Morning Report

October 27, 2023

“The FX markets have been at the mercy of US economic growth and interest rate dynamics this week. A stellar US Q3 GDP print came in at 4.9% yesterday, following positive PMIs earlier on in the week, as US economic optimism reaches new highs. Gains have been trimmed, however, by slowing underlying inflation that further confirms an end to monetary tightening.”

Tim Hallinan – Trading Director


Main Headlines

Republicans in the US House of Representatives debated their strategy on Thursday to prevent a partial government shutdown next month. Speaker Mike Johnson is considering the option of extending funding until either mid-January or mid-April to provide more time for negotiations on the 12 bills required to fund the government through the fiscal year ending on September 30, 2024.

British retailers reported their joint-worst October for sales volumes on record, and they anticipate another challenging month in November. This situation is attributed to households grappling with the rising cost of living, as revealed by a survey conducted by the Confederation of British Industry. The CBI’s monthly retail sales balance, which measures sales over the year to October, declined to -36 from -14 in September. This marks the poorest October reading since 2017, which was already the lowest October reading since records began in 1983.


Sterling firmed overnight as some risk appetite returned to markets, but is set to notch a weekly loss against the dollar barring any US macro surprises. With few data points remaining and a Monetary Policy Committee in blackout ahead of next week’s policy decision, the pound has moved according to external – mostly US – dynamics for much of this week. Last night, it was positive Amazon and big tech earnings, as well as slightly loosening financial conditions, that gave sterling a small boost. Now that the stage is almost fully set for the BoE decision on Thursday, the market view that policy rates have peaked has been cemented, leading to a dovish repricing that has weakened GBP/EUR throughout this week as the tail risk of further hikes is priced out.


The euro has steadied this morning and mirrored the pound’s moves last night, after a non-event ECB decision failed to move markets. The key ECB rate was held at 4.0%, in what was a generally quiet meeting that reiterated the conclusions of September’s dovish hike. In familiar language, the press release explained that domestic price pressures remain strong, but that the labour market is loosening, monetary policy is transmitting forcefully, and the current level of interest rates will bring down inflation if held for sufficiently long. Given her inability to credibly provide a hawkish bias in the forward guidance amid a deteriorating macroeconomic backdrop, Lagarde opted to stay quiet and refuse to give markets ammunition to price in earlier rate cuts, resisting any discussion about rate cuts or balance sheet instruments. The only data print on the calendar today was Spanish flash GDP, which grew 0.3% quarter-on-quarter.


The dollar has eased slightly towards the end of an overall solid week that saw strong growth data bolster hopes for a soft landing and reinforce the higher-for-longer rates outlook. Q3 GDP came in at a consensus-beating annualised rate of 4.9%, but failed to generate significant bullish price action, largely because of the wide range of estimates and the increasing attention paid to the Atlanta Fed’s GDPNow model that predicted 5.4%. In the report’s key headlines, consumption accounted for around half of the overall economic expansion, amid a consumer binge this summer and a personal saving rate running well below the long-term average. This unsustainable demand means that Q4 is unlikely to repeat the success of Q3, particularly given that real disposable incomes fell by 1% in the same period. Overall, traders dialled down expectations of further hikes on the back of the core PCE inflation index for Q3, which came in below forecast at 2.4% – a November hike is now priced out and a December hike has been trimmed to around 20%. The resulting fall in Treasury yields initiated a slight dollar weakening on otherwise upbeat data. On today’s macro diary, we have the core PCE price index for September and the UoM consumer sentiment survey.


Asian equities have shown gains, and US share futures are also on the rise, reflecting cautious optimism driven by solid post-market tech earnings. Hong Kong and Japanese shares have led the advances in Asia, while Australian and South Korean stocks are also showing positive momentum. Mainland Chinese shares have inched higher, supported by data indicating growth in industrial companies’ profits, albeit slightly softer than in the previous period. Traders are also keeping an eye on upcoming US economic data, including the Federal Reserve’s preferred gauge of underlying price pressures.

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

8:00 a.m.: Denmark Sept. Retail Sales
8:00 a.m.: Sweden Sept. Retail Sales
8:45 a.m.: France Oct. Consumer Confidence
9:00 a.m.: Spain 3Q GDP
10:00 a.m.: Italy Oct. Consumer Confidence
10:00 a.m.: ECB Survey of Professional Forecasters
2:30 p.m.: US Sept. Personal Spending, Income, PCE Core Deflator
4:00 p.m.: University of Michigan Oct. Consumer Sentiment
Russia Monetary Policy Decision

Corporate Events

Earnings include Exxon, Covestro, Electrolux, NatWest


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