October 25, 2024

“The dollar shed some gains for only the second session this month yesterday as risk appetite received a boost from softening yields. The focus is now squarely on politics, with the pound gearing up for a budget announcement next week and rising odds on a Trump election win adding to the dollar’s strength.”

Tim Hallinan – Trading Director

USD

The dollar reversed course and handed back some gains yesterday, in what looks to be a momentary blip as we head towards the election. Jobless claims came in lower than expected at 227K and continue to show few signs of runaway job losses just yet, even as the recent hurricanes still warp the result. Meanwhile, the PMIs pointed to a further acceleration in economic activity this month, with the composite index unexpectedly rising from 54.0 to 54.3 and maintaining support for the US economic exceptionalism narrative. Today’s data is not particularly punchy, but a durable goods report is forecasted to print weak, and a consumer sentiment survey is set to come in relatively steady. Most of the talk this week has been centred around the climb in Treasury yields on the back of the recently strong US labour market and activity data, which market commentary has at least partially attributed to a rising term premium as bond investors hedge against a rapid rise in borrowing under Trump (and Harris, to a lesser extent).

GBP

UK gilt yields outperformed yesterday, as Reeves’ media round promised an adjustment to the fiscal debt rules that would increase investment. Some have suggested that this will free up an extra £50bn in headroom in next week’s budget. Day-to-day spending is set fully matched by tax revenues, with the likes of employer’s NI, inheritance, and capital gains tax all options being considered, while capital spending and infrastructure investment projects will be propped up by increased gilt issuance. The loss of momentum in yesterday’s PMI figures illustrated the grip that this budget has on the British economy right now, with the enormous uncertainty around fiscal policy, US politics, and the Middle East delaying spending decisions and depressing confidence. Meanwhile, Governor Bailey once again disappointed and touched little on monetary policy, while his colleague Catherine Mann was very predictably hawkish in her warnings that services inflation still has some way to go.

EUR

The ECB’s hawks are increasingly transforming into doves. Two of the most cautious policymakers on the Governing Council – Nagel and Holzmann – both left a 50bp move in December on the table. The two contractionary PMI reports appear to have fundamentally upended the economic assumptions underpinning caution on easing rates. Policymakers had repeatedly flagged an expectation that rising real wages would fuel consumption growth and keep inflation sticky – a scenario that simply has not materialised and in which officials have now lost confidence. Now, the fear for some is that policy has been too restrictive for too long and that rates may even need to fall to below a ‘neutral’ level and become stimulative for growth. We are light on the ground in terms of data today, but there is a German business climate report that markets are expecting inch modestly higher.

Markets

Risk appetite rose along with global stocks as markets retraced some of this week’s yield spike. Tesla was the star outperformer, jumping 20% on an earnings beat and Musk’s forecasts for strong sales growth next year.

Main Economic Events (All Times CET)

1:30am: Tokyo CPI
10:00am: German ifo Business Climate
2:30pm: US Durable Goods Orders
2:30pm: Canadian Retail Sales
4:00pm: US UoM Consumer Sentiment

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