October 24, 2024

“Today’s PMI data will give us a fresh view on the growth outlooks in the US and Europe. With the ECB extra focused on avoiding a severe weakening in the economy, the eurozone figure will be critical in terms of the size of the next rate cut.”

Sam Cornford – Head of Trading

USD

The dollar index has now gained in 17 of the last 18 sessions as Fed cut expectations have been trimmed and dovish bets have built up elsewhere. While growth-concerned eurozone officials are suggesting that interest rates may quickly need to drop to below ‘neutral’ levels and the Bank of Canada is calling victory on inflation, strong US data has the market implying a 50% chance that the Fed may begin pausing at either the November or December meetings. The consensus is looking for more evidence of a healthy growth outlook from this afternoon’s PMI survey, with a slight cooling to 53.8 as the booming services sector continues to make up for contracting manufacturing activity. An indication that activity is even stronger than expected would fuel further bets on a slower Fed easing cycle, while a weak print could steer the market back towards a more aggressive rate cut path. Jobless claims are expected at 242K, but the uncertain hurricane impact should dull the market reaction.

The Bank of Canada cut rates by 50bps as expected yesterday as it called the end to the fight against inflation and hurries to squeeze out restrictive policy. Governor Macklem said that ‘an early return’ to the 2% target allowed them to take ‘a bigger step’ and that price pressures are all but back to normal, with the BoC now ‘equally concerned about inflation coming in higher or lower than expected’. The loonie briefly dropped to an 11-week low before recovering the kneejerk reaction.

GBP

Sterling is having a better day, rising by 0.3% early on and supported by a rise in gilt yields. It is not clear why markets are trimming their easing bets for the Bank of England this morning, particularly given Bailey’s comment yesterday that disinflation has come at a quicker pace than officials were expecting. The market is expecting the UK to retain its growth advantage versus the eurozone in this morning’s PMIs with a stable 52.5 print. The British economy is relatively unique these days in that both the services and manufacturing sectors are expanding – the US economy has not managed that in four months and Germany since mid-2022. Unlike the ECB, the UK’s steady growth outlook means that concerns about activity are not factoring heavily into the Bank of England’s decision making.

EUR

With weak growth fuelling expectations for faster easing at the ECB, today’s PMIs have become perhaps the most influential data point for the euro. Last week’s 25bp rate cut came largely on the back of a surprise return to contraction in last month’s surveys – the drop in headline inflation had already been well telegraphed – and the possibility of a 50bp move in December rests on the data heading into even weaker territory. So far this morning, a weak set of French numbers have been offset by a better-than-expected 48.4 print in Germany. Both economies remain in contraction, however, and markets are sticking with their 50/50 call on a jumbo rate cut in a few months’ time. Policymaker commentary has skewed ever more dovish this week, with Reuters sources suggesting that debates have already begun at the ECB about cutting rates below neutral and into territory that begins to restimulate the economy.

Markets

Election nerves and rising US yields weighed on equities yesterday and the Nasdaq suffered its worst drop in almost two months, dragged down 1.6% by big tech stocks. The S&P 500 fell almost 1%, while the FTSE 100 and the Euro Stoxx 50 contracted by 0.6% and 0.3% respectively.

Main Economic Events (All Times CET)

10:00am: Eurozone PMIs
10:30am: UK PMIs
2:30pm: US Jobless Claims
3:00pm: BoE’s Mann speaks
3:45pm: US PMIs
9:45pm: BoE Governor Bailey speaks

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