October 31, 2023

“A Chinese manufacturing sector that fell into contraction this month spooked markets this morning, as concerns continue to grow about the second-largest economy’s drag on foreign demand in Europe. Today’s packed macroeconomic diary should see elevated intraday volatility, with CPI and GDP in the eurozone, and consumer confidence and wage growth in the US among the key data points.”

Tim Hallinan – Trading Director

Main Headlines

US House of Representatives Republicans have introduced a plan to provide $14.3 billion in aid to Israel by cutting funding for the Internal Revenue Service (IRS). This move has set up a showdown with Democrats who control the Senate. The House Republicans introduced a standalone supplemental spending bill exclusively for Israel, which contrasts with Democratic President Joe Biden’s request for a $106 billion package that includes aid for Israel, Ukraine, and border security.

British Prime Minister Rishi Sunak is scheduled to discuss the Israel-Hamas and Ukraine conflicts with US Vice President Kamala Harris on her trip to London this week. She will also attend a summit and deliver a speech on artificial intelligence. Additionally, oil company BP reported lower-than-expected Q3 profits of $3.3 billion due to a significant drop in energy prices compared to the previous year.

GBP

Sterling is trading steady against the dollar and weaker than the euro this morning as external dynamics take centre stage today. Net consumer lending grew much less than expected in September, increasing by £0.5bn versus a £2.4bn consensus in further evidence that monetary policy is translating into tightened credit conditions. The BRC Shop Price Index also illustrated a further easing in retail prices, rising 5.2% in October, down from a peak of 9.0% in May. Further sterling-specific price action will likely have to wait until the Bank of England decision on Thursday, although its close relationship with the eurozone will likely see some spillover of the effects of euro area data today.

EUR

Despite a string of mixed data, the euro has been given a lift this morning, having strengthened almost 1% against the dollar from yesterday’s low. A slight downturn in China’s manufacturing business activity initially sparked some weakness early this morning, after which the euro gathered momentum through a string of data that included French Q3 GDP, which grew 0.1% as expected, and German retail sales, which contracted -0.8% month-on-month in September despite expectations for a 0.5% expansion. French preliminary CPI also printed a consensus-matching figure of 4.0% year-on-year, falling sharply from 4.9% in the previous month. Consolidated CPI and GDP figures for the eurozone complete the picture this morning, which are likely to confirm the narrative that the ECB has reached terminal rates amid sharply slowing inflation and a stagnating economy.

USD

Gains on an initial China-induced haven bid have been swiftly erased for the dollar this morning as the Federal Reserve begins its two-day meeting later today. Some weakness can be attributed to the US Treasury announcement that it expects to borrow $76bn less this quarter than anticipated due to forecasts of higher revenue receipts, which provided downward pressure on US government bond yields.  USDJPY has also seen some volatile swings early this week, after a leak yesterday boosted the yen on expectations that the Bank of Japan would tweak its bond-buying Yield Curve Control policy and allow Japanese bond yields to rise higher. The announcement this morning, however, saw the yen’s weakness return as the BoJ’s slight tweak that turned the 1% yield cap into an ‘upper bound’ underwhelmed markets. Another bundle of data today will round off the Fed’s view on the economy ahead of its decision tomorrow, including consumer confidence survey data and the Employment Cost index, which is one of the Fed’s preferred gauges for wage growth.

Markets

European shares rose 0.3% in early trading, with real estate and chemical stocks leading the gains. This provided some relief after Asian equities slid as Chinese manufacturing activity returned to contraction, raising concerns about the world’s second-largest economy. Recent indicators had suggested a nascent recovery in China. The MSCI world equity index, which tracks shares in 47 countries, remained flat, and Wall Street futures pointed to slight losses.

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

10:00 a.m.: Italy 3Q GDP
10:00 a.m.: Poland Oct. CPI
10:30 a.m.: Portugal Oct. CPI; 3Q GDP
10:30 a.m.: ECB’s Visco speaks
11:00 a.m.: Italy sells bonds
11:00 a.m.: Euro-area Oct. Flash CPI; 3Q GDP
11:30 a.m.: Germany sells bunds
12:45 p.m.: ECB’s Muller speaks
3:00 p.m.: US Oct. Conf. Board Consumer Confidence
5:00 p.m.: ECB’s Nagel speaks
5:30 p.m.: ECB’s Guindos speaks

Corporate Events

Earnings include Samsung, Pfizer, AMD, Caterpillar

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