Morning Report

October 25, 2023

“PMI day threw up some surprises yesterday but, overall, reconfirmed the big picture that has shaped the currency markets since the early summer: US economic resilience driving a growth advantage versus a stagnating European economy. This narrative is set for a further test on Thursday with the US Q3 GDP print.”

Tim Hallinan – Trading Director


Main Headlines

In a letter at an annual dinner of the National Committee on United States-China Relations in New York, Chinese President Xi Jinping expressed China’s willingness to cooperate with the United States and manage their differences while working together to address global challenges. He emphasised the importance of establishing the right way of getting along between the two countries, which he sees as crucial for the world.

On Tuesday, Britain decided to scrap a decade-old cap on banker bonuses that it had inherited from the EU. This move signals a clear divergence in post-Brexit financial rules between the UK and the EU. The bonus cap was introduced by the EU in 2014 to prevent excessive risk-taking and behaviour that contributed to the 2008 global financial crisis. Most bankers affected by the cap are based in London, and the Bank of England has argued that the cap has led to higher fixed salaries as a way to circumvent it.


Sterling has stabilised this morning after a sharp PMI-led decline yesterday. Private sector economic activity remained in a stable and modest decline this month, with the services PMI falling slightly to 49.2 from 49.4 in September. According to the report, this signifies an approximate 0.1% quarterly decline in GDP, indicating that a mild technical recession is well within the realms of possibility – this will further bolster the case for a Bank of England rate pause when the Monetary Policy Committee convenes next week. A material growth advantage to the eurozone is beginning to appear in the PMI surveys, which initially gave a lift to GBP/EUR yesterday, although the gains were quickly erased in the afternoon. With the UK macroeconomic calendar relatively bare for the rest of the week, investors will continue to digest the economic picture painted by the most recent data releases ahead of next Thursday’s policy decision.


The euro is trading flat against most major currencies this morning, after yesterday’s underperforming business activity wiped out gains driven by falling Treasury yields on Monday. The composite PMI measure fell to a 35-month low and, excluding pandemic months, signalled the steepest decline in activity since 2013. The eurozone economic growth outlook appears to be going from bad to worse, although, with euro weakness seemingly limited at the moment, a sharper recession would likely be required to push towards parity through the growth channel. The ECB Bank Lending Survey indicated that higher borrowing costs and weakening growth have seen bank credit standards tighten in Q3, with more tightening expected in 2024, suggesting that the ECB’s rate hikes translating into a substantial impact on the real economy. On the diary this morning, the German business climate slightly improved on the previous month, and private loans grew less than expected.


On the other side of the Atlantic, consensus-beating private sector activity further widened the US growth advantage yesterday, trimming most of the losses associated with a downturn in bond yields earlier in the week. The US figures starkly contrasted with those in Europe, where a reacceleration tipped the flash PMIs into marginal expansion from a stagnant outlook in September. The PMIs have actually been among the most pessimistic economic indicators for the US recently, but this positive print provides further support to the US economic resilience narrative and soft-landing hopes that have underpinned the higher-for-longer view and dollar strength. Today, investors can expect new home sales and crude inventories data ahead of the advance Q3 GDP read tomorrow, which is now expected at 4.5% annualised.


Nasdaq 100 Index futures declined as tech giants Microsoft Corp. and Alphabet Inc. reported mixed earnings results. Oil prices fell for the fourth consecutive day amid diplomatic efforts to stabilise the situation in the Middle East. Nasdaq futures dropped 0.7%, and European stock benchmarks also showed weakness. Meanwhile, Treasuries and the U.S. dollar remained relatively stable, and Bitcoin traded above $34,000. In Asia, stocks rose after the Chinese government increased support for its economy and stock trading, with the Hang Seng Tech Index gaining 2.2%.

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

8:00 a.m.: Sweden Sept. PPI
10:00 a.m.: Germany Oct. IFO Business Climate, Expectations
1:00 p.m.: US MBA Mortgage Applications
1:30 p.m.: Riksbank’s Jansson speaks
4:00 p.m.: US Sept. New Home Sales

Corporate Events

Earnings include Meta, IBM, Boeing, T-Mobile


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