconomic data, triggering a stark downwards correction to the dollar. Investors have little time to digest these movements further, however, as the focus turns to the relative growth outlooks between the US and Europe in a raft of PMI releases today.”

Sam Cornford – Head of Trading

Main Headlines

The Republican search for a new US House leader has returned to square one as the process remains deadlocked after three weeks. The party is striving to reach a consensus on selecting a new speaker who can address US funding needs. Republicans are set to meet again on Tuesday to commence the process of choosing their nominee in closed-door sessions with secret ballots. Given the narrow majority of 221-212 in the House, it’s unclear whether any Republican candidate can secure the votes needed to become the next speaker.

Officials from the UK Treasury and the European Commission held their first official forum on finance since Brexit. This inaugural meeting of the regulatory cooperation forum, which had been long-delayed, took place in London and resembles a structure the European Union has had with the United States for discussing regulatory matters. During the meeting, the two parties discussed geopolitical risks and the vulnerabilities of non-bank financial firms. While they referred to the ‘current challenging geopolitical situation,’ no further details were provided. Both sides also noted that their respective financial sectors remain resilient.

GBP

Sterling continues to eke out gains this morning after plunging Treasury yields narrowed the US interest rate advantage and propelled the pound 0.7% higher yesterday afternoon. Gains have been dampened, however, owing to the spillover of disappointing euro area PMIs. On the UK side, the unemployment claimant count increased by a consensus-beating 20.4k, whilst the unemployment rate declined from 4.3% to 4.2%. Little price action was generated on the back of this data however, especially given that the rate is a delayed and experimental estimate rather than derived from its usual labour market survey, which has been hampered by low response rates. Coming up this morning, the flash PMIs will follow the eurozone figures, where a further downturn for the UK economy could erase the final 10bps of policy tightening that remains in futures pricing.

EUR

The parallel euro rally sparked by Treasury moves yesterday has eased in this morning’s trade as eurozone economic activity disappointed on economist estimates.  An initial spike driven by an uptick in the French composite index was overshadowed by downturns in the German and eurozone measures, with all hovering distinctly in contractionary territory. Growth differentials are a key driver in the EUR/USD pair, and a string of PMI disappointments has cultivated much of the euro’s weakness in recent months. The direction of the equivalent US print will therefore guide the common currency’s direction this afternoon. ECB President Lagarde also speaks later today.

USD

Volatile swings in the US sovereign bond markets triggered a sharp decline in the US dollar against its major peers yesterday, as it fell for its fourth day. The benchmark 10-year yield briefly rose above the psychologically important 5.0% level, before plummeting in a peak-to-trough fall of 20bps, seemingly as a result of a series of tweets by prominent bond investors including Bill Ackman and Bill Gross, whose concerns about global risk and a weakening US economy have led them to cover their positions that expected yields to rise. It was fitting that this occurred on the day where the Fed’s Financial Stability Report explicitly noted the stark issue of instability in the Treasury markets, which has been driven by a lack of clarity about economic prospects or policymaker guidance. The PMIs this afternoon are the key data point in the US economic calendar, in which tightened financial conditions are expected to tick services activity into contraction from the relative stagnation indicated in last month’s release. The Richmond Manufacturing Index then follows.

Markets

Global financial markets are showing mixed performance, with European stocks and US equity futures edging higher. Oil prices have eked out gains, and investors are closely monitoring developments in the Middle East. The Stoxx 600 index in Europe has seen a 0.2% increase, and US equity futures are up by 0.5%. Earnings reports are expected later from major companies like Microsoft and Alphabet Inc. Additionally, Bitcoin has surpassed the $35,000 mark, and the US dollar is showing weakness for the fourth consecutive day.

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

8:00 a.m.: UK Jobless Claims; ILO Unemployment Rate
8:00 a.m.: Germany Nov. GfK Consumer Confidence
9:15 a.m.: France Oct. Manufacturing, Services PMI
9:30 a.m.: Germany Oct. Manufacturing, Services PMI
10:00 a.m.: Euro-area Bank Lending Survey
10:00 a.m.: HCOB Euro-area Oct. Manufacturing, Services PMI
10:30 a.m.: UK Oct. Manufacturing, Services PMI
2:00 p.m.: Hungary Central Bank Rate Decision
3:45 p.m.: US Oct. Manufacturing, Services PMI
4:00 p.m.: US Oct. Richmond Fed Business Conditions Index
UN Security Council expected to open debate on the Middle East

Corporate Events

Earnings include Microsoft, Alphabet, Coca Cola, GM

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