October 28, 2024

“There is a huge amount of data this week, and markets will have one eye on next week’s US election. Growth and inflation releases are key in the US and the eurozone, while the focus in the UK is political, with Wednesday’s budget announcement key for sterling.”

Tim Hallinan – Trading Director

USD

The dollar index is trading close to a three-month high ahead of a hugely significant two-week period for FX. Remember that there are two main reasons for the dollar’s rapid recovery this month: a) strong macroeconomic data has wiped out bets on aggressive Fed easing, and b) traders have becoming increasingly convinced of Trump’s chances in next week’s election. The list of data this week is almost ridiculously long, but it is worth picking out the main three: Q3 GDP, core PCE inflation, and non-farm payrolls. Growth is expected at an extremely strong 3.0% annualised rate in the third quarter, the consensus for core PCE is a relatively hot 0.3% m/m for September, and the prediction for non-farms is 110k. That is far lower than the blowout 254K figure that first upended the aggressive Fed cut narrative earlier this month, but investors will be able to look though some surprising weakness given the impact of the recent hurricanes and Boeing strikes.

GBP

Wednesday’s budget is a key risk event for sterling. We all remember the fallout from Truss’ infamous mini-budget and, while very few are expecting a repeat this week, businesses and investors have long been concerned about tax rises and fiscal sustainability. Last week’s weaker PMIs show just how much the nervousness has permeated throughout the UK economy. Reeves has a difficult balancing act, given that she is promising a higher debt, higher spend agenda but has ruled out income tax rises. Her media round last Thursday already confirmed that she will adjust debt rules to allow for tens of billions in extra investment spending, and it appears that the bond markets have already begun to position for some higher gilt issuance.

EUR

October has been poor for the euro – it is down nearly 3% and is on track for its worst month since at least May 2023. And unfortunately, this week’s growth and inflation data look unlikely to reverse bets on a 40% chance of a 50bp rate cut in December. The consensus is looking for a miserable German economy to have dragged eurozone-wide growth down to 0.2% in Q3, while another sub-2% inflation print is expected on Thursday, alongside a drop in the core rate to 2.6%. That all points towards rapid ECB easing.

Markets

Pre-election nerves and rising yields trimmed gains in the US and Europe last week. The S&P 500 fell 1% and the FTSE 100 fell 1.3%, while a mega Tesla rally kept the Nasdaq marginally in the green. In Japan, the Nikkei 225 index has surged by 1.8% this morning after the ruling LDP party lost its majority in an election, potentially slowing down the pace of rate hikes. Oil sank 5% at the open this morning after Israel opted not to attack Iranian oil or nuclear facilities in its retaliatory strike over the weekend.

Main Economic Events (All Times CET)

12:00pm: UK CBI Realised Sales
6:30pm: BoC Governor Macklem speaks

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